February 06, 2022

LCFS Forecast: Increased Electricity Credit Generation to Continue Credit Bank Build and Depress LCFS Credit Prices

Stratas Advisors

Compared to our latest forecast of the California LCFS market, we have changed some underlying assumptions and increased the share of LCFS net credit generation by electricity pathways. Electricity LCFS credit generation has grown from about 0.6% of credits generated in 2011 to an estimated 13.5% share in 2021. Stratas Advisors expects this growth trend to continue as the marginal cost to generate electricity credits is low in comparison to competing pathways such as renewable diesel (HVO), making electricity the largest source of LCFS credit generation. Electricity's share is forecast to rise to 52.4% in 2030, overtaking HVO's share in 2027, a year earlier than previously forecast. Compared with our previous forecast of the LCFS market, all other pathways have smaller shares of net credit generation by 2030 due to the projected strengthening of electricity credit generation, fueled by ZEV (zero-emission vehicle) adoption and renewable natural gas (RNG) use for electric vehicle (EV) charging. The latest California Air Resources Board (CARB) workshop on the LCFS program provided new insights into the future direction of the program and led us to adjust some of our base assumptions.


Source: California Air Resources Board, Stratas Advisors

*This graph includes a forecast out to 2030 that is available in the full version of this article.

In its latest LCFS workshop, CARB laid out the goals of the LCFS program and potential scope planning changes that can be implemented at the earliest on January 1, 2024 and received public comments on potential changes. A longstanding goal of CARB is to drive low-carbon fuel investment and harmonize with other state and regional LCFS programs. Considering the slow progress in other state and regional LCFS programs, with few legislative victories and actual implementation of programs years away, CARB is likely to support LCFS credit prices as the program is expected to be the main driver of low carbon fuel investment for much of the next decade. CARB is considering strengthening the greenhouse gas (GHG) reduction targets of the LCFS program, and Stratas has now included a 22.5% GHG reduction target in 2030, up from the current 20% reduction target, in our base case forecast. Given the current trends in the LCFS market, strengthening credit generation building the credit bank and the negative effect on credit prices, CARB will likely move to strengthen the targets and credit prices to continue to drive investment in low-carbon fuel development. If CARB does not raise GHG targets, credit prices would be expected to continue to fall below $100 USD/MT and reach a floor below an economic level for many projects and investments, which CARB is expected to try and avert.

Another goal shared by CARB during the workshop is to “accelerate transition to zero emission vehicles in line with Executive Order N-79-20”, a new executive order from Governor Newsome that is targeting all new car sales to be ZEVs by 2035. CARB expanded upon this by stating that “Executive Order N-79-20 establishes framework for transition to ZEVs with sales/fleet targets across vehicle classes; LCFS program can support achievement of these targets.” This largely confirms previously held beliefs that the LCFS favors EVs, due to favorable carbon intensity (CI) accounting for electric credit pathways, and that the program aims to support ZEV adoption. In addition, CARB mentioned the possibility of publishing individual EER values for different ZEV types, that presumably would result in more favorable CI ratings and more credit generation from EVs. Electricity pathways have benefited from a relatively opaque accounting system for EV charger use. While biofuel producers complain that every facet of their production process is meticulously measured, for EV charger use an unmetered estimate with comparatively little data, and unused charging capacity is awarded LCFS credits under the ZEV infrastructure pathway. The resultingly strong CI scores and the high efficiency of electric engines in gasoline equivalent terms enable electricity to generate more LCFS credits from a lower volume of energy compared with many alternative fuels. The volume of on-road electricity use in California is also expected to grow through the greater adoption of ZEVs. ZEVs have become more affordable through economies of scale and government subsidies, and so the biggest remaining impediment to mass adoption of ZEVs is the lack of public fast-charging infrastructure in the US. The recently passed Infrastructure Bill and proposed Build Back Better Bill both include provisions to support EV charging infrastructure, renewable electricity generation and ZEV adoption. The projected adoption of ZEVs is supported by recent ZEV sales data that shows strong improvement. ZEVs constituted about 11.5% of vehicle sales in California through three quarters of data in 2021. This is a sharp rise from previous figures of 7.8% of sales in 2020 and 6.84% in 2019.

Source: California Air Resources Board, Stratas Advisors

*This graph includes a forecast out to 2030 that is available in the full version of this article.


In addition to the increased projected uptake in EVs, a saturation of RNG use in the NGV fleet is expected to drive continued strong improvements in electricity pathway CI ratings and increased credit generation. Any renewable electricity produced in the Western Interconnection (see map below) can qualify under the LCFS program if it is sold to a transportation consumer in California. Renewable electricity, largely produced from solar, wind and RNG, has contributed to a strengthened EV pathway CI score with light-duty/medium duty (LDV/MDV) EVs CI strengthening from 30.9 gCO2e/MJ in 2018 to 12.5 gCO2e/MJ in 2020 and 9.3 gCO2e/MJ in H12021. Heavy-duty EV’s CI has strengthened from 45 gCO2e/MJ in 2018 to 19.3 gCO2e/MJ in 2020 and 5 gCO2e/MJ in H12021. Much of this CI improvement has come from increased renewable electricity generation from solar and wind power in the Western Interconnection sold for EV charging in California. Those pathways are generally considered fully carbon-neutral and help counteract carbon intense grid electricity which has a CI of about 83 gCO2e/MJ, equating to about 31 gCO2e/MJ for LDV/MDV EVs charged by grid electricity after applying the CARB energy equivalency ratio for EV engines. With the virtual saturation of RNG use in California’s NGV fleet and the ability for RNG produced or transported by pipeline to the Western Interconnection to generate LCFS credits, future RNG growth is expected to contribute to the strengthening of CI scores of electricity LCFS pathways in addition to the contribution from continued increases in renewable electricity generation from solar and wind. 

WECC map

Source: North American Reliability Corporation

Many RNG LCFS pathways receive strong CI ratings because they both capture methane emissions and replace fossil energy in the transport pool. One such facility in California, Van Steyn Dairy, has the lowest (strongest) CI pathway under the LCFS at -630.7 gCO2e/MJ. Another 36 dairy digester/ animal waste biogas producers have CI scores from -592.7 to -108.4 gCO2e/MJ. With these strong CI ratings, dairy digester biogas generates the most LCFS credits out of all the methane pathways despite its small volume. RNG produced from the dairy digester pathway produces 50.8 LCFS credits for every thousand diesel-gallon equivalent, a credit generation rate of almost 8 times greater than high-solids anaerobic digestion (~6.6 credits/thousand dge). These volumes are expected to remain constrained due to the slow expected growth of the NGV fleet, with future RNG use counting towards electricity credit pathways. Increased use of RNG with negative CI values in the Western Interconnection for EV charging under the LCFS is expected to help strengthen EV pathway CIs significantly and contribute to increased credit generation.

On the renewable diesel side, our view remains largely in-line with our previous forecast. However, the risks to renewable diesel producers seem to have increased; the pace of investment announcements has slowed, feedstock costs have risen and LCFS credit prices have declined. These pricing movements are expected to largely continue in the short-term and will apply pressure to the least competitive renewable diesel projects, likely leading to their cancelation or failure. CVR announced in 2021 that it was pausing the conversion of its Wynnewood refinery to a renewable diesel plant until the economic picture improves. The most competitive renewable diesel projects will have a secure supply of low carbon intensity feedstock, experience producing renewable diesel and good logistical connections the California market. Many renewable diesel producers, such as Marathon and Diamond Green Diesel, announced feedstock supply agreements or vertical integration through acquisition of feedstock suppliers in order to protect their operations in a competitive market for feedstocks. There is already fierce competition for biodiesel and renewable diesel feedstock supplies with current renewable diesel capacity of about 900 million gallons. This competition will only become fiercer as announced US renewable diesel production capacity is slated to be 5.9 billion gallons by 2025.

While actual production volumes of renewable diesel will likely be much lower, the competition for supplies amongst producers and other industrial users of these feedstocks have helped to drive feedstock prices to all-time highs. Lower supply of feedstocks due to quarantine measures also contributed to these record levels, but the forecasted demand for feedstocks is expected to outpace the recovery in supplies and lead to high prices in the next decade. This will apply cost pressure to renewable diesel producers, and many will necessitate strong LCFS credit prices to remain profitable.


Source: California Air Resources Board, Stratas Advisors

Source: California Air Resources Board, Stratas Advisors

*These graphs include forecasts out to 2030 that are available in the full version of this article.

Our latest forecast also incorporated a projected strengthening in corn ethanol’s carbon intensity as carbon capture and storage (CCS) projects are set to be implemented at US corn ethanol production facilities. While the potential impact on the carbon intensity of corn ethanol is expected to be about 20 gCO2e/MJ, few CCS projects have yet to be successful and so our current forecast is conservative on their impact to the LCFS market. The outcomes of these CCS projects will be impactful for US low carbon fuel markets as well as other upcoming developments that should be watched. The Build Back Better Bill appears to be stalled for the time being and unlikely to pass but would help accelerate the adoption of ZEVs if implemented. In addition, the states of New Mexico and Minnesota are expected to vote on their own LCFS programs, and Congress may consider a national LCFS program depending on developments with the federal Renewable Fuel Standard. Renewable diesel projects and their operations are another variable as market forces could complicate this marginal supply of LCFS credits.



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