Regulation design and the potential to optimize trades are driving biofuels and decarbonization strategies, according to commodities trading software firm ION Commodities.
With many production pathways for biofuels production available, regulations are emerging in different jurisdictions to establish clear standards and incentivize the development of new technologies such as synthetic fuels, and to promote market efficiency.
“A lot of biofuels simply aren’t competitive without some form of carbon or sustainability incentive,” Andre Jaeger, senior vice president at ION Commodities, told Platts, part of S&P Global Commodity Insights. As such, “the design and structure of regulation is what drives investment and, by extension, the trading and optimization strategies that develop around them,” he said.
Recent regulations include biofuels mandates in the EU, which stipulate that 2% of aviation fuel supplied at the wing at EU airports is sustainable aviation fuel and that from 2030 1.2% of all aviation fuel supplied is synthetic fuel or eSAF. Across the Atlantic, the US has chosen to prioritize subsidy and tax credit mechanisms.
Many of ION’s clients incorporate their biofuels activity into their existing commodity trading activity. There is “a lot of synergy” in managing the trade lifecycle and supply chain for fossil and renewable fuels in a single system, especially since the blending of fossil fuels and renewable fuels will remain common for a long time, Jaeger said.
“To manage and report business performance of the biofuel portion of their portfolio, it’s crucial for clients to be able to track both the physical fuel and its associated sustainability credentials via certificates,” he said. “Depending on the market, the value of these sustainability certificates can be what makes the business case for biofuels viable.”
Companies in certain member states such as the Netherlands can optimize the blending of physical fuel depending on market conditions but have the option to meet obligations through the purchase of biofuel compliance credits.
Platts last assessed Dutch renewable energy units (HBE-A) for advanced fuel at /Gj ($/Gj) on April 14, up from /Gj when it launched in January 2024, via some volatility resulting from the limited supply of renewable diesel coinciding with a fire at a production unit. The assessment reflects the value of an HBE needed to comply with the Dutch annual obligation through advanced biofuel or bio-gas in the transport sector for the current year.
A shifting regulatory landscape
Biofuel markets and certification societies have come under fire in recent years over their environmental credentials. European biofuel producers have accused Asian biofuel imports of being fraudulently certified and this has resulted in tariffs from Brussels on biodiesel and renewable diesel imports.
It has also resulted in attention on International Sustainability and Carbon Certification, which certified the imports and which is reportedly under pressure from the European Commission recognition of its certification for waste-based biofuels, following a row over imports.
A spokesperson for the commission said it had discussed issues related to sustainable certification, promotion of biofuels, and avoidance of double-counting but had not made a decision.
In carbon markets, the Guardian newspaper published a report in January 2023 alleging that REDD+ carbon credits issued by Verra were largely “worthless” and did not represent genuine carbon reductions.
Energy transition versus other priorities
Since Russia’s full-scale invasion of Ukraine in February 2022, shortages of gas and concerns about heating have raised the profile of energy security and blunted appetites for reducing carbon emissions. Adding to this trend are current concerns in Europe about defense, which are further complicating budget-keepers’ decisions.
However, renewable energy sources continue to be traded. “There is stable and ongoing interest from clients looking to support renewable power adoption, especially around PPAs (Power Purchase Agreements), intraday trading, and life cycle management of energy certificates,” Jaeger said.
In addition, a couple of ION’s European clients have recently started projects aimed at integrating biogas into their trading portfolios. They are managing biogas alongside their existing gas activities and are scaling up their tracking of sustainability credentials through ION’s energy trading and risk management solutions, he said.
Source: Platts
