London — The focus of the European biofuels market is increasingly shifting to the changes and challenges the biofuels market will encounter in 2020 as the last quarter of the year approaches and the tendering season begins.

Next year marks the beginning of a revised Renewable Energy Directive (RED II) running through to 2030, which will raise biofuel mandates year after year.

In 2020, the Fuel Quality Directive setting a greenhouse gas reduction target is also due for completion. However, the implementation of such EU-wide directives is typically subject to individual Member State enforcement, resulting in a plethora of different approaches and a complex operating environment for market participants.

RED II set a 32% target for renewable energy by 2030 and a 14% target for renewable energy in transport. A key difference to the previous directive is the cap for crop-based biofuels at Member States' 2020 levels, with a maximum of 7%, as well as a freeze of palm oil use at current levels, phasing it out in transport by 2030. RED II also includes minimum targets for advanced biofuels at 0.2% in 2022, to reach 3.5% by 2030.

Most European countries will have higher blending mandates in 2020 than in 2019, with notably the Netherlands, at the center of the Amsterdam-Rotterdam-Antwerp trading hub, increasing its biofuels mandate to 16.4% from 12.5% on an energy basis. Germany, the largest biofuels consumer in Europe, has a GHG-based mandate, and will raise the reduction target to 6% from 4%. The UK introduced a dual mandate in 2019 both on a volume and a GHG basis, increasing to 9.75% from 7.25% and to 6% from 4%, respectively. Other countries with GHG-based mandates include Sweden and the Czech Republic, but all other countries have either a volume- or energy-based mandate. Typically if these targets are not met, there is a penalty, which acts as an incentive for compliance as biofuels are usually more expensive than their fossil-fuel equivalents.

The FQD has been in place since 2009 but has recently attracted greater attention because 2020 is the deadline for the targets specified to be met. The FQD sets an obligation on fuel suppliers to reduce the GHG emission intensity of automotive fuels in 2020 by 6% compared with 2010. However, there is as of yet no clear indication as to how and whether it will be enforced across the EU, especially in countries that do not meet it by default through their national blending mandates. Countries that already have GHG-based national mandates such as Germany, have already been incentivizing end-users to blend higher GHG material. However, other countries, such as France and Spain that have volume- or energy-based mandates, typically operate within a lower GHG spectrum. Unless there are penalties for not meeting a 6% GHG reduction target, it is unlikely that blenders will want to pay higher premiums for such product.

Blend-wall limits make meeting mandates difficult

Even just based on RED II, however, ambitious mandates are becoming increasingly difficult to meet. This is largely due to blend-wall limitations because most countries allow for E5 or E10 (5% or 10% ethanol) gasoline blends and B7 (7% biodiesel) diesel blends. As a result, based on current fuel blends available at the pump, fuel suppliers cannot blend greater volumes of biofuel per liter of gasoline or diesel sold. A greater uptake of E10 across Europe could help, as it would instantly double the volume of ethanol that can be blended. France is already the strongest performer in E10 sales, and the Netherlands is the next country where the fuel blend will become available, as of October 1. In Germany, however, the uptake has been slow, with marketing campaigns failing to alter the perception that higher blends of ethanol damage engines. In the UK, there have been discussions around E10 for several years, but amid Brexit uncertainty, talks have once again stalled, and will not resume before 2021, according to the UK Department of Transport.

Market participants are looking at other ways to meet their mandates, including hydrotreated vegetable oil and waste-based double counting material. However, both of these are considerably more expensive options and there are questions around adequate feedstock availability. HVO also heavily relies on palm oil as a feedstock, on which France, for example, will end tax breaks from January, 2020, and which the EU is planning on phasing out anyway over the next decade. The sustainability of waste-based material is also being seriously being called into question, after the latest fraud scandal put Dutch supplier Biodiesel Kampen out of business and its CEO, Cees Bunschoten, in prison for forgery of bio-tickets and money laundering. There have been reports that the Dutch authorities are even contemplating ending the use of double-counting for waste-based biodiesel and are assessing whether it creates a flawed incentive structure.

When it comes to GHG-based targets, market participants are also examining the possibilities for upstream emission reductions, achieved before raw materials for gasoline and diesel reach a refinery or storage facility. For example, these would include reducing flaring of associated gases in crude oil production or efficiencies in the logistics chain.

Overall, it is a complex matrix that market participants will have to navigate to meet targets from 2020. They will need to assess blending limits, make decisions on whether to optimize high GHG savings biofuels, double-counting and UERs or pay the buy-out clauses. Perhaps they do not need worry about GHGs if the country in which they operate does not enforce the FQD. Domestic European production and international trade flows could be faced with challenges and shifts accordingly, which will be ones to watch as they unfold in 2020.

--Chrysa Glystra, chrysa.glystra@spglobal.com

--Edited by Jonathan Dart, newsdesk@spglobal.com

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