Spain’s Biodiesel and Renewable Diesel Outlook June 28, 2017
The increased regular fuel consumption, the higher blending mandate established for 2017 and the fact that duty protection will still prevail at least for the large majority of the calendar year, will allow for higher domestic production levels in 2017. The projected full enforcement of sustainability sourcing in January 2018 will discourage oilseed and oils purchases that are not sustainably certified by the EU.
Spain is among the three top MS in terms of biodiesel production capacity and consumption and is also one of the largest HVO producer and consumer European Union Member States. As in the large majority of EU countries, diesel is the main transport fuel in Spain. However, while the EU diesel-gasoline average ratio is 2:1, in Spain it is 3:1. This means that the potential for ethanol and gasoline to contribute to meeting the RED 10% goal is less than is the case of the EU-wide fuel market. With all other incentives phased out, biofuel consumption in Spain is solely mandate driven.
Domestic biofuel producers have faced competition from imports, which has dramatically reduced production capacity use throughout the years. The somewhat healthier domestic biodiesel sector since the countervailing duties against Argentina and Indonesia enforcement in 2013, along with the enforcement of the national production quota system in 2014 and 2015 has allowed for a production recovery. Nevertheless, industry contacts assure that today, less than 15 biodiesel plants are operative, with the remaining running idle and with limited possibilities to resume production.
Spain’s biodiesel sector relies heavily on imports of raw materials, as the domestic oil production (olive oil and sunflower oil) is destined for the food market. Palm oil is the dominant biodiesel feedstock in Spain, accounting for nearly two thirds of the total production. Consequently, all eyes are at the moment are on the consequences of the European Parliament vote on April 2017 to call on the EU to phase-out the use of palm oil in biofuels by 2020.
Soybean oil represents nearly one third of the biodiesel feedstock. The biodiesel production recovery since 2014 created additional opportunities in-country use of this domestically extracted oil and contributed to improve soybean crushing margins, reducing the exportable oil supply.
In 2016, in the absence of biodiesel quotas, the elimination of the bioethanol specific target favoured biodiesel production, as blenders opted to meet mandates with biodiesel or HVO, which does not count against the seven percent blending limit for labelling purposes, but is eligible for mandate compliance, at the expenses of bioethanol use. Moreover, domestic biodiesel producers managed to increase production to supply the larger domestic market and also increase its sales in other EU Member States.
The economic recovery that resulted in increased regular fuel use, coupled with the higher consumption mandate (5 percent) established for 2017, and the fact that duty protection that will still prevail at least for the large majority of the calendar year (August 2017) will allow for higher domestic production levels in 2017.
The increased mandate (six percent) for 2018, along with the slight growth in consumption of regular diesel, may open up additional room for increased in-country biodiesel production. However, the transposal to national law of Directive 1513/2015 among other factors such as competition from imports, will determine 2018 biodiesel consumption and production dynamics in Spain. Additionally, the projected full enforcement of sustainability sourcing requirements as of January 2018 may discourage oilseed and oils purchases oilseed and oils purchases that are not certified as sustainable under EU requirements and may affect the feedstock mix.
Spanish Regulatory Framework
With all other incentives phased out, biofuel consumption in Spain is solely mandate driven. Other governing regulations, affecting the biofuel sector include sustainability requirements implementation since 2016, although full enforcement is not scheduled until 2018. Double counting provision has been transposed to national law, however; it has not been fully enforced yet.
- Biofuel Targets
Consumption mandates followed a steady upward trend until 2013, when, the downward revision of mandates introduced by Royal Decree-Law 4/2013 reduced Spain’s biofuels market size. Until 2016, the overall mandate could be fulfilled by either biofuel. Given the diesel consumption recovery and the lower volume of gasoline used and considering their respective blending limits the excess over the bioethanol/biodiesel specific mandates was normally fulfilled with biodiesel.
Royal Decree 1085/2015 eliminated the biodiesel and bioethanol specific targets since 2016, and increased slightly the consumption targets for the 2016-2020 period. Interestingly, only the consumption target proposed for 2019 will be higher than the mandate stablished back in 2012, prior to the downward revision of targets carried out in 2013. Electricity from renewable sources used for electric road vehicles or rail transport would cover the gap between the 8.5 percent biofuel consumption mandate and the 10 percent target for 2020.
Biofuel target and sustainability compliance in Spain are managed through a Biofuel Entitlement System. Ministerial Order ICT/2877/2008 appointed the Spanish National Market and Competition Commission (CNMC) as the authority responsible to monitor and control the amount of biofuels marketed or consumed through a certificate system. Biofuel producers and blenders are required to report to the CNMC the amount of biofuels sold to other market operators. Producers and blenders must report the amount of biofuel produced, imported and sold to other companies. Blenders must report on the quantity of regular fuel and biofuel marketed. The CNMC issues Biofuel Entitlements to the different industry actors. One entitlement equals to a Toe marketed.
CNMC provisional data show an excess in fulfilment in 2011 and 2012 and failure to comply in 2013 to 2016. It is our understanding that the excess registered in 2012 may partially make up for the lower compliance the following years through certificate transfer in 2013 – 2016. Also, 2013-2016targets would be achieved once provisionally denied certificates are accounted for. Fines of
763 Euros are imposed per TdB that the obliged party fails to present.
Obliged parties may trade biofuel certificates (each certificate equals one per certificate/metric ton of oil equivalent that the marketed) as long as the CNMC is informed.
Since 2013, when the hydrocarbon tax exemption for biofuels, which amounted to 0.401 Euros/liter
– applicable to the share of bioethanol contained in the blend, was phased out, the mandate breach fine was revised up from 0.276 Euros/liter to 0.602 Euros/liter in the case of bioethanol.
- Biodiesel Quota System
Under the quota system, only producers with quota allocated were eligible for mandate compliance. The effects of quota enforcement were only fully noticed in 2015, as in 2014 consumption mandates could be fulfilled with out-of-quota biodiesel in approximately during the first half of the year. The quota system is not applicable since 2016, which opens up the door to increased EU imports competition.
- Transposition of RED and Sustainability implementation
Royal Decree 1597/2011 transposed sustainability criteria and provisions related to double counting to national law. Sustainability was projected to be required as of January 2013. However, in early 2013 (Royal Decree 4/2013) the GOS established a delay sine die in the implementation.
Since early 2013, during the so-called interim period, obliged parties were only requested to provide the CNMC (National Commission for Markets and Competence) with information regarding type of biofuel
and Origin, and feedstock and origin. Reporting levels of greenhouse gas reduction and soil use are optional.
On March 26, 2015 Spain was formally asked by the European Commission to correctly apply the Renewable Energy Directive for biofuels. Resolution by the Secretary of Energy dated April 29, 2015 announcing enforcement was published on Spain’s official Gazette.
This document mandates that sustainability requirements be fully enforced in Spain since January 1, 2016. Since this date, the transitory period (to allow for the progressive adaptation of the verification system) began. During this period, no verification is being carried out under the national scheme. Hence, the large majority of obliged parties have opted for private scheme certifications in other to keep their options to sell their product in other member states open.
During the transitory period, only sustainable biofuels are eligible for national mandate compliance.
Blenders can still accredit sustainability through private schemes or Responsible Declaration.
The date for full implementation would be January 1, 2018. Obliged parties will then need to accredit sustainability compliance with either private schemes or Responsible Declarations, which start being verified under the national scheme by the CNMC.
The projected full enforcement of sustainability as of January 2018 would take a toll on oilseed crushers’ margins when crushing non-sustainable beans.
Second generation biofuels will get double credit. On April 16th, 2014 The Government of Spain published the list of raw material eligible for double counting against biofuels consumption mandates in the Official Gazette. This list includes Used Oils of animal or vegetal origin, animal fats (Categories 1 and 2 of Regulation (CE) 1069/2009).
In the case of blends or different raw materials only the share that is actually produced out of one of the listed products would count double. In order to be granted with the double credit, origin of the feedstock has to be properly documented. However, the double counting will only enter into force in Spain once more detailed guidelines are issued and, most likely, not until sustainability verification is fully in place.
The Draft Royal Decree on GHG for transport energy and fuels amending Royal Decree 1597/2011 defines categories of raw materials eligible for double counting purposes classified in two groups:
- Group A:algae, bacteria, Organic Fraction of Municipal Waste (OFMSW), industrial residuesnot fit for food or feed use, forest residues and other cellulosic or lignocellulosic material, sewage sludge, straw, cobs cleaned of kernels of corn, husks, animal manure, glycerin, tall oil pitch, palm oil mill effluent and empty palm fruit bunches., bagasse, grape marcs, wine lees, nut shells, and renewable liquid and gaseous fuels of non-biological origin.
- Group B:Used Cooking Oils and Animal Fats.
At the moment, the large majority of the biofuels produced out of double counting feedstock are being exported to other EU Member States were double counting is fully in place. The enforcement of the double counting provision, which has not been established yet, would encourage more in-country use of double counting eligible biodiesel and, consequently reduce the market for biofuels made out of conventional feedstock.
- Technical fuel specifications in place
EU Fuel Quality Directive 2009/30 enabled fuel operators to market B7 and E10. This piece of regulation was transposed into national regulation by Royal Decree 1088/2010, which increased the biodiesel content allowed from 5 percent to 7 percent and the bioethanol content permitted from 5 percent to 10 percent.
Blends with volumetric biodiesel content over 7 percent, or volumetric bioethanol content over 10 percent, or volumetric bioethanol content over 5 percent and over 2.7 of oxygen content in terms of mass, should be labeled indicating the biofuel content. In addition, the following disclaimer should be present: “Before using this product, please make sure it is suitable for your engine”.
- Cap on Food Crop Based Biofuels
On October 5, 2015, Directive 1513/2015 officially introduced a 7 percent cap (energy basis) on food based biofuels thus limiting consumption first generation or conventional biofuels within the wider 10 percent target for biofuels in EU transportation fuel by 2020 set by the RED.
Additionally, a non-binding 0.5 percent national target for advanced (non-food) biofuels was included. EU Member States will have until September of 2017 to enact the reformed legislation. While no consumption target for advanced biofuels has been defined for the post 2020 period, in Spain, according to Royal Decree 1085/2015, the consumption target shall be defined. The draft piece of law made available for public consultation sets the advanced biofuels target in Spain at 0.1 percent. ILUC Directive also includes a New Annex listing raw materials that count double against the consumption mandates, grape marcs and wine lees are specifically mentioned. This Directive also increases the multipliers factors for electricity produced from renewable energy sources consumed by electric road vehicles (from 2.5 to 5) and rail transport (from 1 to 2.5) for the calculation of market share of renewables in transport, reducing fossil fuels market share for mandate compliance. The 10 percent target in road transportation for 2020 remains unchanged.
Fuel suppliers are obligated to submit to Member States, on a yearly basis, the provisional mean values of the estimated indirect land-use change emissions from biofuels traded. Addionally, the Directive increases the minimum reduction threshold of greenhouse gas (GHG) emission for biofuels and bioliquids produced in new facilities.
GHG emission saving from the use of biofuels shall be:
- At least 60% for biofuels produced in facilities starting operation after October 5, 2015.
- At least 35 % until December 31, 2017, and at least 50 % from January 1, 2018 for biofuels produced in facilities starting operation before October 5, 2015, which is the case of all Spain bioethanol plants.
- EU Policy Developments affecting Spain
At the EU level, regulations influencing EU biofuels use in transport include the Renewable Energy Directive (RED), and the Fuel Quality Directive (FQD), both amended by the Indirect Land Use change Directive (ILUC). EU Directives are not directly applicable to Member States as they require prior transposal. While RED and FQD have already being transposed to Spanish law, the ILUC Directive is yet to be transposed.
On November 30, 2016 the EC announced the new biofuels policy for the 2020-2030 period, without setting mandatory targets for biofuels consumption. The future of biofuel in EU is under discussion for the 2021-2030 period. The RED proposal sets a cap on food crop-based biofuels starting at 7 percent in 2021 and decreasing gradually to 3.8 percent in 2030 and a GHG emissions reduction of 40 percent compared to 1990 levels.
Biodiesel Market and Feedstock Use
A stable price scenario and a different regulatory framework led to a rapid expansion of biodiesel production capacity until 2009, when poor market conditions and prices volatility led to reduced capacity use and a slowdown in the pace of investments. Since 2013, installed capacity continues to decline.
As per HVO producing capacity, two CEPSA-owned refineries started producing HVO (Huelva and Algeciras – San Roque) in 2011. The Tenerife CEPSA refinery started processing used vegetable cooking oils (UCO) in 2013. REPSOL refineries in La Coruña, Tarragona, Bilbao and Cartagena also co-process HVO from Vegetable Oils, mostly palm oil, along with fossil fuel. HVO is co-processed in fossil fuel refineries and incorporated to conventional diesel as an additive. Industry sources peg current HVO domestic production capacity at 945 million liters per year.
Biodiesel production in Spain is demand driven; however, production levels have been affected by imports competition throughout the years:
In 2009, consumption mandates were enforced but Spain’s biodiesel production increase rate slowed down due to third countries competition (mainly the United States). The combination of antidumping and countervailing duties against the U.S. biodiesel and the consumption obligation allowed for additional growth of production levels in 2010.
In 2011 and 2012 domestic production of biodiesel declined as a consequence of stiff competition from imported biodiesel originated mainly in Argentina, which continued up to 2013.
In 2013, biodiesel production grew despite, the hydrocarbon tax waiver phase-out, which translated into lower blending incentives, and the downward revision of national mandates in 2013. This is explained by the industry’s hopes for a quota system implementation and tariff protection, which was only granted at the end of the year.
The five-year antidumping tariffs imposed on biodiesel originated in Argentina and Indonesia effective as of November 28th, 2013 along with the developments toward the implementation of a quota system effective for 2014 and 2015 alleviated pressure on producers and domestic production of biodiesel grew for the first time since 2010.
Statistical data indicate that domestic biodiesel production in 2014 amounted to over 1 million litres. In the absence of additional incentives, biodiesel production grew in 2015, in line with the increased conventional fuel demand and the somewhat higher mandate.
In 2016, in the absence of biodiesel quotas, the elimination of the bioethanol specific target favoured biodiesel production, as blenders opted for meeting mandates with biodiesel or HVO, which does not count against the 7 percent blending limit for labelling purposes, but it is eligible for mandate compliance, at the expenses of bioethanol use. Moreover, domestic biodiesel producers managed to increase production to supply the larger domestic market and also increase its sales in other EU Member States.
The increased mandate in 2017 and the duty protection that will prevail at least for the large majority of the calendar year, (August 10, 2017) would allow for higher production levels.
HVO production started in July 2011. Since then, production of HVO in Spain has increased steadily until 2015, when it went down.
- Other Renewable Biofuels
As per other renewable fuels, there is research on biodiesel produced from algae at the public and private level. Abengoa Bioenergy has a pilot plant in Cartagena. In particular, CEPSA reports as well research activity in Huelva testing different types of oil to obtain aviation fuel (bio-kerosene) known as Bio-Jet. There is no biodiesel production from algae at a commercial stage.
In Spain, on advanced biofuels, the consumption target shall be defined. The draft piece of law made available for public consultation sets the advanced biofuels target in Spain at 0.1 percent.
Spain’s biodiesel sector relies heavily on imports of raw materials, as the domestic oil production (olive oil and sunflower oil) is destined for the food market. Area planted to rapeseed, while small, continues to grow year after year driven by greening compliance along with demand for biodiesel production in neighboring countries. Spain continues to have a strong dependency on imported vegetable oil for its biodiesel production.
To supply the robust compound feed industry Spain imports soybeans from Brazil and the United States to be processed in one of the four Spain-based crushing units, whose aggregate crushing capacity amounts to nearly 3.5 MMT per year.
Hence, there is a significant amount of soybean oil available in the market. Traditionally, this oil has been exported to other EU-28 Member States or African countries such as Morocco, Algeria, Tunisia and South Africa) as the domestic food demand for this type of oil is limited.
The healthier domestic biodiesel sector since 2013 has created additional opportunities for the in-country use of this domestically extracted oil and contributes to improve soybean crushing margins. The biodiesel production recovery since 2014 translated in a reduction of soybean oil exports.
Data for the feedstock used in domestically produced biodiesel is not readily available. However, there is public information on the feedstock used for the biodiesel consumed in the domestic market, given the increased level of biodiesel self-sufficiency achieved due to a combination of factors that include reduced mandates, countervailing duties imposed to importers and production quota implementation, it can be assumed that the share of raw materials used to produce biodiesel domestically should not be differ much from the share of raw materials of the biodiesel consumed in country.
Raw materials for biodiesel production in Spain include palm oil, soybean oil Recycled Oils and Animal Fats (RO&AF). To a lesser extent, sunflower oil and rapeseed oil are also part of the mix. Palm oil is the dominant biodiesel feedstock in Spain, accounting for two thirds of the total production. The higher iodine number permitted in Spain allows for an intensive use of soybean and palm oil in biodiesel production for domestic consumption. In the absence of double counting full implementation in the Spanish market, biodiesel produced out of RO&AF is most likely exported to other EU member states where the double credit is fully enforced.
The projected full enforcement of sustainability as of January 2018 may discourage non-sustainable certified oilseed or oilspurchases. Oilseed crushers could face lower margins when crushing non-sustainable versus sustainable beans, as the oil extracted from former would be devoted to the export market, whereas oil extracted from the latter could be sold to Spain-based biodiesel producers.
In 2015 and 2016 about 98 percent of the domestically produced HVO was made out of palm oil. The remaining 2 percent corresponds to shea butter.
Trade data show an increase in palm oil imports since 2013. Palm oil imports have ramped up throughout the years, driven by the biodiesel and HVO production recovery and its growing share as biodiesel feedstock. Indonesia and Malaysia were the primary origins, representing over 75 percent of total palm oil imports.
- Consumption and Marketing
With all other incentives phased out, consumption mandates are the sole drivers for the biofuel market. Hence, consumption mandates together with conventional fuels demand evolution define the Spanish biofuels market size. Total fossil fuel consumption in Spain declined between 2007 and 2013. Since then, a steady increase in diesel consumption has taken place, while gasoline use flattened out. As in the large majority of EU Member States, diesel is the main transport fuel in Spain. However, while the EU diesel-gasoline average ratio is 2:1, in Spain it is 3:1, which means that the potential for ethanol and gasoline to contribute to meeting the RED 10% goal is less than is the case in the EU-wide fuel market. At the moment, biodiesel is the main biofuel consumed in Spain and represents nearly 65 percent of the total liquid biofuels consumption in transport, followed by HVO and Bioethanol, which account for 20 and 15 percent respectively.
The large majority of the biodiesel is placed in the market in non-labeled blends below B7. B100 consumption is small and follows a shrinking trend. Fewer than 150 petrol stations sell labeled and pure biodiesel.Biodiesel consumption followed an upward trend driven by the mandates imposed between 2009 and 2011. Consumption of biodiesel in2012went down due to extensive use of HVO and loweroverall diesel consumption. Factors explaining the dramatic decline in 2013, when biodiesel consumption more than halved, include the hydrocarbon tax exemption phase-out and the downward revision of mandates.
In 2014, biodiesel consumption remained fairly stable and marginally rebounded in 2015 driven by the regular diesel consumption recovery. In 2016 the small upward revision of consumption mandates, the increased regular diesel use along with the bioethanol specific target phase-out have resulted in a biodiesel consumption increase. Additional growth in biodiesel use is anticipated for 2017 as a result of the regular diesel consumption recovery and the higher mandate.
Despite installed capacity exceeds domestic demand projected for 2020, since 2008 biodiesel imports have represented a significant share of the mandate driven internal demand. Imports of biodiesel halved in 2013 driven by the reduction of consumption targets enforced in early 2013. The antidumping tariffs imposed on biodiesel originated in Argentina and Indonesia as ofNovember 28th, 2013, along with production quotas enforcement in 2014 and 2015 contributed to a further decline of imports, with Malaysia filling in the gap left by Argentina and Indonesia as a consequence of the anti-dumping duties imposed.
2016has brought somewhat increased EU biodiesel exports to Spain, in response to the quota systemphase out and the slightly higher internal target-driven demand. In 2016 Spanish biodiesel exports hit a historically record level, driven by sales in other European Member States. The above mentioned duties applied to Argentina and Indonesia will still protect the domestic biodiesel market against these competitive extra EU suppliers, at least until August 10, 2017, date when the EC plans to implement WTO recommendations, allowing to keep imports at a low rate. In 2017 this trend may continue to consolidate.
With all other incentives phased out, consumption mandates are the sole drivers for the Spanish biofuel market. Most of the factors create greater growth potential for biodiesel/HVO than for bioethanol. Duties in place will still keep away the most competitive foreign biodiesel suppliers such as Argentina and Indonesia, at least until August 2017. The smaller size of the gasoline pool limits the contribution of bio-ETBE to meet the overall.
The consumption targets established for the period 2016-2020 set the pace of growth of the biofuel sector in Spain in the coming years. The 2020 target 8.5 percent is below the 10% of renewable energies in transport established by the Renewable Energy Directive. Electricity from renewable sources used for electric road vehicles or rail transport would bridge the gap between the 8.5 percent biofuel consumption mandate and the 10 percent target for 2020.
As Spain biodiesel production is highly dependent on palm oil, all eyes are at the consequences of the European Parliament vote on April 2017 to call on the EU to phase-out the use of palm oil in biofuels by 2020.
The transposal to national law of Directive 1513/2015 among other factors such as competition from imports will determine biofuels consumption and production dynamics in Spain for 2018. Additionally, the projected full enforcement of sustainability as of January 2018 would discourage non-sustainable certified oilseed and oils purchases and may affect the feedstock mix.
Going forward, the future of biofuel in EU is currently under discussion for the 2021-2030 time frame. The Spanish biofuel industry fears the negative effects for their first generation assets use optimization impacts of a switch towards a GHG emission system that further limits crop based biofuels, as second generation biofuels at a commercial stage are not sufficiently developed in Spain.