Biofuels Positioned for 2025 Success Despite Policy Uncertainty
The biofuels sector faces political and regulatory challenges in 2025 but gains support from global mandates and renewable diesel (RD) expansion. Ethanol exports may surpass 2 billion gallons, while RD production rises to 230,000 b/d. Key issues include 45Z tax credit regulations, year-round E15 adoption, SAF expansion hurdles, and competition from Brazil’s corn ethanol.
December 31, 2024
BY Jacqui Fatka
The biofuels sector embarks on 2025 facing several headwinds from political and regulatory uncertainty, while tailwinds could continue from strong exports and higher biofuel mandates from countries around the world.
Renewable diesel (RD) expansion, driven by California’s Low Carbon Fuel Standard, and the world’s growing appetite for ethanol boost the biofuels outlook in 2025. The U.S. Energy Information Administration projects a modest increase in biofuel production over the course of the year, although ethanol supplies will maintain 2024 production levels of 1.05 million barrels per day (b/d). Biodiesel supplies will drop nominally, while renewable diesel will increase from 210,000 b/d to 230,000 b/d (figure). Renewable naphtha and renewable propane are byproducts of a growing RD industry, helping double production of “other biofuels.”
How the incoming administration and Republican-controlled House and Senate finalizes the Inflation Reduction Act’s Clean Fuel Production Tax credit—45Z—will be a major driver of expanded biofuel production with lower emissions. The completion of regulations that account for climate-smart agricultural practices and adequately reward corn and soybean producers will be the lynchpin for future revenue opportunities. Ethanol producers have the most to gain if lower carbon intensity corn can help plants qualify for the 45Z tax credit.
Year-round E15 adoption can see a renewed push under the incoming Trump administration and offset some of the reduced domestic ethanol gasoline consumption due to lower consumer use, as well as the presence of more electric and hybrid vehicles on the road. The shift to E15 from E10 can provide cost savings for consumers but will face logistical challenges of blending and distributing another grade of gasoline as retailers will need to update infrastructure. Ethanol producer margins turned lower in 2024 as excess capacity came online, and it may take much of 2025, or possibly longer, to better align capacity with demand.
U.S. ethanol exports set new records in 2024 with Canada as the top destination. USDA anticipates 2025 ethanol exports to reach $4.2 billion in value, tying the 2023 record value. Falling ethanol export unit values may slightly offset higher volumes, likely hitting above last year’s record of 1.8 billion gallons. Private estimates indicate ethanol exports could surpass 2 billion gal/yr. Expanded renewable blending requirements around the world help build global demand. Indonesia is working toward instituting a 5% blend of fuel ethanol into gasoline for retail use (E5) in 2025, while Vietnam is expanding is current E5 mandate.
The impact of potential tariffs on world trading partners and retaliatory tariffs on U.S. agricultural products, including ethanol and DDGs, could limit ethanol export growth. Brazil’s increasing corn production supported the country’s own domestic growth of corn ethanol facilities, which may increase ethanol competition in the world market.
Statutorily, the U.S. Environmental Protection Agency was to propose new renewable volume obligations in the Renewable Fuels Standard last November, but the Biden administration chose to punt that until 2025. The incoming administration is not apt to quickly propose new 2026-2029 RVO levels but will instead wait, making decisions on pending small refinery exemptions (SREs) first. During the previous Trump term, EPA granted 34 SREs from the 2017 compliance year. Under the Biden administration, the EPA did not approve any SREs and instead denied 79 requests. Now the EPA will need to reevaluate those earlier denials and more, totaling 129 exemption petitions from 2018 and later.
The biodiesel industry criticized EPA for setting the 2023-2025 RVO biomass-based diesel (BBD) levels too low and underestimating the capacity potential from the industry’s $6 billion capacity expansion investments. In 2023, domestic and imported feedstocks supported the production of 4.3 billion gallons of BBD, which surpassed the yearly renewable volume targets for 2023, 2024 and 2025. In 2024, additional blending of soy oil and imported tallow and used cooking oil (UCO) pushed levels above mandated volumes. Soy oil could recapture blending market share if tariffs or regulatory action limit the imports of UCO and tallow, as well as the domestic build out of renewable fuels in China and Brazil where these imported oils originate. China already eliminated its 13% export tax rebate for UCO which will incentivize more Chinese use of its UCO supplies rather than export.
Renewable diesel production capacity will grow just 100 million gallons from 2024 to 2025, reach a total of 5.2 billion and remain steady through 2026, according to an updated analysis from University of Illinois. Despite the recent boom in RD production and a predicted expansion of 20% or more per year, the latest outlook reveals the industry is temporarily plateauing. Beyond the RVO mandates, California and other states’ low carbon fuel programs encourage the continued shift from conventional diesel to RD. California’s 20% limit on vegetable oil feedstocks in its low carbon fuel standard puts downward pressure on the use of soy and canola oil in RD production.
Federal and state tax incentives and low carbon fuel policies will drive the future viability of sustainable aviation fuel (SAF) as most hydrotreated esters and fatty acids (HEFA) plants today can produce either RD or SAF based on market economics. Alcohol-to-jet SAFl has the potential to expand in the longer term, but small pilot and pre-pilot projects will provide minimal supplies in 2025. Airlines including United, Delta and Southwest secured a small amount of domestically produced SAF to fuel planes, but costs remain two to three times as expensive when compared to conventional airline fuel. EIA projects SAF production to expand to 50,000 b/d in 2025 if all announced capacity additions come online. However, today’s SAF use domestically, including some imported fuel, represents a drop in the bucket of the total domestic aviation fuel market.
The promise of SAF may not be realized in the near term, despite the need to continue to find a new demand base to support struggling corn and soybean prices domestically. Potential expansion of SAF is limited by a short tax credit runway for the 45Z, as well as delayed regulatory guidance and uncertain political actions. Illinois’ $1.50 tax credit incentive for SAF limit soy oil’s use but makes the state a potential hub for SAF growth.
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Source : Ethanol Producer Magzine
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