Second-generation biofuels: Riding the decarbonization wave into 2030

The biofuel movement has gone global. The drive to limit carbon emissions in the environment by 2030 has urged governments and companies to hasten the deployment of sustainable biofuels, while regulatory policies and tax incentives worldwide on biofuel usage are accelerating market demand.

The food-versus-fuel debate has pinned a lot of hope on second-generation or advanced biofuels, which are produced from residual and waste products such as used cooking oil and palm fatty acid distillate.

Riding on the second-generation biofuel wave, waste-based feedstocks have become attractive to both biofuel and renewable diesel producers.

Government mandates, lucrative trade drive Asia's biofuels

Across the world, most policies have focused on promoting first-generation or conventional biofuels like ethanol and biodiesel produced from crops. However, production and use of drop-in biofuels, including renewable diesel (also referred to as hydrotreated vegetable oil) and sustainable aviation fuels or biojet, have been increasing.

Road transportation consumed most of the transport-related energy (nearly 78%), followed by marine (11%), aviation (8%) and rail (3%), according to a 2023 report of the International Energy Agency. Of this, renewables made up only 4.1% of transport-related energy consumption, with biofuels accounting for 3.6%.

In Asia, biofuel mandates have tended to be volumetric or energy-based. On the other hand, the US Inflation Reduction Act and Europe's Fit-for-55 package promote the production and use of low-carbon intensity fuels by narrowing the price difference between fossil fuels and alternative low-CI fuels.

The IRA has also introduced new tax credits to support biojet or SAF, clean fuel and clean hydrogen production. In parallel, the EU has set targets to increase the share of renewable energies in transport while implementing regulations to encourage the use of biofuels and renewable gases.

S&P Global Commodity Insights analysts estimate that global SAF supply will reach 2.13 million mt in 2024, of which 2.03 million mt will be SAF produced from hydrotreated esters and fatty acids, or HEFA. However, global SAF demand consistently lags supply. It was estimated at 1.24 million mt in 2023 and is expected to rise to 2.156 million mt in 2024, S&P Global said.

US market to soak up China's used cooking oil

In June 2023, the European Commission initiated an investigation into a complaint by a member state concerning potential fraud linked to biodiesel imports from China. In December 2023, the EU launched an antidumping investigation into biodiesel imports from China. Despite these investigations, China remains the largest UCO import partner of the EU.

However, market participants expect more Chinese used cooking oil suppliers to shift their attention to the US.

The US gained prominence over Europe as the primary destination of China's UCO following the signing of the IRA in August 2022. In 2023, US imports increased by 3.5 times to 1.41 million mt, with 834,000 mt coming from China. From a market share of zero in 2022, China accounted for 60% of US UCO imports in 2023. Canada and Australia are the other two key UCO suppliers to the US.

POME as waste is not really 'wasted'

Another waste feedstock that is gaining favor is palm oil mill effluent, an undesirable byproduct of palm oil production, yet desired by biodiesel producers for its zero greenhouse gas emissions and its eligibility for double counting toward biodiesel mandates in Europe.

Malaysia and Indonesia are the world's largest producers and exporters of POME and the top two global palm oil producers. Large amounts of POME were known to have been exported to Europe and China to produce HVO.

Malaysia's POME exports nearly tripled on the year to 415,520 mt in 2023 on the back of robust demand from Italy, the Netherlands, Spain and Belgium, according to the Malaysian Palm Oil Council.

Rising biodiesel mandates may limit feedstock supply

To cushion the impact of the EU's move to phase out palm-based biodiesel, Indonesia and Malaysia have begun increasing their domestic biodiesel intake. Trade sources said this could curb feedstock availability in the near term as other overseas buyers look to ramp up consumption.

In 2023, Indonesia mandated to increase the share of biodiesel blending in transport to at least 35% from 30% previously. At the same time, Jakarta moved to cut exports of crude palm oil to ensure adequate supply for local biodiesel production. Indonesia is planning to hike the mandate beyond 35% in the next few years, according to sources.

Meanwhile, Malaysia is mulling increasing its current B20 mandate to 30% in 2025, although domestic on-road biodiesel blending has been lower than expected.

Global SAF capacity to double in 2024

The total expected dedicated SAF production capacity could double from 1.8 million mt in 2023 to 3.6 million mt in 2024, according to S&P Global. Nearly half of global SAF capacity is concentrated in Asia, while the remaining capacities are distributed between the US and Europe.

The HEFA pathway was the dominant SAF production technology in 2023 and is expected to continue being widely used this year. Newer pathways, such as alcohol-to-jet and power-to-liquid, remain commercially unviable.

China is expected to add 500,000 mt of HEFA-SAF capacity in 2024 while France is likely to add 380,000 mt of HEFA-SAF capacity through refinery conversion. The US is also expected to start up two production capacities using the alcohol-to-jet and power-to-liquid pathways.

Although the SAF capacities are currently concentrated within Asia, the demand center for SAF remains in Europe and the US as legislative and incentive developments boost the uptake of SAF.