LCFS In-Depth Summary
The LCFS program is the most successful low carbon fuel policy in the US as the program has surprised many doubters while achieving a 12.5% CI reduction target in 2022, 2 years ahead of schedule, causing CARB to accelerate the program undergoing a current formal rulemaking process to accelerate reduction targets. In the meantime market liquidity has consistently grown as there are more than 650,00 MT of LCFS credits transferred on a weekly basis even as the credit bank is at an all-time high of over 15 million MT.
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The program has helped the state to lower its petroleum dependency as petroleum market share (gasoline + diesel) by volume has fallen to 80% due to higher blends of biomass-based diesel, more efficient ICE vehicles, more ZEVs, more PHEV drivers driving 80+% of miles on the battery, and more FFV drivers filling up with E85. Deficit generation is becoming more and more dependent gasoline consumption. Even though gasoline consumption has fallen by 200 gallons used per gasoline capable vehicle in the past decade, it is possible total gasoline demand could be back closer to pre-pandemic levels as there are more gasoline capable vehicles on the road than ever before.
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Credit generation is expected to grow through 2030 as there has been a massive uptick in investment into low carbon vehicles and fueling infrastructure in the US, specifically California. Investors are starting to realize the sheer size of California's low carbon fuel market and the potential impacts of California carbon policies (LCFS, C&T, ACC2, etc) has across the supply chain. The growth in credit generation is not expected to be from one silver bullet as the states dependence on petroleum in the next few years could drop to 70% market share by volume as higher blends of liquid and gaseous low carbon fuels are sold into the state on top of a gradual "market transformation" towards electrification.
In-Depth: LCFS Market
LCFS Progress & Credit Bank
The LCFS program has been successful to date as the program has consistently met annual reduction targets in 9 of the 12 years with 2022 being the most successful already meeting the 2024 CI reduction target of 12.5%, two years ahead of schedule. CARB sets the annual CI compliance schedule known as the "curve". The cumulative net credit generation over the years has caused the "bank", the cumulative amount of credit in market participants accounts, to grow to over 15 million MT in 2022.
Market Liquidity
As the program has become more stringent, the need for credits has grown significantly as nearly 650,000 MT of LCFS credits are transferred every week in 2023 through roughly 65 transactions. Rising liquidity has made a more mature market as 70%-80% of the volume transferred are labelled as Type 2 transactions, which are transfers that occur 10 days after the agreement date. Due to a more mature market, renewable fuel producers are able to hedge out volatile feedstock costs 2-3 years out the curve. Therefore in a down pricing market, as we have witnessed over the past 2 years, the Type 2 transacted price trails the Type 1 transacted price, with the latter being more reflective of the spot price.
In-Depth: Deficit Generation
VMT vs Petroleum Demand & Market Share
Vehicle miles travelled (VMT) in California dropped from 350 billion miles before COVID to under 300 billion miles in 2020 but has steadily grown back to almost pre-pandemic levels. A way to cut through the noise of demand destruction and the following rebound in the last two years is to look at the rate or gallons of petroleum - gasoline and diesel - consumed per 10k miles, which a little under what a typical passenger vehicle travels in a year. Petroleum demand per 10k miles has decreased from over 500 gallons per 10k miles to 425 gallons per 10k miles, while petroleum market share on a volumetric basis is now 80% in California due to higher blends of biomass-based diesel, more efficient ICE vehicles, more ZEVs, more PHEV drivers driving 80+% of miles on the battery, and more FFV drivers filling up with E85.
Gasoline Capable Vehicles & Demand
Deficit generation within LCFS is becoming more and more dependent on gasoline demand as renewable diesel is increasingly taking market share, however there are more gasoline-only and gasoline capable vehicles on the roads in California to the tune of 29 million vehicles or 95% of the light-duty fleet in the state. Gasoline consumption per vehicle has undergone a rapid step change as the average vehicle now consumes 460 gallons per year, a drop of 200 gallons or 30% in the past decade.
In-Depth: Credit Generation
Renewable Diesel: "California Triple Dip"
Crude based diesel gets hit twice by California carbon policies: once by LCFS and the other by C&T known as Cap-at-the-Rack or CAR. Since renewable diesel producers and marketers price against the price of diesel, they commonly “Triple Dip” on California Carbon Policy: once on LCFS credit generation, once on diesel LCFS deficit fee, and once on the diesel CAR fee. Due to this phenomena the LCFS credit price could remain constant while the “Triple Dip” LCFS equivalent price for RD is 2-3x the value of the LCFS credit price going out to 2030. Therefore higher renewable diesel blends amongst the diesel pool are expected to be more economical even at lower perceived LCFS values.
ZEV Sales vs Registrations (Light Duty)
Sales of zero emission vehicles (ZEVs) have increased to 350,000 vehicles per year or over 20% of the total light-duty vehicle sales. Growth in sales and registrations have been primarily driven by Tesla but demand for battery electric vehicles (BEVs) sold by other auto manufacturers (Rivian, Ford, GM, Audi, etc) has increased as well. Even with the aggressive uptick in sales, ZEVs still only makeup less than 5% of the total vehicles registered in California.
Negative CI RNG Buildout & Production
The buildout of anaerobic digesters (AD) located on large dairy farms in California has been significant in the past 5 years to take advantage of the lucrative negative CI value biogas receives under the LCFS program as more than 100 ADs have been built within California alone. Book-and-claim has also enabled ADs located in other states to receive a similar value leading to a large increase in negative CI RNG used as a transportation fuel within the state as 2023 production is shaping up to be 25% above 2022 levels.
Flex-Fuel Vehicles & E85 Market Penetration
The largest amount of low carbon capable vehicles on the road in California are Flex-Fuel Vehicles (FFVs) as there are over 1.23 million FFVs registered in the state. With lower gasoline retail sales, increased labor costs, and higher interest rates, California gas station operators have looked to E85 to replace dismal retail diesel sales as the state now sales over 100 million gallon per year of E85 or nearly 350,000 gallons per station. Gasoline retail prices of $4-$5+ per gallon has led consumers to fill up more with E85 as the estimated market penetration within the state is 18%, the highest in the country.
Renewable Jet (SAF)
CARB is set to include intrastate jet fuel (ie jet fuel used in flights from LAX to SFO) under obligation within LCFS. Intrastate jet fuel demand at pre-pandemic levels was around to 425 million gallons or roughly 10% of the total jet consumed in the state. Current worldwide production of renewable jet or sustainable aviation fuel (SAF) is just under 25 million gallons or above 5% of the total intrastate jet demand.
Sources
• American Lung Association, State of the Air Most Polluted Cities (link)
• Argonne National Lab Light Duty EV Monthly Sales (link)
• CalEPA Fuels Guidance Document (pdf link)
• California Clean Fuel Reward (link)
• California Clean Vehicle Rebate Project, Rebate Statistics (link)
• California DMV Statistics, Outstanding Drivers Licenses (link)
• California DMV Statistics, Vehicle by Fuel Type (link)
• California EDD Employment by Industry Data (link)
• California HVIP, HVIP Impact (link)
• California ISO, Monthly Renewables Performance Report (link)
• California ISO, GHG Emissions Tracking (link)
• California ISO, Managing Oversupply (link)
• CARB Alternative Fuels, Annual E85 Volumes (link)
• CARB Alternative Diesel Fuel Regulation (link)
• CARB California GHG Emission Inventory Program (link)
• CARB Clean Miles Standard (link​)
• CARB LCFS Credit Clearance Market (link)
• CARB LCFS Crude Oil Life Cycle Assessment (link)
• CARB LCFS Data Dashboard, LCFS Value Calculator (link)
• CARB LCFS Guidance Documents, User Guides and FAQs (link)
• CARB LCFS Monthly Credit Transfer Reports (link)
• CARB LCFS Registration & Reporting (link)
• CARB LCFS Regulation (link)
• CARB LCFS Reporting Tool Quarterly Summaries (link)
• CDFA Dairy Digester Research & Development Program (link)
• CDTFA Fuel Taxes & Statistics Reports (link)
• CEC CalEVIP Rebate Statistics Dashboard (link)
• CEC California Energy Consumption Database (link​)
• CEC Weekly Fuels Watch Report (link)
• CEC ZEV & Infrastructure Statistics, Vehicle Population (link)
• Chevron Renewable Diesel Locations (link)
• Cox Automotive US EV Sales (link)
• CPUC, Energy Storage (link)
• Edison Electric Institute, Industry Data (link)
• EIA Company Level Imports (link)
• EIA Petroleum & Other Liquids Supply & Disposition (link)
• EIA US Renewable Diesel Capacity Expansion (link)
• EPA Livestock Anaerobic Digester Database (link)
• EPA Renewable Fuel Standard RIN Generation (link)
• Experian Auto Market Trends Review (pdf link)
• FTC Fuel Rating Rule (link)
• Neste Market Data, LCFS Credit Price (link)
• Neste My Renewable Diesel Locations (link)
• Neste Investor Relations Materials (link)
• Propel Fuels Station Locations (link)
• Phillips 66, 76 Brand Renewable Diesel Locations (link)
• REG Renewable Diesel Fueling Stations (link)
• SSRC, Survey of Large Spark-Ignited Engines in California (pdf link)
• Stillwater Associates, LCFS 101 - an update (link)
• Stillwater Associates, LCFS 101 - a 2022 refresher (link)
• UC Davis, LCFS Dashboard (link)
• US DOT FWHA, Traffic Volume Trends (link)
• Valero IR Indicators, Key Commodity Prices (xls link)
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