This article gives a balanced view of the differential of HVO vs Diesel going forwards. We expect there to always be a significant differential basis supply & demand fundamentals unless UK government reduce HVO duty or RTFC values increase.
As a drop-in replacement to Diesel, HVO is a substitute product - demand for one product increases when the price of the other goes up… As such, much like butter and margarine, despite being made from different ingredients, the prices are closely linked. In fact, HVO prices are often pegged against the Diesel pricing indices.
As per this IEA report , global HVO supply has nearly doubled in the last 10 years to over ~19,000 million litres per year. To put that into perspective, UK HVO demand was ~250million litres last year and renewable fuel use in road, plant and inland waterways was over ~2,500 million litres (under the Renewable Transport Fuel Obligation scheme.
To give you a balanced view of the potential variability of the differential of HVO vs Diesel, we have summarised key supply/demand fundamentals and duty levels below.
Supply
As per this IEA report , global HVO supply has nearly doubled in the last 10 years to over ~19,000 million litres per year. The US produce almost half of global HVO supply. The flow of this US-produced HVO into the UK market has, effectively, been turned on recently with the removal of ‘antidumping’ measures on imports.
Several producers are now supplying cargos into the UK market, alongside Neste - the first-to-market producer.
The feedstocks used to produce HVO are ultimately finite, but they seem adequately available to allow for considerable scale-up of HVO production going forward (more details below).
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HVO feedstock
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Despite this rapid growth in supply, HVO supply will continue to be a drop-in-the-ocean in comparison to total fossil oil supply. BP expect oil to continue to play a major role in the energy system and the world to consume 70-80 million barrels per day in 2035, according to BP's energy outlook.
Demand
UK government has enshrined in law the world’s most ambitious climate change target, cutting emissions by 78% by 2035 compared to 1990 levels. Many of the technologies required to achieve this target are either still at the drawing board, in early-stage commercial development and/or require big upfront capital expenditure & have limitations, particularly technologies for heavy transport & plant.
The demand is also largely driven by policy frameworks / mandates in Europe and the United States for renewable transport fuels.
In Europe, the Renewable Energy Directive (covers transport and ‘plant’) set a new goal for 2030, increasing the target share of renewable energy used in transport to 14 %. It also set the gradual phase out of crop-based biofuels from 7% in 2020 to 3.8% in 2030.
The Renewable Transport Fuel Obligation RTFO drives the UK towards the Renewable Energy Directive’s obligations; obligating UK transport fuel use 14.6% renewable transport fuel as a percentage of transport fuel by 2032.
In order to meet the EN590 conventional Diesel specification, the maximum amount of conventional Biodeisel FAME that can be blended with “mineral Diesel” is 7%. “mineral Diesel” is industry jargon for Diesel produced from fossil, crude oil. This 7% Biodiesel FAME maximum limit, in the EN590 specification, is often referred to as a “blending wall”.
There is no HVO limit that can be blended with mineral Diesel in the EN590 specification. So, there is no “blending wall”. Up to approximately 30% of HVO can be blended with mineral Diesel to produce a Diesel fuel that meets the EN590 specification.
Inevitably, conventional EN590 Diesel will contain more and more HVO as Diesel producers are obligated to produce more and more renewable fuel under the RTFO (see below).
Demand growth is limited by production cost/price. The hydrotreatment process is a very expensive, complex refinery process. Without government support under the Renewable Transport Fuel Obligation (RTFO) scheme., HVO is ~£1 more than Diesel. This limits the demand for use outside of transport substantially and, in turn, the price.
Basis these key supply & demand fundamentals, the material cost of HVO is likely to be higher than Diesel. We wish we could say otherwise!
Renewable Transport Fuel Certificates (RTFCs)
The price of HVO is made up of three main elements - the material cost, plus a premium, minus the RTFC value.
For each litre of HVO that we supply under the Renewable Transport Fuel Obligation (RTFO) scheme, the UK government's scheme to drive the UK to increase the use of renewable fuel in transport, we effectively claim Renewable Transport Fuel Certificates (RTFCs) that have a variable market value (learn more here). The material price will vary in accordance with supply & demand fundamentals but also the value of RTFCs. Should the RTFC price increase then the HVO price would come down.
Duty
The UK government treat HVO in much the same way as they do Diesel, despite the GHG emission savings. Similarly to fossil Diesel, there is white (road) and red (non-road) HVO. The same duty rate currently applies to both;
- 18pence per litre for red diesel/HVO and
- 95 pence per litre for white diesel/HVO.
From April ’22, red diesel was prohibited for most purposes.
Should UK government reduce the duty rate on HVO then we would see the differential between Diesel and HVO respectively. We will have to wait and see if the government support the use of HVO in this way…
We would expect there to always be a significant differential basis the supply & demand fundamentals unless UK government significantly reduced the duty rate on HVO
However, there are methods of controlling the costs of using HVO as a means to substantially reduce emissions in a measured way;
- deploy volumes of HVO rather than Diesel as a you see fit,
- HVO:Diesel blends,
- Cap the amount you spend on HVO,
- Price-risk management measures - fixed-rate / index-linked pricing.
Our team would be happy to discuss these methods in more detail.