Confidential & Proprietary: Carbon Acumen (LCFS Forecast)

Executive Summary: LCFS Forecast 2022-2024 (published May 2022)

The LCFS program has been a success over the past decade driving an additional 1.5 billion gallons of low carbon fuels into the state as the demand for higher carbon intensive (CI) fuels has dropped by nearly 2 billion gallons since 2011. Increasingly more stringent CI annual reduction targets have been consistently met without driving the LCFS credit bank to unsustainable levels as many within industry predicted in recent years.

Recent LCFS transfer value explosion of $14 billion in the past 4 years has led to a flurry of investments in a pre-COVID world into low carbon fuel production and downstream infrastructure into some of the highest credit generating fuel sources such as livestock digester buildout in the San Joaquin Valley for CNG use within the state along with major US refiners expanding renewable diesel production. The tsunami of credit generation from the growth in Renewable Diesel (RD), electricity, and livestock anaerobic digesters (RNG) coupled with COVID gasoline demand destruction puts the LCFS program in a great situation to increase pre-2030 CI reduction targets as the 2030 CI reduction target of 20% is forecasted to be achieved in 2024, a full 6 years ahead of schedule. The respective LCFS credit bank is forecasted to quadruple from over 9 million MT in 2021 to over 36 million MT by the end of 2024.

Deficit Generation Outlook

The combination of higher Renewable Diesel (RD) production and subsequent blending into ULSD in California along with COVID gasoline demand destruction has dropped deficit generating fuel volume, CARBOB and crude based diesel, by over 2 billion gallons. Although there seems to be a potential for higher gasoline demand in the state, the writing is on the wall for crude based diesel demand as domestic RD production is set to expand further in the coming years with the majority of the volume slated for California to capture LCFS value. The question amongst industry of 'if' significant of RD will make it to California has changed to 'when' and 'how much' with the later being in the billions of gallons in a 3.8 billion gallon market.

Deficit generating fuel volume fell to around 14 billion gallons during the pandemic and is forecasted to stay right around that level until dropping to 13 billion gallons in 2024. Respective deficit generation is forecasted to grow to just under 24 million MT up from 19 million MT in 2021. The growth in deficits derives from more stringent CI targets for CARBOB as respective volume remains roughly flat along with higher contribution from incremental deficits growing to 2.5 million MT by 2024 up from under 1 million MT in 2021. Deficit generation from crude based diesel is forecasted to drop from current levels as demand is expected to drop by another billion gallons.

As alluded to above, the thesis for future deficit generation forecast been based on the following three primary factors:

Stagnant gasoline demand recovery (CARBOB)
Crude based diesel lower blending in ULSD
Higher carbon intensive crude driving incremental deficits

Stagnant Gasoline Demand Recovery

Nearly 29 million or 96% of the 30 million LDV population in California are gasoline capable vehicles (gasoline, gasoline hybrid, FFV, PHEV). However prolonged gasoline pump prices above $5 per gallon has sent California consumers buying more vehicles with fueling options (FFV, PHEV) or those with more efficient drivetrains (hybrid) as there are now 3 million vehicles (FFV, PHEV, hybrid) in the state, up 1+ million since 2015. Fully electric vehicle (BEV) sales have also skyrocketed since the beginning of COVID as Tesla alone makes up 10% of new car sales in California with many more BEV models from other large auto manufacturers set to hit the market in the coming years.

The Clean Miles Standard set by CARB regulating the amount of miles driven by TNC companies (Uber and Lyft) are mandated to be 90% electric by 2030. Although this standard should not have a significant impact on current-to-near term gasoline demand it sets the tone for the uphill battle gasoline demand faces in the state as TNC companies account for 2-3% of total VMT (vehicle miles travelled) in the state.

The above factors along with hybrid to full-on work from home models, especially those implemented by SF Bay Area tech companies, provides the groundwork for a downward decline of gasoline consumption in the state as it is still 10% below pre-COVID levels and much lower than the 15.5 billion gallon peak observed in 2017.

Crude Based Diesel Lower Blending in ULSD

Even though total ULSD demand in California bounced back to pre-COVID levels at 3.8 billion gallons in 2021, crude based diesel demand dropped to 2.5 billion gallons, a full billion gallons lower than 2015. As the demand for crude based diesel is forecasted to drop another billion gallons by 2024, or to 35% of ULSD demand, respective deficit generation is expected to drop to 2.3 million MT as CI compliance targets become more stringent.

California is expected to soak up the majority of US RD production, however not all current and future producers have direct access to downstream infrastructure and customers, thus leaving the wholesale RD market to be highly competitive and providing pressure on lower demand for crude based diesel. More commentary on this subject is provided below in the RD section.

Higher Carbon Intensive Crude: Incremental Deficits

California refiners have increasingly processed higher carbon intensive crude in recent years, especially during COVID. The full effect of these actions have not come to fruition within the LCFS market as CARB uses a 3-year CI average to calculate incremental deficits from crude. Forecasted incremental deficits is expected to grow to 2.5 million MT in 2024, up from just under 1 million MT in 2021.

Credit Generation Outlook

Credit generating fuel volume finally crossed the 3 billion gallon mark in 2021. Ethanol is the state's largest credit generating fuel by volume at 1.4 billion gallons but respective credit generation has dropped to under 47% of total credits generated, down from 77% in 2015. Lofted LCFS prices in a pre-COVID world drove investments into three non-ethanol credit generating fuels: RD, livestock RNG, and electricity (on-road and off-road applications). Production from these investments is forecasted to grow credit generating fuel volume to over 4 billion gallons (or equivalent) with credit generation set to more than double to nearly 40 million MT in 2024.

The foundation for forecasted credit generation has been based on the following three factors:

RD higher blend rate in ULSD
Electricity growth for both on-road and off-road applications
Livestock digester RNG higher blend rate in CNG/LNG pool

Renewable Diesel (RD) Higher Blend Rate

RD volume in California is forecasted to grow another billion gallons to 2 billion gallons in 2024, or just over 55% of ULSD demand. Massive growth in US renewable fuel production has been seen before within the ethanol and biodiesel industries as combined volumes are now 16 billion gallons per year. However, blending of these fuels into the nations and California's respective gasoline and diesel pools substantially above a 10% blend has been a hot pressed issue for both industries as neither has significant control of downstream infrastructure or customers, especially at a retail level, thus losing out on billions of dollars in profits from RIN and LCFS value. RD producers have taken note of past failures and have gained access to downstream customers as high blend RD (R99, R95) is currently sold at over 20% of the current diesel stations in the state. By owning retail infrastructure, RD producers have the potential to drive revenue from 7 different streams: wholesale, RIN, BTC, LCFS, LCFS diesel arb, C&T diesel arb, and California retail margin (the highest in the country) to help buffer profitability versus feedstock price volatility.

Electricity On-Road & Off-Road Growth

Electricity is now the 2nd largest credit generating fuel in the state and is set to rival RD, the top credit generating fuel, for the top spot in the coming years. On-road credit generation is set to more than quadruple to 11 million MT in 2021 as the amount of EVs on the road is poised to grow by an additional 1 million vehicles (BEV, PHEV) by 2024 along with benefitting from a cleaner grid as wind, solar, and energy storage continues to build out in the state to help lower grid average CI.

Off-road electricity applications such as forklifts, public transit, ocean going vessels (OGV), electric cargo handling equipment (eCHE), and electric transportation refrigeration units (eTRU) accounted for 41% or 1.2 million MT of total electricity LCFS credits in 2021. Credit generation from electric off-road applications is forecasted to grow to just under 2 million MT in 2024 with forklift generation doing the heavy lifting as there are many incentives to transition the remaining 70+% of the states forklifts population to electric. Public transit buildout from LA Metro (2028 Olympics), BART, and the LAX people mover are set to come online in the next few years. helping drive off-road credit generation further.

Livestock Digester RNG Higher Blend Rate in CNG/LNG

Total RNG credit generation is forecasted to nearly triple from 2.7 million MT in 2021 to 7.4 million MT by 2024 with livestock digester RNG (negative CI) accounting for 80% of the NG demand. With funding from Cap-and-Trade auction proceeds, buildout of livestock digesters in the San Joaquin Valley has quadrupled the amount of livestock digesters in California to over 80 with 90+% of the RNG slated for transportation purposes. The buildout of these digesters within the state is currently around 2/3 complete, thus providing more tailwinds for post-2024 CNG/LNG demand to be nearly 100% sourced from negative-CI RNG sources.

Ethanol & Biodiesel

Combined ethanol and biodiesel credit generation has seemed to peak just under 6 million MT in recent years. Due to blend limitations for both fuels within the gasoline and diesel pools, respectively, along with relatively stagnant CI, forecasted combined credit generation is set to fall to 5.5 million MT by 2024. For this forecast E15 was not considered as it is not allowed by regulatory agencies to be sold in the state.

Projects & Other Fuels

Credit generation from other fuels such as hydrogen, alternative jet fuel (AJF), renewable naphtha, propane, as well as project based incentives for EV charging and hydrogen fueling infrastructure is expected to grow year-over-year in tandem with volume growth. However these respective credit generation categories have never exceeded 2% of total credit generation, thus expected credit generation growth from these categories is forecasted to be negligent when comparing against the top 5 credit generation fuels.

Below is a summary of forecasted credit and deficit generation along with end-of-year LCFS credit bank and CI reduction.

LCFS Credit Generation & Credit Bank Summary Table

LCFS Credits Forecast (million MT)	2018	2019	2020	2021	2022	2023	2024
RD, RNG, EV	5.5	7.9	8.8	13.2	18.6	25.3	33.3
Other	5.8	7	6.6	7	5.9	5.9	5.7
CARBOB, Diesel	-11.8	-15	-14.7	-17.8	-19.1	-20.9	-21.5
Incremental	0	0	-0.4	-0.7	-1.6	-2.2	-2.5
Total Credits	11.3	14.9	15.4	20.2	24.5	31.2	39
Total Deficits	12.4	15.5	15.5	18.9	20.7	23.2	24
Credit Bank	8.8	8.3	8.1	9.5	13.3	21.4	36.3
Carbon Intensity Reduction (%)	4	6	7	9	12	15	20

Additional Research & Commentary

Credit & Deficit Generation per Gallon

Credit generation per unit for credit generating fuels has more than doubled to over 6,500 MT per million gallons in 2021 from <3,000 MT per million gallons in 2015 as lower CI fuel has found its way to California. Deficit generation from deficit generating fuels has slowed to just over 1,100 MT per million gallons in 2021. Per unit credit generation is expected to grow as more lower CI fuels (EV, RNG, etc) make their way to California vs higher CI credit generating fuels such as ethanol and biodiesel remain stagnant.

Credit Generation per Gallon (RD, RNG, EV)

RD has helped credit generation per gallon reach over 6,500 MT per million gallons in 2021. Growth in fuels such as electricity for EVs and negative CI RNG will have asymmetric impacts on total credit generation as for every 100 million gge of electricity used in EV will have the same credit generation as 500 million gallons of RD, whereas every 100 million dge of livestock RNG will have the same credit generation as 800 million gallons of RD.

CAISO Grid Emissions

CAISO emissions have dropped 20% since 2015 to 53 million MT CO2e in 2021. CAISO sources supply roughly 80% of the states 280 TWh electricity needs, thus driving grid average CI scores down to 76.73 gCO2e/MJ in 2022. Grid emissions are expected to drop further as more renewable energy sources and battery storage come online particularly those in PG&E and SoCal Edison planning areas as those two areas alone consume 74% of the state's electricity.

Renewable Energy Growth & Curtailment

Wind and solar have been the primary contributors to renewable energy growth to the CAISO grid climbing to 67 TWh of production in 2021 or 30% of the total energy provided on CAISO. Curtailment from wind and solar has not became a significant issue yet as it is only 1-2 TWh. Renewable energy production is expected to grow past 70 TWh in 2022 as YTD performance is 5% over 2021 on top of additional energy storage projects coming online such as the Tesla/PG&E Moss Landing battery storage facility.

California Livestock Digester Buildout

Livestock digester buildout in California has boomed in recent years primarily financed by California Bioenergy and Maas Energy Works along with grants from C&T auction proceeds as the state now has 80+ operational livestock digesters with the primary use for CNG and electricity to capture $80/MMBTU (-300 CI, $200/MT LCFS price) LCFS value.

Renewable Diesel Feedstock

Total worldwide RD production exceeded a record 1.3 billion gallons in 2021. Feedstock procurement has started to become more diversified as UCO, tallow and soybean oil made up 530 million gallons or 40% or RD production in 2021, up from 210 million gallons in 2015. New RD production projects without pretreatment units plan to run soybean oil as the primary feedstock, thus driving potential RD CI closer to 60 gCO2e/MJ from the current sub 40 gCO2e/MJ.

Gasoline Demand vs VMT

The easiest way to cut through COVID demand destruction is to view gasoline demand on a per 10,000 mile basis. Although California drivers are overall driving less they are also using less gasoline per 10,000 miles driven. The shift to EVs, more efficient engines due to CAFE standards, and high gasoline pump prices will have further impact on gasoline demand. (note: the bump from 2015 to 2016 stems from the VW dieselgate as consumers traded in their diesel car for less energy efficient gasoline vehicles.

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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