In recent years, the Hydrotreated Vegetable Oil (HVO) market has undergone significant transformations due to a confluence of factors such as increased production capacities, shifting demand dynamics, and regulatory changes. HVO, a renewable fuel that can be produced from a wide range of feedstocks, including waste oils, food crops, and animal fats, has gained prominence as a sustainable alternative to fossil fuels. However, between 2022 and 2024, the HVO market has faced challenges, including fluctuating prices, changes in legislative requirements, and competition from substitute biofuels. This blog explores the key developments in the HVO market over the past few years, focusing on supply growth, demand dynamics, and legislative impacts.

Understanding Hydrotreated Vegetable Oil (HVO)

Hydrotreated Vegetable Oil (HVO) is a renewable diesel fuel produced through a hydrogenation process that converts organic feedstocks into a high-quality biofuel. Unlike traditional biodiesel, HVO is a "drop-in" fuel, meaning it can be used directly in existing diesel engines without modifications. This versatility has made HVO an attractive option for industries seeking to reduce their carbon footprint and comply with environmental regulations.

The Appeal of HVO

HVO offers several advantages over conventional fossil fuels and other biofuels:

• Sustainability: HVO is produced from renewable feedstocks, reducing dependence on fossil fuels and lowering greenhouse gas emissions.

• Compatibility: As a drop-in fuel, HVO can be seamlessly integrated into existing infrastructure and vehicle fleets.

• Performance: HVO provides superior performance characteristics, such as high cetane numbers and low sulphur content, enhancing engine efficiency and reducing emissions.

Global Supply Growth

Between 2022 and 2024, the global production capacity for HVO has seen substantial growth, driven by significant investments and the commissioning of new production facilities worldwide. In 2022, the global HVO production capacity was approximately 14 million metric tonnes per year (MMT/year), increasing to around 23 MMT/year by 2024. This growth is attributable to key developments in the United States and Asia.

United States: A Major Player in HVO Expansion

The United States has played a pivotal role in expanding HVO production. In 2021, the US production capacity stood at approximately 4 MMT/year. By 2022, this capacity increased to 7 MMT/year, driven by projects from companies like Diamond Green Diesel. The growth continued, reaching 9.6 MMT/year in 2023, and is projected to hit 10.4 MMT/year by the end of 2024. This represents a remarkable increase of almost 150% in just three years, highlighting the US's commitment to renewable energy expansion.

Asia: Rising Capacity in Key Regions

Asia has also experienced significant growth in HVO production capacity. In 2021, the region's capacity was around 2 MMT/year. By 2022, this figure increased to 2.3 MMT/year, reaching 2.6 MMT/year in 2023, primarily due to expansions in Singapore and China. By 2024, Asia's capacity is expected to reach 3.5 MMT/year, marking a 75% increase over three years. Notable projects include Neste's Singapore refinery expansion and new plants in China, Japan, and South Korea.

Exports to Europe

The increased production capacities in the US and Asia have led to a rise in HVO exports to Europe. Europe has been a significant market for HVO due to its stringent environmental regulations and the push for renewable energy sources. The influx of HVO from the US and Asia has helped meet European demand, contributing to the global trade dynamics of renewable fuels.

Shifting Demand Landscape

While global supply has expanded, the demand dynamics for HVO have shifted, particularly in Europe, due to legislative changes and market conditions.

Sweden's Legislative Impact

In 2023, a significant shift occurred in Sweden's HVO demand due to new legislation aimed at reducing the cost burden on consumers and industries. The legislation cut the mandatory blending of biodiesel from 30.5% to 6%, leading to a drastic reduction in HVO demand. Consequently, Sweden's imports decreased from a monthly average of around 110,000 cubic metres (m3) in 2023 to only 10,000 m3 per month in 2024, representing a decrease of over 90%.

Biofuel Blending and Ticket Creation

The European biofuel market has experienced a flood of cheap advanced biofuels from Asia, particularly advanced Fame 0 (Fatty Acid Methyl Ester), which has emerged as a cheaper alternative to HVO. The advanced characteristics of Fame 0 allow producers to double count tickets, resulting in extensive blending activities and a high supply of compliance tickets. These tickets, used by fuel suppliers to meet renewable energy targets, have become saturated, leading to a decrease in their prices. Consequently, the need for high physical blends of HVO has decreased, as adding more cost-intensive HVO to maximise ticket creation is no longer economically advantageous.

Regulatory Influences

The HVO market has been heavily influenced by regulatory frameworks, particularly within the European Union, where environmental regulations drive demand for renewable fuels.

European Union Regulations

The European Union has been at the forefront of promoting renewable energy through stringent environmental regulations. The EU's Renewable Energy Directive II (RED II) sets ambitious targets for increasing the share of renewable energy in the EU's energy mix. This directive mandates the use of biofuels, including HVO, to reduce greenhouse gas emissions and promote sustainability.

Impact of EU Regulations on HVO Market

The EU's regulatory environment has created a favourable market for HVO, encouraging its adoption as a renewable fuel. However, the influx of cheaper biofuels and compliance tickets has complicated the market dynamics, leading to oversupply and decreased economic viability for HVO blending.

AFS Energy's Role in the HVO Market

AFS Energy B.V. plays a crucial role in helping companies navigate the complexities of the HVO market and comply with EU regulations. AFS Energy provides comprehensive solutions to optimise the use of HVO and other renewable fuels, ensuring that businesses can meet their sustainability targets effectively.

Supporting Compliance with EU ETS Regulations

AFS Energy facilitates the buying and selling of emission allowances under the EU Emissions Trading System (ETS), enabling companies to meet their compliance obligations cost-effectively. The AFS Energy ETS System offers streamlined access to trading EU Emission Allowances (EUAs) through a user-friendly platform. Clients benefit from real-time data access, including live quotations and market news, along with instant order confirmations and a comprehensive trade history.

Strategic Advice and Tailored Solutions

AFS Energy assists companies in managing their carbon footprints by offering strategic advice on reducing emissions and optimising their carbon trading strategies. Our tailored approaches ensure that businesses can achieve significant reductions in their carbon output while maintaining operational efficiency. By focusing on bespoke solutions, AFS Energy helps companies navigate the complexities of carbon management and achieve their sustainability targets effectively.

Data Management and Transparency

AFS Energy provides robust data management solutions to accurately monitor, report, and verify emissions, ensuring transparency and reliability in all reports. Our systems are designed to handle large volumes of data, providing accurate and timely information to support sustainability initiatives. Additionally, AFS Energy supports the transition to renewable energy sources and energy efficiency measures, promoting long-term sustainability and cost savings.

Conclusion

The Hydrotreated Vegetable Oil (HVO) market has undergone significant changes between 2022 and 2024, driven by increased production capacities, shifting demand dynamics, and regulatory influences. While global supply has expanded, particularly in the United States and Asia, demand dynamics in Europe have shifted due to legislative changes and market conditions. The influx of cheaper biofuels and compliance tickets has led to oversupply and decreased economic viability for HVO blending.

AFS Energy plays a vital role in helping companies navigate the HVO market and comply with EU regulations. By providing comprehensive solutions, strategic advice, and robust data management, we ensure that businesses can achieve their sustainability targets effectively. As the HVO market continues to evolve, companies must adapt to the changing landscape, leveraging technological advancements and regulatory frameworks to maximise the impact of their renewable fuel initiatives.