IEA (2022), Renewable Energy Market Update - May 2022, IEA, Paris https://www.iea.org/reports/renewable-energy-market-update-may-2022, Licence: CC BY 4.0
An uneven recovery as exceptionally higher prices and lower GDP undermine previous growth projections
Biofuel demand recovered in 2021 from Covid lows, to near 2019 levels. However, in 2022 we expect higher prices for oil and biofuels, combined with lower GDP expectations, to slow demand growth by 20% compared to our previous forecast. Growth in transportation fuels, albeit at more modest levels, and strengthening biofuel policies still drive year-on-year biofuel demand higher by 5% in 2022 and 3% in 2023.
Biofuel demand in 2021 reached 155 400 million litres, returning to near 2019 levels. Demand rose 8 700 million litres year-on-year, which is similar to our Renewables 2021 estimate from December 2021. The recovery across fuel types was uneven, however. Ethanol demand rose 6% year-on-year in 2021 but remained 7% below 2019 levels. By contrast, renewable diesel use expanded by around 70% from 2019 and biodiesel demand rose 0.2% from 2019.
High prices slow biofuels demand growth
Russia’s invasion of Ukraine is sending shocks through energy and agriculture markets, worsening already high prices. As a result, biofuel demand growth is now forecast to slow by 20% in 2022, equivalent to 2 200 million litres, compared with our previous forecast of a higher increase of 11 000 million litres. Weaker demand growth for transportation fuels largely underpins our downward revision. As of 4 April 2022, the IEA expects global oil demand growth will be 1.2% lower this year compared to our January forecast. The downward revision is due to a combination of Covid-related mobility restrictions in China and weaker GDP growth. Since biofuels are blended with gasoline and diesel, slower growth in transportation demand directly impacts biofuel demand, with declines deepest in important biofuel markets such as Europe, the United States and Brazil.
The agricultural industry is struggling with its own price shocks, which in turn have driven up biofuel prices in most markets. Increases vary by region and by fuel. For example, Brazil’s ethanol prices are up 20% while in the United States they are up 30% since January 2022. Globally, biodiesel prices have risen between 20-30% this year alone. Price increases are on top of already lofty levels reported in December’s Renewables 2021. In response, several governments are relaxing or delaying policies, which also contribute to slowing demand growth.
To estimate the impact on biofuels since Russia invaded Ukraine, we compared our current forecast against a pre-invasion January assessment. This forecast incorporated changing oil demand and price developments since the annual Renewables 2021 was published in December 2021. The update led to a slight 0.5% downward revision to our new 2022 forecast.
Brazil accounts for the majority of the decline in global biofuel demand growth. Demand has been revised lower across all transport fuels from pre-invasion January estimates, with gasoline now -0.2% and diesel at -0.7% in 2022 versus 2021 levels. Lower transport fuel use slows 2022 Brazilian biofuel demand growth by 40% compared to January projections.
In the United States, we have revised down our 2022 biofuels growth by 15% from January’s forecast. In 2022, gasoline and diesel demand are expected to be 1.5% and 2% respectively, lower than forecasted in January of this year, which in turn drives down ethanol, biodiesel and renewable diesel blending. It is unclear how rapidly changing market dynamics will influence the US Environmental Protection Agency’s (EPA) decision on renewable volume obligations (RVO) set to be released in June. The EPA shared proposed requirements earlier this year, but since then transport fuel demand has declined and biofuel prices have increased, which may influence the EPA’s final recommendation On the upside, the US government expanded the right to blend 15% ethanol during summer months to help lower gasoline bills. However, only 2% of fuelling stations provide 15% blending and so we expect this policy change will only slightly increase ethanol demand in 2022.
In Europe, 2022 gasoline and diesel demand are expected to be 1.5% and 1.1%, respectively, lower than forecasted in January of this year. Several governments are also proposing, or have already, reduced blending obligations because of high biofuel prices. At the time of writing, Belgium, Croatia, the Czech Republic, Finland, Germany and Sweden had all announced changes that, if implemented, will contribute to reduced biofuel demand in 2022 and 2023. For instance, Finland will lower blending obligations by 7.5 percentage points, on an energy basis, in 2022 and 2023. The impact of these changes in various regions remains unclear, however, as states will still have to comply with other policies like the EU’s Fuel Quality Directive (FQD), which mandates greenhouse gas reduction targets. In our forecast, we estimate Finland’s plans lead to lower biofuel demand equal to 180 million litres in 2022. Combined, biofuel demand growth expectations are reduced by 16% compared to January levels.
In the Asia and Pacific region we estimate biofuel demand growth is down 36% in 2022 compared to our January forecast. Indonesia accounts for almost all of this decline. In January, we had expected Indonesia would begin implementing its 40% blending mandate this year. Given higher prices and uncertainty surrounding the starting date for its new blending requirements, we have pushed increases in biofuel demand well into 2023.
Biofuel demand grows in 2022 and 2023 despite disruptions
While growing more slowly than previously forecast for 2022, global biofuels demand is still expected to increase year-on-year by 5%, or 8 500 million litres, and rise by a further 3%, or 5 200 million litres, in 2023. Transport fuel demand growth, although at a slower pace, and government policies continue to drive demand higher for global biofuels.
The United States leads global biofuels growth, with demand expected to increase by 6% in 2022 compared to 2021 despite our downward revision from January. The recovery in gasoline and diesel use to pre-Covid levels, California’s low carbon fuel standards (LCFS), implementation of renewable fuel standards (RFS) and the federal biodiesel blenders’ tax credits will all combine to drive this expansion. We expect US biofuel demand in 2023 to remain near 2022 levels as ethanol demand declines slightly due to stable blending levels and lower gasoline demand growth. Lower ethanol use is offset by continued policy driven growth in renewable diesel demand.
In Brazil, we forecast 1% growth in biofuels demand in 2022 relative to 2021. Ethanol use expands slightly, despite weaker gasoline demand over the time period. Ethanol prices remain more attractive than gasoline, which should lead to a higher blending share. This growth is partially offset by lower biodiesel demand driven by a 0.7% decline in diesel use in 2022. Biofuels demand is expected to rise by a sharper 8% in 2023, led higher by stronger gasoline and diesel consumption and expectations that Brazil will reach its 15% biodiesel blending target by the end of 2023.
Europe biofuel demand is expected to expand by 6% or 1 600 million litres in 2022 relative to 2021. Growth is supported by stronger state-level policies and rising gasoline and diesel demand recovering from Covid lows, albeit at a slower rate than forecast earlier in the year. Biofuel demand growth slows in 2023, however, as gasoline and diesel demand ease on energy efficiency gains and expanding electric vehicle fleets, which outpace demand growth from strengthening policies.
In the Asia and Pacific region biofuel demand continues to grow, at 9% in 2022 and 12% in 2023, due to robust gasoline and diesel growth, strengthening government policies in India and higher biodiesel blending requirements in Indonesia. India continues to raise ethanol blending, reporting a 9.7% blending rate for ethanol in gasoline in April 2022. China contributes little to demand growth since there is no visibility on new support policies. China’s 14th Five-Year Plan provided little insight on its biofuel plans other than reiterating its intent to “vigorously support advanced biofuels”.
Forces of uncertainty – fuel, feedstocks and policies
Oil and biofuel prices, energy and food security, and greenhouse gas objectives are all in flux, introducing multiple uncertainties into our forecast. The main factors that influence biofuel demand in the coming years are oil prices, biofuel prices and how governments evaluate the role of biofuels in navigating energy security, food security and greenhouse gas objectives.
Oil prices, GDP growth and demand
In the wake of Russia’s invasion of Ukraine, prices for international benchmark Brent crude rose to highs of almost USD 140 bbl/d and ranged from USD 100-120 bbl/d from March through April. In addition to high oil prices, the economic fallout from the escalated Covid crisis in China is undermining the outlook for the global economy. As a result, GDP growth assumptions have been lowered to 3.4% in April compared to 4.3% in January. Higher oil prices and weaker GDP growth have combined to curb transportation demand globally, especially in key biofuel markets like the United States, Europe and Brazil. If the higher price and lower economic environment persist, already modest growth in transport demand may weaken further, which in turn would reduce our current biofuel demand estimates. These downward pressures may partially be countered by an increase in demand for biofuels stemming from its lower prices relative to other fuels such as ethanol in the United States and Brazil.
Feedstocks and biofuel prices
Biofuel and feedstock prices continue to climb as well. Biofuels are primarily made from corn, sugar, vegetable oils and used cooking oil, which are all near or at all-time highs. However, some feedstocks are more affected than others. For instance, vegetable oils rose across the board and prices as of April 2022, are up 65-164% since 2019, which in turn has fuelled higher prices for biodiesel and renewable diesel. Corn prices are also up, putting upward pressure on ethanol prices. On the other hand, sugar, used primarily in Brazil and India, is less impacted.
According to the USDA, a number of factors are propelling global agricultural commodity prices to near-record levels, including the potential loss of exports from Ukraine, increased global demand, weather-related supply disruptions, lofty energy prices, increased fertilizer costs and countries imposing export restrictions on certain food crops which exacerbate the impacts on markets. For example, Indonesia’s decision in April to temporarily ban some components of palm oil put further upward pressure on biodiesel feedstocks.
It is unclear how or when commodity prices will come down, especially since the impact on markets are interrelated and widespread. While higher prices should encourage farmers to grow more crops, equally costly fertilizer supplies could limit overall yields, undermining the benefits of more planting. Export barriers could also limit increased production from these countries since farmers would be less able to capture export benefits.
Beyond market responses, governments are also considering whether biofuels help or hinder volatile fuel prices, energy and food security, and GHG reduction policies. These forces are playing out differently in various countries and regions, and by individual fuels. For instance, in India, ethanol policies are moving ahead as planned since ethanol helps reduce oil demand, decrease greenhouse gas emissions and sugar prices have increased less than other crops. In Brazil, biodiesel blending requirements remain relaxed because of high feedstock prices, despite higher GHG emissions and the need for more oil to make up for biodiesel reductions.
To date, ten governments have, or are proposing, relaxed, delayed or postponed biofuel blending requirements or GHG quotas this year, in addition to actions taken in 2021 because of already high prices. The stated rationale for these policy decisions is to reduce additional fuel costs borne either by consumers or by governments. The two exceptions are a proposal in Belgium which specifically targets crop-based feedstocks and statements from Germany’s Minister of Environment stating her intention to reduce crop biofuel use in Germany. Should high prices persist, other governments may also pause or delay mandates. Biodiesel and renewable diesel will likely be under the most pressure since prices for these fuels have risen faster than oil prices, and the vegetable oil market, which most of these fuels are produced from, continues to see high price increases. While some production may shift to wastes like used cooking oil and tallow, these feedstocks are already at high prices and in limited supply. On the other hand, the United States will temporarily extend its 15% ethanol blending mandate over the summer months with the aim of reducing gasoline prices for consumers.
Food security is also top of the agenda for many governments, but to date only Belgium and Germany are considering relaxing biofuel mandates to address this issue. This is primarily because there are better and more effective tools to address food security concerns. The FAO has recommended ten actions to manage current high prices, including maintaining trade policies, diversifying food supplies and supporting vulnerable groups. Nevertheless, China has warned ethanol producers that it will “strictly control processing of fuel ethanol from corn” and the European Union Commission has noted it will support member states that reduce mandates in the name of food security.
Governments are expected to tread carefully when considering reducing mandates, however. Any reduction in biofuel demand comes with an increase in both oil deliveries and GHG emissions, which runs counter to priorities for most governments with biofuel requirements. These policy priorities will likely make any changes temporary in order to address short-term challenges. Finland for example relaxed its targets for two years, while also increasing its long-term target blending target from 30% to 34% by 2030.
Policy reactions to high biofuel and oil prices
Policy proposal, change or continuation
Argentina passed a law to reduce the biodiesel blend rate from the original 10% to 5% because of high crop costs. The law also authorises the government to lower the biodiesel blend rate to 3%, and to halve the ethanol volume entering the fuel sector from corn ethanol if necessary.
Brazil will maintain its biodiesel blending mandate at 10% for biodiesel, from an intended 15% target for 2022. The move to 10% was made in 2021 and then continued this year to reduce diesel prices.
Belgium’s green coalition has shared a proposal to remove current biofuel mandates temporarily to reduce fuel and food costs and then slowly fade out crop-based fuels by 2030.
The Colombian government reduced its ethanol blending mandate from 10% to 4% from April 2021, with the aim of returning blending to 10% in September 2021. However, in August, Colombia extended the 10% increase to January 2022 but is now proposing a 6% target until August 2022.
The Czech government has proposed removing blending targets, but this will not be confirmed until the end of the year and greenhouse gas reduction requirements would still apply.
Finland will reduce its renewable energy requirement to 12% from 20% for 2022. It estimates this will reduce fuel prices by 12 cents per litre.
Germany’s Environment Minister proposed to “further reduce the use of agrofuels from food and feed crops," in response to high food prices resulting from the Russia/Ukraine war. There is of yet no proposal.
Sweden is proposing a pause to its GHG targets for the transport sector for 2023 at 2022 levels. Increases will continue post-2023.
Indonesia still plans on increasing its 40% blending mandate, but this is now not likely until 2023.
Croatia will remove penalties on blenders that miss their targets.
The United States is allowing 15% ethanol blending during summer months.