What’s Going on with LCFS Credit Prices transcript
EcoEngineers recently analyzed 10 years of CA-LCFS data to project fuel supply, deficit and credit generation, and pricing analysis to estimate fuel supply and credit pricing trends from 2022-2025 and 2025-2030. We also conducted a virtual roundtable, and several experts joined me in discussing these burning questions, including EcoEngineers RNG Services Director Dave Lindenmuth, Carbon Consultant Chelsa Anderson who is the lead author of our RFS/RIN analysis report, and Dr. Roxby Hartley who, along with EcoEngineers CEO Shashi Menon, is the lead author of our LCFS Fuel Supply & Pricing Analysis Report.
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Brad Pleima, P.E. (00:07):
A lot of EcoEngineers, account managers, and consultants are getting the question, “What’s going on with LCFS credits?” Why have they gone from the highs of $200, to I think around $120 today? I brought some of our team onto this discussion. This is the team we recently completed some LCFS and RFS, and ran fuel supply and pricing analysis reports.
Brad Pleima, P.E. (00:32):
What’s happening in the LCFS market is tracking what we’ve been saying for the last 18 months, 24 months. I don’t think that’s a good thing, because I wish credit prices were back at $200 for everyone, but at least internally, it felt good for us to validate the assumptions and some of the models. I think that gives us some confidence about where we think the market’s going to go. What was the basis of the report, and how did you go about determining where… how are we going to frame up this LCFS analysis, and how did you tie it into pricing?
Roxby Hartley, Ph.D. (01:05):
One of the good advantages we have at EcoEngineers is that we see a lot of projects. One of the reasons why there were so many iterations is we have projects coming in, and we wanted to make sure that our report captured what we thought was going to happen with the credit supply market. We have many nascent projects. We see them from people’s ideas all the way through to fully functioning facilities. Because of that, we have a good overview of the credit supply that’s likely to come to the market.
Roxby Hartley, Ph.D. (01:36):
When we started doing this, we had the discussion, hey, what’s going on with the CI score with dairy RNG? What’s going to happen with the RD supply? Each director of services was looking and going well, yeah, there’s going to be a lot of extra credits coming from here. What’s going to happen with CCS for ethanol. When we started to discuss, well, how are we going to support credit crisis when we see all these surface specs come to the marketplace. So we decided, well, we’ve got to figure out one, where does the pressure point? At what point do we see credit crisis start to fall and where will they fall to? And that was the point of the modeling and figuring out the elasticity of demand at different credit prices for all the different fuel tax.
Brad Pleima, P.E. (02:30):
Also, just with the number of dairy projects, the number of renewable diesel projects, the low CI electricity, those are really the main three drivers. Of course, everything impacts the overall LCFS market, from new hydrogen projects, potential CCS projects, but really those three fuel types are really lowering the CI score like with RNG and electricity, or are shipping large volumes of fuel, like in the renewable diesel case into the California market. So were you surprised that this happened so quickly or is this, was this to be expected and maybe just in your opinion, did COVID have any accelerating impacts on that or is this kind of what you anticipated. And then two, maybe how long do you think this lasts?
Roxby Hartley, Ph.D. (03:18):
Definitely pushed the market into surface early, and it did back into deficit. I was really quite surprised to see the minus 60 CI score for average RNG for the last quarter that was reported. That happened a lot faster. I think the RD, renewable diesel, coming in, we low balled our estimates so that we of the volumes and that’s going a little faster than I anticipated as well. More of those plants are coming. Every single of these plants aren’t going to come online, but they seem to be coming online that are steady rate that we expected that they… to me, the announcements that were made about them. Yeah. So yeah, it’s going… It’s happening a little quicker than we anticipated.
Brad Pleima, P.E. (04:03):
The whole reason LCFS credit prices are declining is, there’s more credits out there in the market being generated on a quarter by quarter basis than there is deficits being generated. And if you think about renewable diesels, specifically, you’re taking in that is a hundred percent drop in replacement to diesel fuel. So a gallon of diesel fuel is generating a deficit. If you put in a gallon of renewable diesel, it’s now generating credits, but that gallon of diesel is no longer generating deficits anymore. And so you have this snowball effect of fewer and fewer deficits. Even though the compliance curve gets steeper and steeper when you start displacing more, more overall volume with renewables and that’s going to have an impact and it is having an impact on overall pricing.
Roxby Hartley, Ph.D. (04:54):
The thing about renewable diesel is it basically takes away the deficits, whereas the cannibalization of the RNG market with dairy gas doesn’t change the deficits and EVs don’t affect the deficits very much. They’ve got with the high EER of over three… between three and four, you’re seeing minus one 50 minus one 60 equivalent electricity. When it doesn’t displace that many gallons of petroleum gasoline. Renewable diesel displaces it pretty much one from one. So, yes, I agree completely.
Brad Pleima, P.E. (05:29):
You came at this looking at developing RNG projects. And what were some of the things that you were looking at when you were maybe on the other side, and then also, coming into the eco engineers team, seeing all of the LCFS report, the projections and supply analysis that we’re doing, anything surprise you? How do you think this is going to impact the RNG market specifically now that credit prices have softened a little?
Dave Lindenmuth (05:55):
Yeah. I think the first thing looking at renewable natural gas projects when we were evaluating or when developers evaluate, a new landfill or an existing landfill conversion project, I think everyone pretty much in agreement and realizes that the long term placement of landfill gas in California is probably not something you’re going to depend on if you’re developing a landfill gas plant. So, I think for the short term, LCFS is a nice bonus if you can get it for a few years in the front end of that project. But I think that most of those projects are being developed and built really with a dependence on the RIN values and the development of other voluntary or compliance markets. And as you move into the swine and dairy projects developers are counting on that LCFS revenue, but the stacking of LCFS credits and RINs helps to at least diversify that.
Dave Lindenmuth (06:54):
And so, I think the marginal projects, the ones that are smaller dairies and further away from pipelines and need trucking and really just make it there when you’re at $175 or $200 and need all of that LCFS revenue are going to be the first ones that start to maybe slow in development or question. But there are many other projects that work at $100 or $125, but definitely stress the development economics on the front end of the project and may slow some of the development on rushing out to get supply agreements or manure supply agreements that at you’re signing, that have the option that construction has to happen in 3, 6, 12 months. And I think that supply chain, and COVID, and just the rush to also develop these projects has, has stressed them a little bit from a time perspective.
Dave Lindenmuth (07:53):
A lot of the RNG projects are just taking a little bit more time to come online than maybe they had hoped. And then from an RNG perspective, the other piece of what was really surprising to me when reviewing the LCFS report and contributing a little bit is that when RNG development is looking at California in the LCFS market, they sort of look at it in a vacuum of what is RNG doing to the LCFS market, not really realizing the number of credits and the other projects like renewable diesel and hydrogen, and that the elect… the EV market that can… I think is, as you said earlier, Brad, can all together move the market, not necessarily each one of them independently. And so you have to remember as an RNG developer, you’re not the only one that’s looking to the California markets to gain revenue from the LCFS market. And you’re, you’re competing with other types of fuel. That’s going to get placed there and not just with other RNG projects.
Brad Pleima, P.E. (08:56):
What are we thinking for the next couple of years for RINs in general?
Chelsa Anderson (09:01):
Yeah. Thanks, Brad. I think the number one factor that when you’re looking at RIN prices, it’s going to be the RVO. The RVO really sets the requirement for how many RINs there are going to be needed. So the EPA has proposed the RVO for 2021 and 2022. And until they really finalize that, we don’t really know what that RVO is going to look like, but the hope is it’s going to continue to go up over the next coming years, which will make the demand for RINs, which will hopefully increase the price for RINs. Another factor with the RVO is that RIN bank carryover, and that will really dictate and change depending upon what that RVO is.
Chelsa Anderson (09:36):
The higher, the RVO that’ll lower that RIN bank carryover so the demand will be greater. But if that RVO is lower than what we’ve expected, that RIN bank carryover could carry a greater volume over, which would decrease that demand. So that could decrease prices. And probably the last thing that we’ve looked at is the cellulosic waiver credit. One thing to note about that gas prices are really high right now, and typically the higher the gas price, the lower that cellulosic waiver credit’s going to be. So that could have the potential to drive D3 RIN prices down, but we’ll just kind of have to wait and see what happens with those gas prices.
Brad Pleima, P.E. (10:12):
Chelsa, going forward in the next a couple of years, what are some of the things we’re looking for? Obviously setting the RVOs, what are we… overall, are we optimistic? Where do we think things are going to go with RINs?
Chelsa Anderson (10:28):
Yeah, I think overall we are optimistic that the RVOs will increase year after year. One thing we’ve been hearing, which is kind of interesting is the EPA might release the next three years RVOs, which could dictate growth, and we can kind of see what that’s going to look like. So hopefully that happens and we can see a greater insight, which kind of could help with pricing in the future.
Brad Pleima, P.E. (10:49):
Where do we think LCFS credit prices are going to go? Have we found a bottom? Do we think things could have the potential to decrease a little bit more? What about short term? Where do we think that’s going to go?
Roxby Hartley, Ph.D. (11:02):
My prediction is it will keep going down and find the bottom probably over the next two, three years. I don’t expect to keep decreasing as quickly as it has. In the long term though, I think the prospects are of broad. We’re seeing other markets coming online and we’re… and surprising we’re seeing… Well, not surprising. We’re seeing the voluntary market come about, and that might be influenced by the SCC with what they’re proposing to do. And I think generally carbon pricing is going to underscore the RCS prices in the medium for the long term.
Brad Pleima, P.E. (11:42):
Dave, what about you? Do you think this impacts development?
Dave Lindenmuth (11:46):
I do think it will affect development. I think where this will maybe drive some parties closer together is if people are willing to step in and decide what they think that bottom is. And if they’re willing to take a longer term agreement and say, we’re willing to step in and take the risk in the long term for the upside of where we think LCFS is going, projects may be more willing to take that and be closer together where they were maybe… Their opinions may have been 50 or $75 apart on LCFS credit pricing for that strike price. Then this may actually bring those two parties closer together, and you may see some longer term floor pricing or fixed pricing on the LCFS placement because those entities that are still placing RNG in California and dispensing it there want the lowest CI projects for their customers and their portfolio.
Dave Lindenmuth (12:42):
So they still need development of some of this gas, but they might be willing to maybe step in and take some more longer term floors or hedges the developers are willing to live with if they think there’s a lot more downside and want to protect themselves.
Brad Pleima, P.E. (12:57):
And at some point it’s not going to be economical to ship liquid fuels into California at some $100 LCFS credit price, wherever that bottom may be. It doesn’t really affect RNG, as you said. You’re going to ship RNG into California because you don’t have the transportation cost like you do on the liquid fuel side. So at some point when we find that, where that bottom would be, things are going to rebound and supply’s going to stabilize.
Brad Pleima, P.E. (13:21):
Well, I appreciate everyone’s time today. If anyone wants more information on the LCFS report or the RFS report, feel free to reach out to any of the four of us. And we can certainly provide you more information about it. So thanks. Thanks everyone for your time today. Have a good one.