Build a regulatory intelligence team The regulatory landscape varies dramatically among countries and regions and is evolving rapidly. Traders that develop a deep understanding of local market regulations, credit qualifications, future trends, and potential changes will be better able to shape their trading strategies and secure offtakes or supply arrangements. The economics of sustainable fuels such as renewable diesel, which has relatively high production costs, are highly dependent on regulatory incentives and vulnerable to regulatory uncertainty. For example, the cost of SAF from HEFA–UCO 14 in Europe without incentives was recently about $2,200 per metric ton, 100 to 150 percent more than the cost of producing fossil-based kerosene today. 15 That means users either rely on substantial credits (such as LCFS, Renewable Identification Numbers, 16 Blenders Tax Credit, or the new IRA credit stack in the United States) to break even or customers pay the required price for mandated volumes and pass those costs on to customers (the primary mechanism in the European Union). The outlook for many of these programs could be affected by regulatory changes, which will influence the price of subsidized fuels in the years ahead. For example, multiple IRA credits will expire after several years. The RFS program has also historically been volatile, with the price of RINs often driven by legislative outcomes and market perception of new targets set by the US Environmental Protection Agency. Develop global trade flow models Gaining an understanding of global trade flows, while feasible in the current context, will be far more difficult in the coming years given the level of uncertainty, lack of transparency (including the dearth of trade categories for some products), and complexity in the sustainable-fuel market.
Optionality is especially critical in this environment. Winning traders will model how fast each commodity will grow and in which market it will likely clear (including within-year demand dynamics) as well as anticipate shifts and monitor key changes in logistics capability and access within regions. Enhance origination capabilities Traders will need robust origination functions to secure offtakes or supply agreements for specific feedstocks and products that offer competitive flow advantages. Successful traders will structure these agreements to balance price, volumetric flexibility, and logistics to enhance optionality and derisk volume flows if market dynamics change. Traders also have opportunities to rent or buy blending facilities, acquire sustainable fuels (including certificates) and fossil fuels, perform blending, and detach sales of molecules and credits—essentially creating a secondary market in a given country for the certificates or “tickets.” Commodity trading organizations attracted to sustainable fuels by their dynamic nature and growth could try to anticipate how the market will evolve and identify inconsistencies in pricing across products or over time, offering opportunities for market arbitrages. Successful traders look for areas of greatest transactional volume and seek to build scale around these opportunities. Often, they will use scale to continue to capture value when margins collapse as the gaps start to close. Strengthen the trading team The interdependencies of feedstock, fuel, and credit prices within sustainable fuels and across other sectors are complex. Successful traders will need to model correlations among products and explore arbitrage opportunities across specifications, locations, and timing. For example, as demand grows for second-generation feedstocks for drop- in fuels, the prices of advanced waste and oils could become more volatile. Through 2021 and part of
14 Hydroprocessed esters and fatty acids produced from used cooking oil. 15 Giulia Squadrin, “European SAF market takes flight,” Argus Media Group, April 17, 2023; “Jet Fuel Price Monitor,” International Air Transport Association, accessed August 18, 2023. 16 The US Environmental Protection Agency’s Renewable Identification Numbers system is used to enforce and track compliance with the Renewable Fuel Standard program.
Accelerating the journey to net zero
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