Key facts
- Spain's implementation of the EU's RED III directive is expected to increase demand for HVO Class III from 2027.
- The new mandate ends the practice of double counting for national biofuel obligations, requiring higher absolute volumes of renewable fuels.
- HVO Class III, made from category 3 tallow, is not eligible for double counting.
- Spain's HVO production capacity is approximately 900,000 t/yr, with Repsol being a major producer.
- Germany has also introduced policies supporting HVO Class III demand.
Spain's adoption of a mandate to implement the EU's recast renewable energy directive (RED III) is anticipated to boost demand for hydrotreated vegetable oil (HVO) Class III starting in 2027, according to market traders. HVO Class III is derived from category 3 tallow. The EU's RED III directive mandates member states to achieve a 14.5% reduction in greenhouse gas emissions from transport fuels or a 29% share of renewable energy in transport by 2030. Under RED III, biofuels from certain feedstocks listed in Annexe IX can be double counted towards renewable energy mandates, but this does not apply to GHG-reduction mandates. While there is a sub-target for Annexe IX Part A feedstocks, Annexe IX Part B feedstocks like used cooking oil (UCO) are capped. Spain has opted for a GHG reduction mandate in its RED III transposition, effectively ending the double counting practice for national biofuel obligations. This means obligated parties will need to use higher absolute volumes of renewable fuels to meet GHG reduction quotas, thereby supporting demand for drop-in fuels such as HVO. In Spain, biodiesel blending is capped at 7% and ethanol at 5%, while HVO can be blended up to approximately 20% into diesel. Cores, Spain's strategic reserves agency, estimates demand for biofuels blended into diesel in 2025 at 1.92 million tonnes, representing an 8.7% blend rate by volume. This implies about 40% of these biofuels were double counted. Argus Analytics projects Spain's HVO demand for 2025 at around 715,000 tonnes. Spain's legislation also increased the sub-target for Annexe IX Part A biofuels to 1.2% and maintained a 1.7% cap on those from Annexe IX Part B feedstocks. Category 3 tallow is not listed in Annexe IX and is ineligible for double counting in any EU member state. Consequently, HVO Class III has typically traded at a discount to waste-based grades like UCO-based HVO (HVO Class II), which also offers greater GHG savings (around 85-90% for UCO versus 72-82% for category 3 tallow). However, with Annexe IX Part B feedstocks capped and double counting unavailable under Spain's GHG mandate, compliance value will increasingly depend on GHG performance. This may narrow the value gap between HVO Class II and Class III, improving blending economics for Class III, as its higher GHG savings become a key advantage over Class II for obligated parties. Spain's HVO production capacity, including standalone hydrotreatment and co-processing facilities, totals approximately 900,000 tonnes per year. Repsol accounts for about 722,000 t/yr across its facilities. Moeve operates two co-processing plants with a combined capacity of roughly 86,000 t/yr and plans to add 500,000 t/yr of HVO and sustainable aviation fuel (SAF) production by late 2026 or early 2027. BP also produces HVO via a co-processing unit with a capacity of about 109,000 t/yr. Dreexo Energia and Alfa Laval are expected to launch a 100,000 t/yr hydrotreatment plant next year. Beyond Spain, Germany has introduced policies supporting HVO Class III demand. The country recently decided to allow category 3 tallow under its GHG mandate from 2026, subject to a restrictive 0.3% cap. Germany adopted RED III in April and retroactively ended double counting for Annexe IX biofuels in 2026. This policy change, coupled with capped biofuels, has led to HVO Class II and Class III being valued similarly in Germany based on their GHG savings. The Argus HVO fob ARA Class III/II spread narrowed to around $15/m³ on May 22, its tightest since August 2025, compared to an average of $72/m³ in 2025. These policy changes in Spain and Germany could stimulate greater movement of category 3 material beyond its traditional demand centers in northern Europe. The broader European picture remains mixed, with the Netherlands limiting incentives for category 3 tallow-derived biofuels and France proposing a 0.6% cap from 2027 to protect other sectors.