As at end-2020, US renewable diesel capacity totaled nearly 0.6 billion gallons per year (gal/y) and will soon reach 2.4 billion gal/y. Proposed and announced projects would add another 1.8 billion gal/y by 2024, and if all come online as planned, production would total 5.1 billion gal/y by end-2024.1https://www.eia.gov/todayinenergy/detail.php?id=48916
With well capitalised greenhouse gas reduction programmes, such as the federal Renewable Fuel Standard and California’s Low-Carbon Fuel Standard (LCFS) already in place, renewable diesel looks set to take a lead role in the fulfilment of renewable fuel targets. However, there are bumps in the road.
A board member at Environmental Fuel Research (EFR) told us that “overwhelming interest” and the sheer number of renewable diesel and natural gas projects in the pipeline across California mean “we’re starting to run up against the barriers of just how much of this product can the market actually absorb”, with the expert questioning whether “we’ve gone past the peak”. However, we heard that other ripe markets for renewable diesel include Oregon, Washington and, increasingly, Canada. The aviation industry is also an ideal candidate for renewable diesel, as diesel plants can be modified to produce more sustainable aviation fuels, a market that represents 20 billion gal/y. “What people are guessing is that some of the renewable diesel capacity that’s already being built will be converted to sustainable aviation fuel, and new capacity that comes online might be aimed in that direction.”
Another primary risk with renewable diesel is the availability of fat, oil, and grease (FOG) feedstocks. “We only used half of it [FOG supplies] in 2020 and we’re going to be using 88% of it in 2024,” the EFR executive said. Used cooking oil (UCO) is a key feedstock, with companies such as Darling Ingredients springing up to capture this resource and redistribute accordingly. But even here there are concerns. “Demand at the moment is completely outstripping supply,” an executive at Green Fuels told Forum. “If there are only 12 million tonnes globally and Europe needs six million of that, that gives a picture that demand is outstripping supply.” Palm oil could be a viable alternative, but as our experts noted, there are big environmental sticking points here. As we heard in another Interview, a lot of work is being done in North America on oil seed crops, including variants of canola, that could be grown to make feedstocks for renewable fuels.
Yet another risk, we heard, is the rising cost of UCO, which is projected to exceed that of soybean oil. “A year ago, the average price for all of these fats and oils was USD 0.29 per pound, now it’s USD 0.58 per pound,” the EFR board member noted. “That’s a big jump.” While this can be attributed to several factors, “the main factor is announced renewable diesel expansions and new plants coming online”, they added.
Meanwhile, the value of credits from California’s LCFS programme, which is based on the price for a tonne of carbon, have dipped. Our expert noted that the price of carbon in California in 2020 traded at an average of nearly USD 200 per tonne, adding about USD 2 per gallon to the price of renewable diesel. But, due to the large inflow of renewable diesel and renewable natural gas into the Golden State, the price is currently around USD 145 per tonne, having fallen to about USD 1.30 per gallon as at November 2021.
Other issues flagged to us in Interviews include uncertainty regarding whether the Federal Blenders Tax Credit will be extended and the rising costs of building renewable diesel plants. Indeed, one expert noted that a USD 500 million plant at the start of 2019 would now have a USD 600 million CAPEX price tag.
Against this backdrop, the EFR executive believes that “we have already seen the golden days of massive renewable diesel profits, peaking at the end of 2020”. They pointed to some figures from Diamond Green Diesel, the largest renewable producer in the US and a joint venture between Valero and Darling Ingredients. In Q3 2020, Diamond had an EBIDTA per gallon of USD 2.41, dropping to USD 1.95 in Q3 2021. “Still a great business, but nowhere near the USD 2.41 that Diamond Green Diesel had achieved.” The specialist said Q3 2020 through H1 2021 was an “amazing time for renewable diesel”, but they don’t see those figures returning. “I see the future in the USD 1-1.50 EBITDA range.”
Although there are a number of emerging risks, this also means there is an opportunity to plan for them accordingly. For example, as feedstocks become more scarce, operators can ensure that their pre-treatment capabilities can accommodate a variety of feedstocks. “These are relatively immature or thin markets… and so being able to work one’s way through the available materials seamlessly is probably the number one factor in profitability,” the former UOP executive said.
Government support for renewable fuels is likely to continue growing, with many companies investing capital for that growth. However, the industry’s growth is distorting supply-demand balances for key feedstocks, resulting in volatility in feedstock costs and thus profitability of the business.
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The information used in compiling this document has been obtained by Third Bridge from experts participating in Forum Interviews. Third Bridge does not warrant the accuracy of the information and has not independently verified it. It should not be regarded as a trade recommendation or form the basis of any investment decision.
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