Challenges and Opportunities in Biofuels

By Steve Hartig, Former VP of Technology Development at ICM

The North American biofuels market can be split into three main segments all of which have major dynamics.  What I would like to do is give a high-level overview of what I see as some of both the challenges and opportunities across these.

• Ethanol which is a produced from corn and sorghum in about 200 plants mainly across the Midwest and blended at about 10% with gas.  Majors such as POET, Green Plains, Flint Hills, Valero, ADM and Cargill do a bit more than half of the 16 billion gallons production with the rest done mainly by farmer co-op plants.  An average plant size is about 80 mln gpy.  About 10% of gasoline is ethanol.   Cellulosic ethanol is the newer area which has had many challenges but companies such as POET DSM are producing some volumes from crop residues and Lanzatech from gas streams.
• Biomass based diesel produced mainly from vegetable oils and waste fat in a large number of plants, typically rather small, across the US with the market leader being REG.  Total volume sold in the US, per the EPA was 2.3 bin gallons, in 2018 or about 4-5% of the total diesel supply.  Actual capacity is much larger at 4.1 bln gallons.
• Bio jet fuel which is still embryonic but an interesting are with about 25 bln gallons of potential.  What is exciting is that this area is likely to grow in volume over time and alternative approaches such as electrification are difficult for aircraft given the weight of batteries so this is a long term and growing market for biofuels

Challenges for the corn ethanol and biodiesel producers are very much around profitability and the regulatory environment while the embryonic cellulosic and jet fuel areas still has many technical challenges to prove viability.

Corn Ethanol

There is a huge challenge today due to oversupply versus demand driving prices down.  There is much arguing as to the cause of this but it seems to be a combination of low or no growth in gasoline demand, significantly added ethanol capacity, a slow uptake of higher-level ethanol blends and the EPA Small Refinery Exemptions.  This is aggravated by the dynamics in corn pricing this year due to weather.

Unless E15 volume increases significantly, things are only going to get worse as essentially all forecasts show gasoline volume decreasing over the coming five to ten years driven by increased fuel economy in the short run and vehicle electrification in the long term.

Forecasting what will happen is difficult as ethanol is very different than most commodity chemicals due to the relatively small plant size, driven by corn supply economics, and the large number of companies active in it.  In most commodity chemicals markets, a handful of companies control the market and new entrants are difficult due to the lack of economies of scale.  However, continued consolidation and the closing of smaller, less efficient and poorly located plants will continue.

The starting point for surviving any downturn and long term sustainable profit will be having a plant with a low cost position driven by a combination of scale, plant technology, location, operational excellence and strong maintenance.  The difference between leaders and laggards here can be over $.10 per gallon, which is huge.

However, the likely winners will be those that also embrace some form of specialization next to the commodity markets for ethanol, distillers grains and corn oil.

A number of options exist and this is also an exciting area of focus for many companies.

Main areas include:

• Moving towards higher value animal feed by fractionating the distillers grains into more focused animal feeds.   Options for this exist from many suppliers including ICM and Fluid Quip Process Technologies.  Both companies take an approach of splitting the DDGS into two streams, one a high protein feed product targeted at poultry, swine and aquaculture and the remainder being either a DDGS at the low end of the protein specification or a wet fiber and syrup product targeted at cattle.   The value comes from the fact that the higher protein product more competes with soy rather than corn and  can capture a higher price.  Both companies have multiple installations in place and claim paybacks in the 2-4 year range.  Considerations for installing these technologies would include plant scale and geographic location with proximity to cattle allowing the use of wet feed an advantage.

• Towards the future, options will include using stillage as a fermentation broth such as both White Dog Labs and KnipBio are developing.  Both companies are focused on using the relatively inexpensive stillage to produce single cell proteins aimed at aquaculture.  These products can potentially compete with fish meal which a$1500/ton and is also limited in growth potential. White Dog Labs has announced an initial installation in Nebraska while KnipBio has announced a cooperation with ICM towards commercializing their technology.

• Focusing on California and the increasing low carbon fuel markets.  Today, with the value of a carbon credit close to $200, a plant with a CI of 75 can get a premium of over $.25 per gallon.  There are only a few plants in the 60’s but many in the mid 70’s.  Typical approaches include alternative power sources such as land fill gas or anaerobic digestion to biomethane combined with cogeneration of electricity and steam.  Other options include solar or biomass boilers.  A newer approach is the use of membrane technology to reduce the energy used in the molecular sieves or alternatively modifications to the evaporators.  The keys when considering this approach would include a good starting point with plant efficiency and the cost of west coast shipment.

• Using the ethanol plant as a platform to produce other products.  Edeniq has a number of plants producing cellulosic ethanol from corn fiber while both ICM and D3Max have their first, larger scale, plants under construction.   Cellulosic ethanol from corn fiber is much lower cost to produce than cellulosic ethanol from crop residues or energy crops.  Edeniq has no capex and claims a cellulosic ethanol amount of 3-4% while both D3Max and ICM indicate levels more in the range of 7-8% but have significant capital.   However, the payback can be short given a combination of a D3 RIN and potential LCFS credit.  Another alternative in the future may be butanol with Gevo (NASD:GEVO) and Butamax both having demonstration facilities up and running.

I believe these options will be a game changer for the industry but companies must make the right choice based on starting position, plant location, scale and technology, risk tolerance, operational capabilities and capital availability.  A key item for many of these is that they will typically create a more complex plant and business environment which can require a higher level of staffing, capability and management expertise.

I think the future can be bright for ethanol but I foresee a future that likely has fewer, larger and more sophisticated plants than are in place today.

Biomass based diesel

Biomass based diesel (BBD) has very different dynamics with about 100 plants in the US, some of which are very small, less than 10 mln gallons per year.  Many of the plants are driven by location by feedstocks, either soy or corn oil or waste fats and greases.  Demand for BBD is very much driven by the RFS as it typically costs more than petroleum-based diesel but can fulfill either the D4 BBD RIN or the Advanced D5 RIN.  This is particularly the case with the biodiesel tax credit lapsing in 2017 and, at least so far, not being renewed.

The big change going on now is the shift towards renewable diesel, presently about 15% of total BBD, which is more costly to produce but is essentially a drop in for diesel and can have lower carbon numbers, depending on feedstocks.  Due to the lower CI it is being heavily targeted at California for sale under the Low Carbon Fuel Standard.  In addition, it can capture a greater RIN value.

The plants scheduled to come on line over the next few years is mind boggling given today’s position.  Expansions planned or proposed by Diamond Green (a joint venture between Darling Ingredients (DAR:  NYSE) and its joint venture partner Valero Energy (VLO:  NYSE)), NEXT Renewables, RYZE, Philips 66 (NYSE:PSX)/Renewable Energy Group (NASD:REGI) and others could add up to 2 bln gallons of new Renewable Diesel volume focused on West Coast markets and almost doubling the total volume of BBD volume.  This is in addition to global expansions in biodiesel by companies such as Neste and companies coprocessing it in oil refineries.

Selected US Renewable Diesel Projects

Note:  Project information from company websites and public announcements

This will have significant impacts on the market:

• The total diesel fuel market is not expected to grow much, per the EIA, so this fuel will need to displace petroleum-based diesel which may negatively impact pricing.   There also is more capacity than there are RINs available which will have a downward impact on that.  On the plus side, is the LCFS which is spreading beyond California and will bring a carbon credit.  REG indicated in their 10k that the 2018 value was between $.40-.80 per gallon.

• Regulation unclarity will continue between the RFS volume obligations, tax credits, trade policy, and the Small Refinery Exemptions which appear to have more impact on BBD than ethanol.  Right now, several smaller BBD producers are not operating due to lack of profitability.

• How about feedstocks?  Right now BBD uses a combination of soy oil, corn oil and waste fats and greases.  BBD today uses about a third of the US soy oil supply so this will clearly impact pricing and availability certainly in the shorter run.  What will aggravate this is that all the feed streams are byproducts of other processes so cannot be increased on their own along with all the dynamics hitting soy on the trade side.  The EPA in their draft 2020 RVO estimates that from 2019 to 2020 feedstock availability would be enough to produce about 144 men gallons of advanced biodiesel and renewable diesel.

I think this business will continue to have challenges in the future and it is also likely not all the plants proposed will be built but the trend towards renewable diesel will continue.

Bio-jet Fuel

Bio jet fuels have a completely different environment that ethanol and biodiesel both as they are presently not mandated by the government and also as they are in an earlier stage of technical development.

There are three broad technology areas that cover much of the effort.  Most technologies would produce a fuel that could be blended at some level with standard jet fuel.

1. Renewable diesel/oil to jet—This process is an additive process to biobased diesel taking the diesel and cracking it, isomerizing it and then purifying the end product.
2. Alcohol to jet—Basically taking an alcohol, either ethanol or butanol, and then dehydrating it to remove the extra oxygen and then catalytically or chemically converting this to jet fuel.  The advantage of this is the ethanol routes are well developed so only the final process step is new.  Potentially this could consume some of the excess ethanol in the market but that would likely be with a penalty to CI compared to routes such as LanzaTechs using cellulosic feed streams.  Players here include Gevo, LanzaTech and Byogy.
3. Gas to liquids—the typical routes here are gasifying a biomass or MSW stream into syngas and then using technology such as Fischer Tropsch to convert it to jet fuel.  Pyrolysis is another alternative.  This is earlier stage technology but has the potential for very low carbon due to feedstocks and will have wide feedstock availability.  Players here include Red Rock Biofuels and Fulcrum.

Selected US Jet Fuel Projects

The diesel fuel route is clearly the one with the fewest technical hurdles but will run into the same feedstock issues that biodiesel has if it moves to any significant volumes.  Alcohol to jet would be the next most straightforward while it seems like the gas the liquids route has the best carbon footprint and also feedstock potential.  However, it is unclear what the cost will be and what technical hurdles they will hit.

The next five years will see major learning taking place as commercial plants for many of these technologies are underway.

What makes bio jet particularly interesting and challenging is that it really is a global market so any regulations put in place by a single country could be very challenging to implement and enforce.  Conversely, given the global trade environment it seems unlikely that a global pact will appear anytime soon.

Without a mandate, it appears the airlines are broadly experimenting with biofuels but not making any major commitments.  My cynical view would be that they are doing everything they can to show progress while putting minimal money on the table.  Given the impact of fuel prices on airline profitability and the fact today that most or all biojet fuels will be more expensive than fossil-based fuels I would guess progress will move slowly.

Looking at the RFS, the pathways exist to capture a D4 RIN for biodiesel type approaches, a D5 RIN for Renewable diesel approaches and a D7 when using cellulosic feedstocks.  It does not appear that there is an existing pathway for a corn-based ethanol to jet fuel.

The question is what the RFS will do if biojet fuel grows significantly in volume as they presently define all their mandates based on surface transportation.  If there were suddenly an extra billion gallons of RIN’s available without the obligated parties needing to purchase them this would crash the value of the RINs.  California is working on routes within the LCFS but this presumably would be restricted to California.  Overall, this could provide benefits would not want to bet a business on the availability of RINs.

Long term, I think bio jet fuel will be a large and important market but it will take some form of carbon charge or other mandate.  Until that it will likely stay small.

I think today is an exciting time in biofuels, as always, with lots of dynamics and opportunities for companies to succeed but also fail.

Author Notes

Steve Hartig is an experienced executive with almost 40 years of experience across DuPont, DSM and ICM in leadership roles.  He is presently acting as an advisor/consultant to companies in the biofuels and other segments.

This post first appeared on Biofuels Digest. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

The post North American Outlook on Biofuels Challenges and Opportunities appeared first on Alternative Energy Stocks.

by Jim Lane

In hand we now have the latest earnings reports from what you might call the 8 Pathfinders – eight publicly traded stocks whose second quarter results offer insights into the health and performance of the advanced bioeconomy as 2019 heads towards its closing crescendos.

Our 8 Pathfinders – In the world of global renewable diesel at scale, Neste (Neste.HE); pure-play enzymes, Novozymes (NVMB); In pharma and synbio, Codexis (CDXS); as a hybrid play in advanced fuels, Aemetis (AMTX); in advanced marine and jet fuels, Gevo (GEVO); for biodiesel and hydrocarbons, Renewable Energy Group (REGI); in advanced began foods, Beyond Meat (BYND), and for a diversified ethanol and nutrition play, Green Plains (GPRE).

At Neste

As CEO Peter Vanacker, noted: “Neste’s solid financial performance continued. We posted a comparable operating profit of EUR 367 million in the second quarter, compared to EUR 277 million in the corresponding period last year. Renewable Products’ quarterly sales and production volumes were the highest ever. The renewable diesel market continued to be favorable, but feedstock prices increased as communicated earlier. Our sales volumes were 745,000 tons, and this new quarterly record was also supported by the excellent operational performance at the refineries. The higher sales volume had a positive impact of EUR 79 million on the comparable operating profit year-on-year. The comparable sales margin averaged at USD 568/ton, which was 12% higher compared to the corresponding period last year, leading to a positive impact of EUR 32 million on the operating profit. During the second quarter 65% of volumes were sold to the European markets and 35% to North America. During the quarter our renewable diesel production facilities operated at a very high average utilization rate of 105%, based on the nominal capacity of 2.9 Mton/a. The share of waste and residues was 77% of the total renewable raw material inputs.”

Outlook: Developments in the global economy have been reflected in the renewable fuel, feedstock and oil markets; and volatility in these markets is anticipated to continue. Vegetable oil price differentials are expected to vary, depending on crop outlooks, weather phenomena, and variations in demand for different feedstocks. Global oil product demand growth is expected to continue at a lower rate than in 2018, while global refining capacity additions are expected to grow driven by large projects in Asia and the Middle East. Based on our current estimates and a hedging rate of approx. 80%, Neste’s effective EUR/USD rate is expected to be within a range 1.14-1.16 in the third quarter of 2019.

At Novozymes

Novozymes “confirmed on all fronts following the adjustments communicated on June 6,” with First-half year-on-year (y/y) organic sales growth of -3%: Household Care -2%, Food & Beverages -2%, Bioenergy -4%, Agriculture & Feed -6%, Technical & Pharma +2%. EBIT margin 30.0%. Net profit up 1 percentage point (y/y).

CEO Peder Holk Nielsen said, ““Our half-year sales performance is not satisfactory, but as expected, following the revised full-year outlook on June 6. Softness in US agriculture and some emerging markets, including the Middle East, has created headwinds. We’re confident sales growth will accelerate in the second half of the year as the Freshness platform, BioAg and Bioenergy all step up, and the Middle East comparison eases.”

At Codexis

As CEO John Nicols noted: “Product revenue increased a very solid 68% over the prior-year period with strong contributions from Merck, Urovant Sciences and four additional global Top 25 pharmaceutical customers. R&D revenue was spread across an increasingly wider base of customers including Nestlé Health Science, four global Top 25 pharmaceutical customers, and two new customers in two new verticals. We also secured a dedicated R&D project team working with another new global customer targeting an entirely different molecular diagnostics application class for Codexis. Additionally, we are delighted with Casdin Capital’s $50 million investment in Codexis, as announced in June. We appreciate their confidence and their recognition of the versatility of our CodeEvolver platform technology.

Q2 revenues were $12.3 million, compared with $13.5 million for the second quarter of 2018. Product revenue was $6.2 million, up 68% from $3.7 million for the second quarter of 2018, with the increase reflecting customer demand for enzymes for both generic and branded products.The net loss for the second quarter of 2019 was $6.5 million, or $0.12 per share, compared with a net loss for the second quarter of 2018 of $3.7 million, or $0.07 per share.

Codexis is affirmed its financial guidance for 2019 for revenues are expected to be $69-$72 million; and product revenues are expected to be $26-$29 million.

At Aemetis

Aemetis’ reported in Q2 $11.1 million of revenue from India operations during the second quarter of 2019, representing a 106% increase from the prior year quarter.  Aemetis said it continues to advance its ultra-low carbon California cellulosic ethanol biorefinery, which is expected, upon completion, to add approximately $80 million of high margin revenues. Utilizing thousands of tons of waste wood from California’s Central Valley, the Aemetis cellulosic ethanol biorefinery is expected to produce the state’s lowest carbon ethanol fuel and reduce greenhouse gas emissions in the process.

At Gevo

Gevo reported $5.1M in quarterly revenue, a $4.7M EBITDA loss and ended the quarter with cash and cash equivalents of $29.2 million. The company entered into an agreement with Air TOTAL for Gevo to supply its sustainable aviation fuel to Air TOTAL for use and distribution in France and other parts of Europe.  With the finalization of this new supply contract, Gevo will initially supply Air TOTAL SAF from the South Hampton facility in Silsbee, Texas and eventually from the expansion of Gevo’s advanced biofuels production facility in Luverne, Minnesota plant which is expected to be constructed in the next several years. Gevo also reported successful completion of the Port of Seattle renewables trial, and a trial with Virgin Australia.

CEO Pat Gruber noted “the pieces necessary to drive Gevo’s business are falling into place.  We believe we are making real progress on refinancing our secured debt, securing offtake agreements for our advanced renewable biofuel products and advancing manure biogas and wind projects to decarbonize our Luverne Facility.  Evidence of our progress include the supply agreement with Air TOTAL.  In addition, we are working on securing a loan for up to $45 million that could be used, in part, to pay off our current secured lender.

At REG

REG reported 197 million gallons sold, 127 million gallons produced, revenues of $560.6 million and adjusted EBITDA of ($42.3 million).

REG’s average selling price per gallon was $2.70, a decrease of 13.2% resulting primarily from lower biodiesel prices, which were down $0.55 per gallon from the second quarter of 2018. The lower biodiesel prices resulted from customers’ preference to take on smaller share of the benefit of a potential BTC reinstatement, and from lower ULSD prices. D4 RIN prices in the second quarter of 2019 were $0.16 per RIN lower on average compared to the second quarter of 2018. The Company produced 126.8 million gallons of biomass-based diesel during the quarter, a 2.0% increase.

CEO C.J. Warner noted:  “The challenging margin environment continued in the second quarter as a result of uncertainty around both the BTC and small refinery exemptions. Within this context, our underlying performance was strong with a 15.0% increase in gallons sold and a 2.0% increase in gallons produced. We continue to believe that the BTC will be reinstated, which will reward our strong operational performance. On the non-operating front, we are pleased that we finalized the sale of our Life Sciences business and paid off our 2019 convertible notes without financing, primarily from cash on hand.”

The Company estimates that if the currently lapsed BTC is retroactively reinstated for 2019 and 2018 on the same terms as in 2017, REG’s Adjusted EBITDA would increase by approximately $81.0 million for the quarter.

At Beyond Meat

BYND reported net Q2 revenues of $67.3 million, an increase of 287%; gross profit was $22.7 million, or 33.8% as a percentage of net revenues, net loss was $9.4 million, or a loss of $0.24 per common share, compared to net loss of $7.4 million, or a loss of $1.22 per common share in the year-ago period; and adjusted EBITDA, which is a non-GAAP financial measure, was $6.9 million compared to an Adjusted EBITDA loss of $5.6 million in the year-ago period.

CEO Ethan Brown said, “We are very pleased with our second quarter results which reflect continued strength across our business as evidenced by new foodservice partnerships, expanded distribution in domestic retail channels, and accelerating expansion in our international markets. We believe our positive momentum continues to demonstrate mainstream consumers’ growing desire for plant-based meat products both domestically and abroad,”

Brown said that Q2 growth was driven by an increase in sales volumes of products in the fresh platform across both retail and restaurant and foodservice channels, driven by expansion in the number of retail and foodservice points of distribution, including new strategic customers, international customers, and greater demand from existing customers.

At Green Plains

Green Plains reported a Q2 net loss of $45.3 million compared with net loss of $1.0 million, or $(0.02) per diluted share, for the same period in 2018. Revenues were $895.9 million for Q2 compared to compared with $986.8M for Q2 2018.

CEO Todd Becker noted, ““We continued to face a challenging ethanol margin environment compounded by a reduced run rate early in the quarter as we emerged from a first quarter production slowdown that impacted our financial performance,” commented Todd Becker, president and chief executive officer. “We believe that maintaining a strong balance sheet while continuing to reduce operating expenses through our Project 24 initiative, should give us the financial stability to withstand any elongated margin weakness the industry may face.”

“While our company and industry have been hit hard by government policy, geopolitics and oversupply, we are not waiting for the recovery to happen. We will continue to transition this platform to high protein animal feed production as a growing driver of more predictable and stable earnings, beginning with the completion of our high protein project in Shenandoah, Iowa in late 2019.”

Becker confirmed an LOI to sell a minimum of 50% of its cattle subsidiary for $75M. He also said that Project 24 remains on course “in lowering our operating expenses to an estimated 24 cents per gallon across our ethanol platform.

Looking at the Sector

So there we have it, choppy waters. Fast growth at Beyond Meat, confidence and strong growth in renewable diesel crisis in first gen US ethanol and biodiesel, lackluster growth in enzymes, particularly in agriculture. Synbio product revenues continue to be small but fast-growing, as we see at Codexis; Indian biodiesel finally performing as long expected, but slow development within Aemetis’ cellulosic ambitions. Gevo continues to zig and zag in search of the capital to realize its ambitions in marine and jet, with significant offtakers showing increased interest in the platform.

The bottom line, the more advanced the technology (Beyond, Neste, Codexis), the better the results for this quarter. For a number of years there has been a real increase in the dependence of the industry on its more established companies and sectors, such as first-gen ethanol, biodiesel, and conventional protein. The pendulum has been singing towards “advances via advanced” and it will be interesting to see how the second half of the year shapes up.

For sure, the Trump Administration is just killing farmers, advanced manufacturing and domestic renewable fuels. EPA has been a thorn in the industry’s side ever since the agency was handed responsibility for administering the Renewable Fuel Standard, but never more so than now. The distress is real, though companies that saw the headwinds are doing better than others. As Green Plains’ Todd Becker observed, “we are not waiting for the recovery to happen.”

Transition is in the air — it is a Year of Living Endangeredly.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

The post Living Endangeredly- Q2 Biobased Earnings Roundup appeared first on Alternative Energy Stocks.

by Jim Lane

In another small but sharp blow to the Trump Administration’s strategy for American manufacturing revival, news arrives from Texas of a second smaller biodiesel shuttering owing to “ challenging business conditions and continued federal policy uncertainty,” as Renewable Energy Group (REGI) phrased it in announcing the closure of its15 million gallons per year New Boston, Texas biorefinery.  The company is currently working with plant employees on relocation opportunities within the production network.

The tax credit issue

The forces impacting the US biodiesel industry at present are complex, but REG in this case is pointing the blame at the biodiesel tax credit, the renewal of this tax credit has been stalled for more than 18 months in Congress — the credits expired at the end of 2017 — and there has been no definitive progress on renewal (or clear progress on new directions) from Congress, which has stymied the US biodiesel industry in terms of its long-term capital and operating strategy formation and execution.

“This closure comes today as a result of the poor economics over the last 18 months resulting in large part from the uncertainty surrounding the Biodiesel Tax Credit,” said Cynthia J. Warner, REG President and CEO.  “Despite significant bipartisan support, Congress’ inaction on this value-added incentive has led to unsustainable market conditions.”

Iowa US Senator Chuck Grassley was more blunt. “The long delay in addressing these provisions is needlessly putting thousands of good paying green jobs at stake. A couple of weeks ago we saw a biodiesel plant in Nebraska close down, costing about 40 employees their job. And just today Renewable Energy Group announced it’s closing a Texas plant due to the uncertainty of the tax credit. Should we fail to extend the biodiesel tax credit soon, many more could follow. That would put the 60,000 jobs supported by the biodiesel industry nationwide in jeopardy.”

As Grassley tipped, earlier this month the Duonix joint venture between Flint Hills Resources and Benefuel announced the closure of their biodiesel plant in Beatrice, Nebraska.

Both the Duonix and New Boston decisions were styled as plant closures, rather than idlings, and the future of the respective project sites is unclear at this time, though we can essentially rule out re-opening of the plants under current conditions. Divestiture or scrapping — and re-purposing under new management — all have to be considered possibilities for the projects., For the employees, it represents a heartbreaking cessation, and the loss of good-paying jobs in rural America.

Grassley takes to the Senate floor

Grassley pointed the finger at House Democrats for stalling on the tax extenders package.

“The budget and debt limit agreement announced Monday is yet another missed opportunity to provide answers for the millions of taxpayers – both individuals and businesses – who are waiting on Congress so they can finalize their 2018 taxes and in some cases even stay in business. While Finance Committee Ranking Member Wyden and I have been ready and willing to address tax extenders since early on in this Congress, the new Democratic majority in the House of Representatives has been reluctant to act.”

It may well be that the failure to include a tax extenders package in the budget and debt agreement was the final straw for REG management in terms of the decision on the fate of the New Boston plant.

According on Grassley, according to the U.S. Joint Committee on Taxation reports that green energy incentives make up 60 percent of the tax extenders package, including provisions for renewable fuels, to promote electricity generation from  renewable sources and tax incentives for more energy efficient buildings and homes.

Grassley noted:

“Here I would have thought the new Democratic majority in the House would be all about “green jobs” and reducing our nation’s carbon emissions through alternative-energy sources. Yet, they have been reluctant to embrace a bipartisan tax package with nearly 60 percent of the cost dedicated to green-energy incentives. These provisions include relief for homeowners who obtain debt forgiveness on a home mortgage, a deduction for mortgage-insurance premiums and a provision that allows college students to deduct tuition and related expenses.

“To highlight just one of these provisions, in 2017, over 1.5 million taxpayers took advantage of the college tuition deduction. You can think of that as over 1.5 million students who have been left dangling for 2018 and so far this year as Congress continues to consider whether or not to extend this deduction.”

The New Boston backstory

We reported in November 2012 that REG had  acquired the 15 million gallon per year biorefinery located in New Boston, Texas, REG paid $300,000 in cash and issued 900,000 shares of its common stock to North Texas Bio Energy for the multi-feedstock biorefinery located about 22 miles west of Texarkana. It was REG’s second Texas biodiesel production facility, following its 2008 acquisition of its Houston-area plant. The New Boston facility began production in June 2008 and has been idled for approximately four years.

We reported that the plant underwent construction and upgrades and re-opened in July 2013. At the time, REG planned to utilize animal fats and other high free fatty acid feedstocks to produce biodiesel at the refinery.

In many ways, a change in policy helped propel REG to make the acquisition in the first place. As we reported in August 2011, a change in Texas law came into effect that month that offered a more straightforward way of tracking biodiesel use, and therefore qualifying for a tax exemption. Previously, oil companies had been required to track and report biodiesel blending to the tenth-of-a-percent but the new rule allowed tracking to a whole percentage point. The old rule had been burdensome for most, meaning many didn’t take advantage of the tax break nor biodiesel blending. The change had been tied to hopes for a stronger biodiesel market in Texas. h

The New Boston story over the 6-1/2 years of REG ownership had been one of significant strides towards better operation and cost. In the end, not enough.

“We truly appreciate all the efforts of our team and those that support our New Boston plant,” said Brad Albin, Vice President of Manufacturing.  “They significantly improved safety, demonstrated capacity, yield, quality and costs. However, these improvements could not overcome the unfavorable economics of the plant relative to our other options for ongoing focus and forward investment.”

Other economic forces at work

Facility size increases. While a 15 million gallons facility would not have been considered large by industry standards even back in 2012, the size of typical biodiesel or renewable diesel plants has been on the rise. NEXT Renewables has announced a 600 million gallon project for the Columbia River, REG and Phillips are planning a 250 million gallon renewable diesel plant in Washington state, World Energy is expending to 300 million gallons in California, and Diamond Green Diesel is expanding its 170 million gallon facility in Louisiana. The pace of construction and the scale of production is widely considered to be great news for renewables, but puts added pressure on smaller facilities.

As REG CEO CJ Warner noted for the Digest readers, “There’s a strong analogy to oil refining, here. Over time, we will see greater economies of scale and larger projects, that’s the natural progression and it’s good for everyone. But, the smaller plants have a place, especially if they have good locations, adjacent to a feed or a product market, and that’s especially the case with biodiesel. There are good reasons why smaller-scale plants can work well, whereas for renewable diesel it really needs to have scale because of the capex involves. The problems come when the policy uncertainties mount up.”

EPA policy on biodiesel expansion. The EPA has proposed, even in the face of massive proposed capacity expansions, to keep US biodiesel mandates at the 2,4 billion gallon mark through 2020 and 2021. And, small refinery waivers have destroyed demand for biomass-based diesel as well as ethanol in the US.

Warner commented,”there has been a very broad brush painted on the Renewable Fuel Standard, and almost a complete misunderstanding of the differences between the ethanol and biodiesel economics. They are not very similar in many important respects. As Scott Irwin in an important paper out of the University of Illinois pointed out, with the way ethanol is used for gasoline and octane, the small refinery exemptions have not resulted in the kind of demand destruction as we have seen with biomass-based diesel. The RVO has not been expanding, and when you add in these waivers, the total volume impact is significant.”

And, a recent win for ethanol on E15 isn’t going to add any joy for biomass-based diesel, either. With year-round ethanol approval stuck for many years at E10, the oil industry blended as much as 300 million gallons of biodiesel in select years to comply with the general volume requirements that both corn ethanol and biomass-based diesel can be used to satisfy. The E15 year-round approval was a huge win for ethanol, but was of negative value for America’s favorite advanced biofuel.

Trump gets a raspberry from farmers in Iowa

It may be that the biodiesel impacts of recent actions on the RFS led to an unexpectedly sour reception for President Trump in a farm state tour, according to observers who had expected the President’s reception to be “a victory lap”. The Digest has learned that, on Air Force One after leaving the Midwest, the President expressed dismay at the impact the EPA’s small refinery waiver program was having with his political base. “I don’t understand why Exxon gets one,” the President is said to have remarked. EPA Administrator Wheeler struggled to explain the optics of a program that focus on refinery profits and hardship rather than refiner profits and hardships, but is described as having pushed back hard with the President on the basis that the EPA is required to follow the law regarding refinery waivers. Trump’s reported reaction to the problem? It’s up to Agriculture Secretary Perdue and Administrator Wheeler to work it out.

More economic forces at work

Low soybean prices. Trade difficulties with China have been cited as a factor in low prices for US soybeans, and that’s meant that plants using advanced technology to process more exotic feedstocks, such as waste oils and greases, have faced tougher competition from first-generation soy oil-only plants.

REG’s Warner noted, “Here’s another case where an analogy to oil refining is helpful. As refiners started to invest in higher complexity configurations, for example to handle higher sulphur and lower cost crudes, there became a light/heavy differential in the market for crude feedstocks. If you had a refinery focused on light, sweet straight refining, you hardly made any money but sometimes you could do better than anyone else, when the differential between the heavy and light feedstocks changed dramatically.

In our business, there’s usually a big discount for the more challenging feedstocks, and soy is more expensive, like the light sweet crude. The straight run soy biodiesel plant is harder to make money at in most cases, but right now we have have a shrinkage of that differential.”

Exports. Export conditions are not favorable owing to trade wars, low oil prices, and uncertainty over the future of diesel engines, and international policy uncertainty.

Are there export opportunities? Yes, says Warner, but points us to carbon intensity. “That’s the key,” she said. For more and more states and nations, the value of a lower carbon intensity fuel is rising, and for that reason a biomass based diesel can be very effective. There will be more demand for low carbon intensity fuels and the Nordics are an example. Also, Canada is developing a program, and British Columbia already has a program.”

California’s Low Carbon Fuel Standard impact. The LCFS favors renewable diesel, which generally has lower carbon intensity scores and higher blend rates than conventional biodiesel. This has the impact of steering REG’s attention, among others, towards large-scale renewable diesel plants using waste-based fats, oils and greases.

Not so fast, cautions Warner. “Our new blend UltraClean as a combination of biodiesel and renewable performs very well for engine and environment. Also, we can blend biodiesel at a higher percentage than in the past, and we have opportunities in the Midwest now for B100 even in the polar vortex. People have thought of biodiesel as a B5 product, or a B20 in the summer, but through technology we are seeing that change.”

Capex opportunities elsewhere

For companies such as REG and JVs such as Duonix, the capex requirements — for creating a scale of production and favorable feedstock mix that made these two projects more competitive — proved to be prohibitive. Simply put, companies like REG have been forced by US policy uncertainty into a quandary over potential costs of capital (not knowing whether expansion could be financed through cash flow or by debt, for example), and that’s bound to stymie investment at the more marginal project sites, possibly now as well as into the near future. Only the largest and most profitable refineries and new projects are likely to clear the risk vs return hurdle while bumpy US policy continues to confound experts, producers, and analysts.

As Warner confirmed to the Digest, “you need to have certainty to invest, so the programs have to become law, and there has to be a track record that warrants the risk.”

The Bottom Line

Is this the end to plant closures, or idlings and slowdowns? Unfortunately, it is not likely to be the case — more facilities are bound to be impacted the longer this policy impasse remains. Though the nameplate production is small in the case of New Boston, it’s a sign of the times and not a good one.

The fix? For now, there are three opportunities, all in the hands of the  US federal government, that could provide more support for the renewable fuels industry and the advanced manufacturing job growth.

1. More positive action from the Trump Administration on trade that could re-open export opportunities for fuels or soybeans.

2. EPA action on biomass-based diesel demand targets.

3. Action from the Congress on the renewal of the biodiesel tax credit.

Longer term opportunities? Oil prices are expected to rise in 2020 and may remain elevated over current conditions throughout 2021. Currency moves may help US producers more in the future — the dollar is strong at the moment, making exports even tougher than they already are. Also, further bans on palm oil as a feedstock for biodiesel — in the EU or elsewhere — would also be beneficial for US producers though not for overall global biodiesel demand.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

The post Another Biodiesel Plant Gets The Axe. Here’s Why. appeared first on Alternative Energy Stocks.

by Jim Lane

When the world’s leaders for sustainable aviation fuels have a general meeting the week before the COP24 global climate sessions (this year in Poland), you can bet that the focus will be breaking the “You Can Have Two out of Three Conundrum” of aviation fuels. Which is to say: affordable, available at scale, and sustainable, pick any two of the three.

Fossil fuels are (usually) affordable and always available at scale. Sustainable jet fuels that are available at scale have generally not been affordable to date, and affordable sustainable fuels have been mostly explored at bench scale, so far.

San Francisco’s buying more renewable fuel

Case in point, the exciting and welcome news that Shell, World Energy, SkyNRG, KLM, SAS and Finnair have joined forces to reduce carbon emissions at San Francisco Airport.

Turns out that Shell Aviation and SkyNRG have commenced the supply of sustainable aviation fuel (SAF) to international airlines KLM, SAS and Finnair at San Francisco Airport (SFO). The fuel is produced by World Energy, currently the only at0scale SAF refinery worldwide, at the Paramount refinery in Los Angeles, and is made from used cooking oil, resulting in a fuel that has significantly lower lifecycle carbon emissions than conventional jet fuel. In general, sustainable aviation fuel has a reduction potential of 60-80%, compared to conventional jet fuel.

And, isn’t this the same refinery that provided diesel and jet fuel blends for which the Navy paid $2.07 a gallon in late 2015? (And, though that was a 10 percent biofuels blend, the same refinery won a competitive bid in 2017 for a 30 percent biofuels blend).

So what’s not to like? In the context of aviation demand, running at billions of gallons worldwide and every drop of that airlines would like to switch-over to sustainable aviation fuels — there’s the problem of Peak FOG.

No that’s not something you see in San Francisco around November; it refers to a global shortage of waste Fats, Oils and Greases. Turns out the world runs out of affordable, sustainable liquid alternatives to fossil fuels faster than it runs out of fossils.

Year of the Tree

Which is why the talk of CAAFI was, in a nutshell, all about wood — not virgin timber, mind you, or even the choice parts of the timber supply chain that become 2x4s or round logs. No, there’s no Frame-House vs Fuel in here. It’s the needles, tops, branches that are the waste products of our usual applications for wood. Plus, thinnings as we take dead trees out of forests to limit fire risk.

A breakthrough in woody biomass from federal lands?

Among the more juicy items heard on the floor at CAAFI, one that regards the unfortunately-named 40 CFR 80.1401, Renewable Fuels Standard and Regulation of Fuels and Fuel Additives.

The 2,000 page FY2018 Omnibus Spending Bill signed by President Trump on March 23, 2018, in Title IV General Provisions, on page 866, states; “That the Federal policy relating to forest bioenergy- must be consistent across all Federal departments and agencies, shall recognize the full benefits of the use of forest biomass for responsible forest management and recognizes biomass as a renewable energy source. The only limitations is that, the use of forest biomass for energy production does not cause conversion of forests to non forest use”.

CJ Evans (Managing Director, American Diversified Energy Consulting Services) added, “Some background on this language. I first tried to advance legislation in 2007 (through Rep. Adam Putnam’s office) to make the definitions of biomass consistent across all federal laws. There were almost a dozen different definitions.  I hit a buzz saw of opposition from interest groups and abandoned the effort. Mark Riedy also got involved at one point and several groups wrote white papers in 2014 and 2015, without making any progress.

“I was working on other issues during the last 5 months of 2017 (restoration of funding for Title 17 and EERE at DOE and removal of a provision in ag appropriations that would have eliminated USDA staff working on renewable energy programs) but had contact with the offices that could fix the problem with not being able to use diseased trees from national forests and have the wood quality as renewable biomass. So I wrote a short bullet list with some suggested language and gave it to a couple of these offices … and it was included in the Omnibus Spending Bill. Certainly one of easiest legislative victories I’ve ever undertaken.”

The capacity build out

The numbers are getting impressive amongst those who can produce heavy fuels — diesel and jet fuels, specifically.

Consider these. Neste (NEF.F, NESTE.HE, NTOIF, NTOIY), 910 million gallons of existing capacity and a capacity-adding project underway. World Energy, 60 million gallons of existing capacity, with a project underway to expand to 300 million gallons. Diamond Green Diesel (a joint venture between Valero (VLO) and Darling Ingredients (DAR)) with 170 million gallons in place and expanding capacity towards a goal of 300 million gallons. REG (REGI), 70 million gallons in place in Louisiana, and a project underway in partnership with Phillips 66 to build new capacity in Washington state.

And that’s not taking into account companies such as Red Rock Biofuels (first commercial under construction), Fulcrum Bioenergy (first commercial under construction), SG Preston (first commercial under development), Ryze Renewables (first commercial under development), and EnerSysNet (pilot under development), among many more. Not to mention the companies pursuing alcohol-to-jet, including LanzaTech, Gevo and Vertimass.

The feedstocks

Think residues. That’s where the sustainability has, so far, met the economics. There have been three basic thrusts, to date. First, the afore-mentioned foray into waste FOG. There is municipal solid waste, which Fulcrum is using. There is waste wood, which Red Rock has been using. And, there has been waste land — targeting lands that have fallen out of traditional agricultural production because of crop disease or changing economics with traditional crops — Agrisoma and the SPARC consortium in Florida are targeting land that in years gone by would have been home to citrus or cattle in South Florida.

CORSIA fuels, baby

Perhaps the most welcome news of the floor is at last a single word that we can use to replace all the monikers and acronyms for sustainable aviation furls. SPK, SAF, CARB fuel, RJ just to name three of many.

Now we know we can simply call them CORSIA fuels. For the CORSIA Global Carbon Offsetting Scheme that the airlines have established. Which is not a carbon tax or emissions trading, and it applies only to international flights (which represent about 67 percent of commercial airlines fuel use).

Now even the CORSIA group has come up with a three-letter acronym of their own, CEF, CORSIA-eligible fuel. We’ll ignore that. CORSIA is fine.

The leading expert we know is Nancy Young of Airlines 4 America and here are your 10 takeaways:

• single global market-based standard
• time frame 2021-35
• CORSIA is in lieu of other measures imposed
• 2021-26 voluntary phase in for countries, 2027 mandatory other then exempt countries or routes eg LDCs
• 76 countries representing 76% of international in the opt-in phases, in 2027 goes up about 90 percent
• demonstration of compliance every 3 years begins Jan 1 2019
• monitoring is country by country reporting to ICAO
• alt fuel not included in 2019-20, rather in 2021 when offsetting begins
• emissions savings from purchase of CORSIA eligible fuels reduces individual operators obligations
• when we fly country to country, this is the single mechanism

On concerns that airlines will simply buy offsets and ignore fuels. Young predicts: “Watch what happens to the market over 15-20 years as countries move to meet Paris and CORSIA obligations, it will be a tight offset market.”

Mabus: stop buying a way out of a problem and starting buying into a solution

Former Navy Secretary Ray Mabus took the stage and said:

“When I was the nominee for Secretary of the Navy and waiting for my confirmation, what kept jumping out at me in the briefings I received was fuel, how it could be used as a weapon against us. We set a policy goal that no later than 2020 half of fuel would come from non-fossil. When i did that frankly the technology and the economics weren’t there, but we believed that we could save the navy and taxpayers money by doing i, and i saw energy as a national security argument and alternative fuels as a key part of that energy security.

“I got a little push back on that particularly from Congress where one legislator said “you’re the secretary of the navy not energy. I said that the navy has always led in energy transformation, sail to coal, coal to oil, oil to nuclear, and every time we did that there were all these naysayers. They would say, things like ‘why are you giving up all these coaling stations for this unproven oil technology,’ and every time single they were wrong and they are completely wrong about alternative energy.

“We moved aggressively. We tested and certified every type of ship and aircraft. We flew on 100% biofuels. And Fulcrum and Red Rock are here today and doing well, and we made an investment in them. But we got the benefit. 77 mgs in 2015 90/10 blend and in 2017 a 60 million gallons purchase on a 70/30 blend. In each case, 25 cents cheaper to the navy.

“Now, in 2017 I wasn’t there any more pushing for this. Now, it’s the new normal. Now, the navy and so many others — including airlines like United, KLM, Lufthansa and Alaska are moving aggressively, and ports and airports like San Francisco, Singapore, Oslo, Brisbane and Seattle. Alternative energy in all its forms did one major thing for the Navy, it made the navy better at what they do, better warfighters. This is not a group of ardent environmentalist, they run in big ships and have a lot of vehicles. They have become leaders because of the proof that it makes them better at doing the job that the United States needs them to do. Ultimately it was national security, not the 60-90% reduction in greenhouse gas emissions that was important.

“But, the US government put out a national climate assessment the day after Thanksgiving. Every time the assessment comes out , the warnings become more severe, the consequences more dire. The lower states have warmed 1.5 degrees this century, 1.2 degrees in last few decades and will get 3-12 degrees warmer by end of the century. The effects of this are catastrophic. Already we see the effects on places and people, we have the the first internally displaced people from climate change in some of our coastal islands.

“Big companies are now seeing the benefits of direct action. But we have got to get beyond buying carbon offsets. We have to stop buying our way out of a problem and starting buying into a solution. Two immediate ideas. Corporate jet fuels costs usually 3-4X larger than big commercial airlines, Switching to alternatives would send a strong signal that corporations are paying attention. And, favor airlines as business travel partners by screening for alternative fuels. Using that power with business travel to make sure we are moving in the right direction.

“We all have to change how we operate, just as we did at the Navy. In the military if you keep doing the same things you become predictable, and predictable is defeatable. If you don’t change and make the moves you have to make, and think differently about how you procure fuel, your corporation will go away.”

“The RFS debate has been not productive and about locking in first-generation biofuels and failing the industry.”

In his opening remarks, Steve Csonka, executive director of CAAFI said “Aviation is at a crossroads – a vision for expansion but a carbon intensity that the public is turning sharply against. if done right, biofuels can be part of the solution, but not done right it is the opposite.  LanzaTech is clearing industrial emissions, Agrisoma is planting cover crops.. Fulcrum is reducing landfill waste. The RFS debate has been not productive and about locking in first-generation biofuels and failing the industry.”

“The problem is the low cost of offsets”

SG Preston CEO Randy LeTang veered away from feedstocks as the primary challenge. “The problem is not feedstock, but support from the end consumer, when you have high cost fuel vs low cost credits. How can we drive down the cost to provide fuels without he support of airlines offtakers? We see lack of interest and waning interest from offtakers given the optionality of low cost offsets vs high cost fuels.”

#1 opportunity: “clean up this biointermediates rule”

For US policy, CAAFI brought in Advanced Biofuels Association president Mike McAdams, who noted that the 2019 RVO was as expected, and of more interest was the Brady tax bill which offers a 7 years tax credit starting at $1.19 and sunsets after 7 years. He noted that the i#1 opportunity was to “clean up this biointermediates rule”,  that it is essential in scaling advanced biofuels that bio-intermediates be allowable and with a mass balance rather than carbon-14 analysis system. He noted that “consumers are increasingly aware of aviation carbon impact and want to participate in real change; now is the time to drive policies to enable alternative jet fuel commercialization. But he warned that efforts could be undercut by carryover RINs. He commented that 2.8B carryover RINS issued in 2018; up from 2017’s 2.25 billion, and in the D6 RIN pool that had taken the RIN value from 80 cents to 6 cents.

“LCFS is the right tool to address the toughest GHG sector, heavy transport”

For California policy, CAAFI brought in Graham Noyes, who noted that the overall California Low Carbon Fuel Standard drives down the carbon intensity of California fuels by 1.25 percent per year through 2030, with obligated parties having the option to buy credits or blend low carbon fuels. Jet fuels are coming into the standard, though on an opt-in basis at first.

The value of California credits. Noyes noted that a technology with a carbon intensity of 40 could earn $1.19 per gallon and those with a carbon intensity of 10 could earn $1.83 in the trading values today.  He said that the LCFS is the right tool to address the toughest GHG sector, heavy transportation, because it materially overvalues alternatives compared to cap and trade of emissions and offsets.

He noted that Low Carbon Standards were very much in an expansion mode. Washington state in 2019 could be next, there was a coalition of interests in the Midwest looking at a regional LCFS, and a RGGI group for the Northwestern states. Noyes said that the essentials for

2019 were continued vocal leadership from A4A and CAAFI, and sustained support from the agencies.

“We all see a significant shift, that customers are demanding low carbon solutions and by and large the majors don’t make them.”

World Energy COO Bryan Sherbacow commented, “I was pleasantly surprised after 2008 with the Obama Administration coming in to find that the military were the new hippies in embracing sustainability. It seemed clear and obvious this was going to be the successful path forward and that Secretary Mabus was setting out the demand signal. Our timing worked well and we were awarded the first commercial fuel and now on our 3rd Navy contract and its one of our more important pieces of business for us. But the US government eliminated the USDA component and hopefully we can restore that, because we probably won’t be competitive in the fourth solicitation.

Meanwhile, people being displaced and fires are breaking out and it is important what we do. We all see a significant shift, that customers are demanding low carbon solutions and by and large the majors don’t make them.

“At World Energy we are partnering with incumbents in the oil & gas space and we become part of their distribution where they are compelled by policy, We don’t have to replicate the infrastructure – just work through them. Our California asset was back in 2013 a small asphalt refinery and we formed a JV to convert to renewables with initial deliveries in 2016 and first deliveries to UAL and delivering into LAX since then. We started at 3,000 barrels per day and are expanding to 20000 barrels a day. With our process we produce 50 percent jet, but about 10 percent very competitively on a cost basis. So, we’re making 3-4 million gallons, and in the future we would ideally make around 30-40 million gallons.

The problems are that the incentives significantly favor diesel over jet, and that we have to get past fats oils and greases and get to novel feedstocks. The incentives can be fixed, right now if a customer shows up in the California market we can win those contracts every time, unless we have just done a poor job of educating the customer. Now, in January, jet fuel will be included in that LCFS program and that will make a big change.

On technology, the tricky part of that most processes that involve gasification of woody biomass, which is available and affordable, give you a lot of naphtha and not enough diesel, so the economics don’t work nearly as well as they could, because naphtha generally fits into the lower-value gasoline pool.

Get beyond private wood

Red Rock Biofuels CEO Terry Kulesa noted, “the gasoline pool is growing and there’s a need for 30 percent more diesel going forward. We use the same process, different suppliers compared to Fulcrum BioEnergy, we gasify biomass, use FT to get to a biocrude, then hydroprocessing to produce a finished fuel. We’re making 15.1 million gallons per year of heavy transport fuels. The tricky part? In terms of technology, it’s really the gasification. The tricky part of the economics is that we have to buy private wood, we can’t qualify for federal renewable fuel credits when we use wood sourced from federal lands.” Even though we all could use getting some of that waste wood off of federal land.

“Completion? We’ll be completed in December and we expect 6-12 months of ramp up. Plants never run exactly as designed, that’s why we have great operators.”

“We need alternatives to landfilling fossil plastics that cannot be recycled or reused”

Neste’s US head, Neville Fernandes spoke about the growth at the world leader by production volume. “At Neste, we’re at 260000 barrels per day [in petroleum capacity] or 910 million gallons per year in Poorvoo, Rotterdam and Singapore, we have $1.4 billion in operating profit. In a few weeks we’ll make the decision on adding 340 mgy in Singapore which will take out total footprint up to 1.3 billion gallons.

Our pathway involved moving to renewable diesel in 2007, renewable jet in 2015, Ultra low Sulphur marine in 2018 and renewable propane and chemicals are the new initiatives. In the future, we see ourselves building a GreenHub to convert waste plastics to fuels. Last year, 80 percent of our feedstock came from waste and residues. In the short term it is about waste FOG; in the longer term we see microbial oil, algae and plastic liquefaction as important feedstocks. And we need alternatives to landfilling fossil plastics that cannot be recycled or reused.

“100% biofuels now ready for ASTM balloting”

Chuck Red at ARA took the stage to focus on 100% biofuels flights and supplies. “We’re now ready for the ASTM ballot. And we expect to have out first commercial unit at 3600 barrel per day in the Western US, with ARA participating as an equity partner and using a USDA 9003 loan guarantee.

“It’s jet, and ground operations, too”

FedEx’s (FDX) Joel Murdoch noted that the demand is not only for jet fuel but for diesel for ground operations, for many.

“FedEx’s goal is 30 percent alternative fuel use for aviation by 2030.  In petroleum we contract for 1-2 years but we contract for 5-10 years with alternatives, with exit mechanisms, and we have a 5% maximum per location until the security of supply established.”

The challenges? More than just fuel price and composition, Murdoch advises. “There are logistics as well as cost. Truck, rail, pipelines — how will it be transported? There’s the airport fuel consortiums to consider, will the blends be on or off the airport. There’s the use of existing tankage, the addition of new tanks. And more.”

Replacing aromatics

Representing the US Department of Energy was BETO director Jonathan Male, who noted that the 26 billion gallon jet fuel is expected to double in size and would require nearly a billion tons of biomass. He noted that most blends are restricted to date to 50 percent because of the performance of aromatics. “But, are there renewable molecules and help us with particulate matter and give us what aromatics do?” He suggested that R&D should and would examine replacing the aromatics with iso-alkanes and cycloalkanes.

Pursuing economics through process optimization and co-products

Overall, Male’s message was “Bring Down Cost’ and he noted that when it comes to feedstocks, and processing, yield was the goal and “every gram counts”.  To reach the economics needed, he said, you have to have unit operations s that work together in an optimal way — you don’t have a process until you join units together,” and by inference, you don’t have a sustainable, affordable, defensible process until the units work together in an optimal way.

NIFA’s National Program Leader in the Division of Sustainable Bioenergy Bill Goldner chimed in decisively on this point, The co-products are really important to the economics.”

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

The post Aviation Biofuels: The Year of the Tree appeared first on Alternative Energy Stocks.

by Jim Lane

In Iowa, white smoke has emerged from the Renewable Energy Group (REGI) conclave: Tesoro EVP and former Sapphire Energy CEO C.J. Warner has been named chief exec of Renewable Energy Group, at a pivotal moment for biodiesel in Washington and around the world and amidst a boom for renewable diesel like the world has never seen.

REG has been making good progress with Wall Street under interim CEO Randy Howard and its share price has been on the rise, and the plants have been humming along nicely churning out hundreds of millions of gallons of biodiesel and the liquid gold also known as CARB diesel (or renewable diesel qualified for the low-carbon markets in California, Oregon and British Columbia). All that, built on an incredible run from single-plant operator to biodiesel behemoth under, first, Jeff Stroburg and then Dan Oh.

Now, the next chapter begins to unfold.

Here’s the REGI challenge

It’s a brilliantly operated company that generated some $220 million in net income last year. Yet, the company has a P/E ratio of around 4.4 compared to the NASDAQ average that hovers around 25. If the company were valued along with its NASDAQ peers, it would have a $5B market cap and could be using its stock to roll up a huge amount of production capacity through M&A. And there’s not an REGI investor who wouldn’t like to see a juicy $130 stock price.

The few cases in history where you get these kind of market disconnects are when the balance sheet is a toxic waste dump, the products are shortly destined for the scrap-heap of history or there’s a huge potential lawsuit liability. None of those apply in this case. So, there’s been major progress, but there’s huge upside. And, so long as the company remains this undervalued, it makes REG a ripe target for acquisition, raiders, privatization efforts, or activist shareholders.

What’s going to happen to REG? Let’s look at the two fundamentals that restless investors are pointing us too: feedstock cost and the dependence on tax credits and RINs to generate value.

The world of REG’s prices and values

Here’s a graphic from Iowa’s Center for Agricultural (CARD) to illustrate biodiesel’s fundamentals.

The red marks the operating margins and the green represents feedstock costs — the one, minuscule, the other daunting. What need to be done to unlock REG’s value? It really comes down to restructuring REG’s income stream. Investors see the company as entirely too dependent on those tax credits and RINs.

There’s come evidence for their fear. Congress only passed the 2017 tax credit in early 2018, did not renew the credit for 2018 at all, as of yet, and the 2015-16 credits came in well into 2015. Only one year, 2016, has REG entered into a new year with a tax credit assured.  The Brady bill dropped into Congress last week with a thud, offering a 7-year tax credit extension but discounting and sunsetting the credit in the mid 2020s.

And, in case you were still feeling swimmingly happy about your REG share price outlook, the Trump Administration’s negotiations with the renewable fuel industry on sweeteners and support have mostly focused on year-round availability for E15 ethanol and not on expanding the market for biodiesel, much. The current EPA mandate for 2019 is way below the industry’s production capacity.  Which means that biodiesel gets hit on the nose by the way EPA runs the RFS program, but the relief efforts generally target ethanol, instead of America’s favorite advanced biofuel. Here’s some color on RIN values (with biomass-based diesel in blue):

That’s hardly grist for shareholder enthusiasm and its tough on REG-s long-term investments planning, too. Can’t be positive for company morale, either.

Solving the problem

Warner, as the incoming CEO, will have several options. One, more of the same, hammer on Washington to extend tax credits and protect RIN values. Two, acquire or build production capacity in renewable diesel to take advantage of the sweet margins for that fuel, taking advantage of REG’s strong position in fats, oils and greases (FOG) acquisition. Three, transform feedstock costs by tapping into wood residues and MSW to make biocrude that can be upgraded to renewable diesel. Four, find a way to privatize the risk that flows from government hemming-and-hawing over tax credits, taking REGI out of the firing line when tax credits do not appear. Five, deliver on the promise of REG Life Sciences with a product line or two that generates the kind of company-altering cash flow that’s been helping the likes of Amyris of late. There may be others in the REG option quiver, but you get the general idea.

The Warner / REGI backstory

Warner arrives on January 14, 2019. She brings more than 35 years of experience in the energy industry, including an extensive background in refining. Most recently she served as Executive Vice President, Operations for Andeavor (ANDX, formerly Tesoro Corporation), an integrated marketing, logistics and refining company. Prior to her most recent role, Ms. Warner served as Executive Vice President, Strategy and Business Development of Andeavor.  Before joining Andeavor, Ms. Warner served as President, Chief Executive Officer, and Chairman of the Board of Sapphire Energy, a biofuels company. Prior to Sapphire Energy, Ms. Warner served as Group Vice President of Global Refining and Group Vice President of Health, Safety, Security, Environmental and Technology for BP (British Petroleum). Ms. Warner serves as a member of the Board of Directors for IDEX Corporation and serves as a member of the National Petroleum Council.

“After completing a thorough and deliberate succession planning process, we are pleased to welcome CJ Warner as our new President and CEO,” said Jeff Stroburg, Chairman of the REG Board of Directors. “Her background and success, coupled with her passion for developing renewable fuels that transform the transportation fuels market to a cleaner and sustainable future, makes her an exceptional choice to lead REG.”

“I am delighted and honored to be joining the REG team as President and CEO,” said Warner. “This growing company is well positioned to meet the rising global demand for cleaner, competitive low carbon fuel solutions.  I look forward to the exciting future ahead and to leading the team with a continued focus on value creation.”

During the leadership transition Randy Howard will remain engaged with the business.  Upon completion of the transition, Randy will continue to serve on the REG Board of Directors, a position he has held since February 2007.

The Bottom Line

Natives are restless, which is to say shareholders. Being an incredibly well-operated company in a fast-growing space is not as attractive to them as it should be, but it’s tough to fire investors. And the company is operating too strongly to hope that anyone can work a miracle from the inside by simply boosting productivity.  There’s not much upside left in performance, but there’s upside in REG Life Sciences, feedstock and restructuring policy risk. None of which is easy to do — but anyone who’s been around CJ as part of the “Beyond Petroleum” generation that advanced at BP under Lord Brown, or her subsequent years bringing Sapphire Energy from a great idea to an at-scale reality, or her work taking Tesoro (or Andeavor, take your pick) into the world if renewable with relationships with Fulcrum, Ensyn (ESNC) and the acquisition of Virent, will be of great cheer. She’s a winner.

And, we might see in her strategic work at Tesoro that renewable diesel might well be the most potent option in front of REG to boost margins, add capacity and dominate the California market where policy risk is lower. The key ultimately is feedstock. The world is reaching Peak FPOG far faster than Peak Oil.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

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by Helena Tavares Kennedy

The seasons are changing in many parts of the world right now, but what really is changing this autumn is how the world is looking at renewable diesel. Phillips 66 and REG’s announcement about a new renewable diesel plant on the U.S. West Coast planned for 2021 comes after a notable increase in refineries that are being converted and changed over to renewable diesel. Change is good, especially in this case.

As Bob Dylan sang, “For the loser now, Will be later to win, For the times they are a-changin’.” And who knew he was singing about the RFS and biofuel economy before it even existed with “There’s a battle outside, And it is ragin’. It’ll soon shake your windows, And rattle your walls, For the times they are a-changin’.”

Maybe Dylan’s song is playing in the corporate offices of Texas-based Phillips 66 (PSX), a former petroleum focused energy company, as they see the value of change by partnering up with one of the largest producers of advanced biofuels – Iowa-based Renewable Energy Group (REGI, a.k.a. REG). While it was over a year in the making, they announced last week that planning is underway for the construction of a large-scale renewable diesel plant that will utilize REG’s proprietary BioSynfining technology for the production of renewable diesel fuel.

Planned feedstocks include a mix of waste fats, oils and greases, including regionally-sourced vegetable oils, animal fats and used cooking oil. If approved, production at the new facility is currently premised to start in 2021.

Location, location, location

The new facility would be constructed adjacent to the Phillips 66 Ferndale Refinery in Washington state. The Ferndale Refinery is a perfect spot with existing infrastructure, including tank storage, a dock, and rail and truck rack access and happens to be a hot spot for this type of project with a Mercurius biorefinery nearby.

“The proposed facility’s strategic location in Washington state would enable us to move renewable fuels more efficiently to support West Coast and international fuel market demand,” said Brian Mandell, senior vice president, Marketing and Commercial, Phillips 66.

“REG is excited to be working with a leading refiner, Phillips 66, on a project that has the potential to significantly expand biofuel production in Washington state and provide low carbon fuel markets with products that are in significant demand on the West Coast,” said Randy Howard, CEO of REG. “We look forward to working with state and local stakeholders to facilitate development of this important project and increase the supply of low carbon fuels in the region.”

Transformations abound

Phillips 66 isn’t the only one converting from petro-based diesel into biodiesel. Several others are keeping up with the changing times and moving towards more sustainable diesel.

In fact, World Energy announced a $350 million investment over the next two years to complete the conversion of its Paramount, California facility into one of the cleanest fuel refineries in the world, as reported by The Digest in October. The project will enable World Energy Paramount to process 306 million gallons annually. The conversion to renewable jet, diesel, gasoline and propane will reduce both refinery and fuel emissions while supporting more than 100 advanced, green economy jobs.

“This project will transform the Paramount facility into California’s most important hub for the production and blending of advanced renewable fuels,” said Bryan Sherbacow, Chief Commercial Officer of World Energy. “This investment will better enable us to deliver much needed low-carbon solutions to our customers. Importantly, with 150 million gallons of annual renewable jet production capacity, World Energy will be able to help the commercial aviation industry combat its greenhouse gas emissions.”

Another conversion is underway by Andeavor (now joined with Marathon as of October 1^st and known as Marathon Petroleum Corporation (MPC)). As reported by The Digest in August, Andeavor is converting the North Dakota Dickinson Refinery to process 12,000 barrels per day of renewable feedstocks, including soybean oil and distillers corn oil, into renewable diesel fuel. The project is expected to be completed in late 2020 and is subject to permitting and regulatory approval.

ENI (ENI.MI) is another petroleum company that switched to renewable diesel. While it still is an oil and gas company, Eni expanded into renewables with its Venice biorefinery in Italy a few years ago which was renovated by UOP to produce renewable diesel. Eni is even supplying the city of Venice and their waterbuses with its E15 Eni Diesel+ which is part produced from UCO collected in the city.

Eni must be doing something right in the renewable diesel space since the Indonesian government is now collaborating with ENI to see if it’s feasible convert Pertamina’s Plaju and Dumai refineries into biodiesel production facilities, as reported in The Digest in October. Both refineries were built in the 1930s with refining capacity of 133,700 bpd and 170,000 bpd respectively. Conversion of refining production capacity into biodiesel production is becoming more common in Europe with both ENI and Total having done it or are currently in the process of doing it, such as Total’s La Mede refinery in France.

Neste (NEF.F, NTOIF) is expected to decide by December as to whether or not it is sticking to an internal deadline of December to make its investment decision about the potential new aviation biofuel production facility in Singapore. As reported in The Digest in October, the company already produces biofuel in Singapore but increased demand for renewables spurred by the most recent IPCC report and Norway’s 0.5% aviation biofuel mandate has given further impetus to the project that the company has already spent “tens of millions” developing.

In November 2017, the Digest reported that Valero (VLO) and Darling Ingredients (DAR) were looking at doubling Diamond Green Diesel production from 275 million gallons to 550 million gallons at the DGD facility in Norco, Louisiana. Why? They are looking into the future through their crystal ball…in anticipation of growing demand for renewable diesel due to the RFS and global low carbon markets. This comes on the tail end of their most recent expansion where they went from 160 million gallons of renewable diesel to 275 million gallons in annual production capacity. Though they had to replace a catalyst that was damaged recently which will lower 3^rd quarter projections, they expect to go back to 275 million gallons rated capacity very soon.

LCA of renewable diesel

Renewable diesel is a low carbon and low sulfur fuel, making it an attractive investment for any company looking to lower their carbon footprint, whether it’s because shareholders are pushing for it, local or state mandates are demanding it, or consumers are requesting it.

If you aren’t convinced about renewable diesel’s environmental benefit, a recent LCA study showed that biodiesel reduces GHG emissions by 72% including ILUC. As reported in the Digest in January, the Argonne National Laboratory, Purdue University, and the U.S. Department of Agriculture (USDA) study represents the most up-to-date and comprehensive lifecycle analysis of biodiesel ever produced. This study represents the first time Argonne National Laboratory has published a lifecycle assessment of biodiesel including indirect land use change (ILUC).

The more the models reflect real world data, biodiesel’s benefits become even clearer. The improved model reduces ILUC emissions by more than 30 percent relative to the score adopted by CARB in 2015. Those are some impressive stats that can tempt any petroleum-based company to switch at least some of their facilities over to biodiesel. Add the fact that it is a drop-in fuel and you’ve got a win-win situation.

What does this all mean?

By our estimates, we are talking about more than 1 billion gallons being converted recently from traditional diesel to drop-in renewable diesel out there, and with California’s mandate as well as others internationally, the demand alone for road transport, not counting jet fuel or marine and shipping fuel is significant. The demand is there and now it looks like the production is starting to catch up to meet that demand. More renewable diesel is still needed, however, so we anticipate seeing more announcements for renewable diesel expansions, new constructions, or conversions from petro-based diesel to biodiesel. After all, the times are a changin’.

Helena Tavares Kennedy is a writer for Biofuels Digest, where this article was first published.  Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

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“The global economy likely faces an economic crash of horrible proportions in 2020, not for want of a nail but want of low-sulfur diesel fuel,” writes renowned energy analyst Phil Verleger in a note this month titled “$200 Crude, the Economic Crisis of 2020, and Policies to Prevent Catastrophe”. Not good timing for a White House re-election effort if, as expected, the blame falls on lack of preparedness in the 2017-2020 run-up to the projected crisis..

It’s a dire scenario but there’s hard data behind it, and though few go as far as Verleger, almost every expert is warning of a low-sulfur diesel; refining capacity crunch. You can read the Verleger note in full here.

The root cause? A rule agreed by the  International Maritime Organization in 2008 and confirmed in 2016 to reduce sulphur content in marine fuels from 3.5 percent to 0.5 percent beginning in January 2020.

The proximate cause? Neither shipping owners nor oil refiners found a way to comply either through fuel-switching, crude-switching to bring in less sulphur-laden “sour” crudes, or to add enough refinery equipment to remove sulphur.

As the National Biodiesel Board’s Technical Director Scott Fenwick told The Digest:

The IMO (International Maritime Organization) has set new sulfur specifications for all marine fuels to not exceed 0.50% sulfur by the year 2020.  Right now, vessels are able to use high sulfur fuels in international waters but must use the same fuels within coastal waters (up to 200 mile radius) in what are called ECA (Emission Control Areas).  Typically, marine vessels use the dirtiest fuels available.  In order for ships to meet these new criteria, significant amounts of ULSD (ultra-low sulfur diesel fuel) will be need to be used for blending or in place of typical marine fuels.  Biodiesel is another option for blending.

NEXANT’s Ron Cascone added:

Instead of “playing checkers” with refinery modifications or scrubbers for a short term fix, we should be “playing chess” with low-sulfur, low NOx, and low-carbon solutions like biofuels or  methanol, LNG,  or DME, which can be bio-based. The stakeholders needing to examine strategies in this area include, besides the refiners, fuel brokers, and ship owners, also companies that use ocean shipping (that is, nearly all manufacturers, retailers, etc.)  and have commitments to lowering carbon footprint  (that is, many companies).

Why were refiners and shipping companies caught flatfooted?

There was an expectation that everyone would kick the can down the road, and extend the deadline to 2022. But the deadline was not extended.

Why can’t the US and others simply frack their way out of a supply problem, as in the past?

It’s not something you can frack your way out of. It’s not only about crude inventories but about low-sulphur refining capacity.

Tough timing for a shortage

The shift in demand — 2 million barrels per day — comes at a time when global diesel demand for road transport and other uses is on the rise. The resulting shortage of low-sulphur diesel leads to the bid-up in “light sweet” crudes and a shift to producing more diesel and less gasoline from those crudes — and the price increase that facilitates this supply and demand shift is in the $160 to $200 range. Enough to tip the global economy into recession or depression, says Verleger.

As Verleger points out, there’s already a world commodity except perhaps wine that has so much variance, and especially so in sulphur content. As Verleger notes, “the diesel fuel produced from Nigeria’s best crude oil has a sulfur content of 0.13 percent when refined, while the diesel refined from Middle East light crude oil, one of the most common crudes, contains 0.53 percent. The Arab Heavy crude that generally upticks in supply to meet demand increases contains between 1.8 and two percent sulfur. Shale oil from fracking operations is loaded with sulphur — so it is not a case where fracking operations will necessarily save the day.

So, the swing producer necessary to moderate prices when demand shifts is going to be hard to find, despite the fact that, as Verleger notes, “the public-health arguments for the IMO 2020 rule are incontestable and compelling,” and the refiners and shipping owners have had 12 years to make ready.

The impact?

Verleger writes: “The crude price rise will send all product prices higher. Diesel prices will lead, but gasoline and jet fuel will follow. US consumers could pay as much as $6 per gallon for gasoline and $8 or $9 per gallon for diesel fuel.”

Will compliance be forgotten? Can the world simply embrace sulphur-laden marine fuel forever?

IMO’s secretary-general Kitack Lim told Platts recently: “At this point, the regulation which brings into force the 0.5% limit in sulfur in fuel oil from January 1, 2020 cannot be changed from a legal perspective, so there is no possibility of delay.” As far as individual countries simply ignoring the requirements for operating with low-sulphur fuels, it’s worth noting that the predictions for $200 oil do not relate to low-sulphur oil, but all oil.

Mitigation steps that might be taken

There are several options, although installing equipment faster at global refineries does not appear to be one of them. Fuel-switching to liquid natural gas is one. Adding sulphur-scrubbing equipment to ships is another (unlikely). Re-visiting the rule is a third, and very unlikely — the IMO recently voted 171-3 to reduce greenhouse gas emissions. The US could release light sweet crude from the Strategic Petroleum Reserve. Non-compliance is a risky option — shippers that violate the rule are likely to have their insurance invalidated, based on recent IMO moves.

The biofuels option: biorefining capacity eases the oil refining strain

As Fenwick told The Digest. “Biodiesel will play a role, whether it is on the ship, or backfilling the low-sulphur road transport volumes that are diverted from traditional oil refineries to serve the new demand for low-sulphur marine fuel.” Already biodiesel and renewable diesel have extended the global refining capacity and fuel supply by 4-4/12 percent. There’s an opportunity to step up here to supply more low-sulphur fuel, and it is estimated that one billion gallons per year could be added to the supply of low-sulphur fuels./

As we reported in March 2017, the International Standards Organization has created the new F class of marine fuels that allows for blending of up to 7% of FAME biodiesel, allowing for more 10 ppm sulfur automotive fossil diesel to be used in the marine fuel pool. Adding Cloud Point and CFPP (Cold Filter Plugging Point) to the specifications are meant to help increase the uptake of biodiesel in marine fuels by letting operators know when fuels need to be heated.

Fenwick commented, “A few years ago there were no grades. Those grades are minimal demand right now as shippers become used to them. I expect they will become significant in the next two years.”

And, there’s renewable diesel. Although production quantities are small, so far, in the context of the global marine trade, $160-$200 per barrel low-sulphur crude prices will shine more attention on sulphur-free biodiesel and renewable diesel. For example, a 7 percent biodiesel blend with Middle East light crude oil (0.53 percent sulphur), brings that fuel into compliance. And there’s reason to cheer on that score.

An an Exxon Mobil found in a study on marine biodiesel:

The results obtained during the biodiesel trial have shown no negative impacts. Biodiesel has been used for many years in similar engines in land-based applications with no adverse effects. Biodiesel blends (B5 and B7) can be utilized in the marine environment onboard a properly operated and maintained vessel with a diesel engine. As with any fuel, proper storage and handling are key in maintaining fuel quality to ensure trouble-free operation.

How much excess capacity is available?

The estimates we have received suggest that as much as 1 billion gallons per year in excess capacity is in place around the world — or 65,000 barrels per day. Enough to support 7 percent blends of one million barrels per day. And, when you think about it, global biodiesel and renewable diesel could all be put to use in supporting a transition to low-sulphur fuels — and with as much as 4 billion gallons of capacity, there’s enough to support the 2 million barrels per day volumes that analysts say are needed — at 14 percent blends. That supports compliance via all that Arab Heavy .

Combined with some fuel switching to LNG, and targeting the right crudes for expanded diesel supply — we might find that global recession might well be averted. And, should actions not be taken to bring a supply of biodiesel and renewable diesel into marine fuels — we might find that $9 per gallon US fuel prices might well provide the incentive necessary to re-invigorate the discussions around alternatives.

Who is impacted?

Companies like REG [REGI], World Energy, Diamond Green (the Valero-Darling [DAR] Joint Venture), Ensyn, Gevo [GEVO], Fulcrum BioEnergy, Red Rock Biofuels — all of these are in the conversation when it comes to expanding diesel capacity. And a host of smaller biodiesel producers in the US, across the Americas and in Europe and Asia. Also, think DME – such as Oberon Fuels.

What can Congress do?

Distribution of this Verleger report on Capitol Hill might help. Experts tell us that ‘anything that educates the Congress that petroleum is a global market with a global price is a good thing. Also, the US government might well mandate more biodiesel to make sure those backfilling volumes of ULS diesel is available for road transport.

NBB’s Scott Fenwick observed, “Congress did create the RFS to extend and expand the nation’s refining capacity – and with low carbon, low sulphur technology in mind. They could not have foreseen this particular supply crunch but they did prepare us for a crunch with the RFS

Further reading

Here’s a relatiovely definitive report on the topic from NEXANT:

PERP 2017S7: Technologies to Meet New Bunker Fuel Specifications.

Bio-methanol  is covered, along with other feasible bio-bunkers in Nexant’s recent report, Biorenewable Insights: Biofuels for Land and Sea.  This report presents technoeconomics for a very wide range of land and marine biofuels . The TOC is here and the abstract is here.

And, could bio-methanol be a significant player in marine fuels in the future? The Methanol Insitute believs so, and here’s their latest deck exploring the options and opportunities.

In addition, for Nexant’s somewhat more conservative counter-view to Verleger’s, see the TOC for Petroleum and Petrochemical Dynamics, Refined Products, December 2017.

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The last post highlighted several companies in the alternative energy, conservation and environment technology fields that have delivered exceptional price performance over the last year.  Prospects for growth in sales or earnings appeared to be key drivers of the price movement.  It makes sense to seek indicators of growth as cues for those companies that may become tomorrow’s price movers.

Crystal Equity Research’s novel alternative energy indices were a good place to go on a ‘quest for growth.’

Beach Boys Index  –  Biodiesel

The two analysts who publish estimates for Renewable Energy Group (REGI:  Nasdaq)apparently expect a surge in growth in the current year followed by a leveling off in the long-term.  The forecast five-year compound annual growth rate is 15%.  What is driving the growth?  The company has just completed expansion of their biodiesel plant in Ralston, Iowa to 30 million gallons per year from the previous 12 million gallons.  The Ralston plant is one of the company’s 13 biomas-based diesel refineries with a total effective production capacity of 565 million gallons per year.

Renewable Energy took on debt to finance the expansion project.  Total debt at the end of March 2018, was $332.8 million, giving the company a debt-to-equity ratio of 42.92.  The leverage has helped drive return on equity to 21.4% in the most recent twelve months.  The company is profitable, delivering an 8.0% operating profit margin.  That should help pay down rent.

Electric Earth Index  –  Wind

Broadwind Energy (BWEN:  Nasdaq) has won attention from only one analyst, but that individual has a great deal of confidence in the company prospects in the wind energy industry.  Expectations are for growth to accelerate next year to over 800% following by a leveling off to 24% compound annual growth over the next five years.  The company manufacturers towers used for wind turbines as well as industrial applications.  Broadwind recently booked $10 million in new tower orders.

While Broadwind’s topline shows great promise, profitability has been an issue for the company. Operating cash flow has not always been positive.  In 2017, operations used $9.4 million in cash resources. Fortunately, the previous year had been a year of strong cash generation with operating cash flow totaling $17.3 million.

Broadwind shares are trading closer to its 52-week low price.  If growth unfolds as is predicted by the consensus estimate, strong comparisons should help drive the stock price.

Mothers of Invention Index  –  Efficiency Technology

Aerovironment (AVAV:  Nasdaq) produces energy efficiency systems and unmanned aircraft.  The consensus estimate suggests the five-year compound annual growth rate is expected to be 30%.  This represents nearly a tripling in growth compared to the last five years when growth averaged about 10% per year.

In April 2018, the company introduced a new charging system for electric forklifts. Aerovironment also won orders from the U.S. Army for its Switchblad Lethal Miniature Aerial Missile System.  Total hardware awards were $67.8 million with deliveries beginning in December 2017 and extending through September 2018.  An additional $43.3 million in service contracts were also signed for a period of three years.

Aerovironment earned a 12.4% operating margin in the twelve months ending January 2018.  Sales-to-cash conversion was 10.4%.  With a business model with this level of efficiency, new orders translate to strong earnings.

The Atomics Index –  Solar

Analysts have predicted a 34% five-year compound annual growth rate for Canadian Solar (CSIQ:  Nasdaq).  This represents a significant pick up in pace from the last few years.  The company’s 35 megawatt solar portfolio in India reached commercial operation in March 2018.   Canadian Solar is not stopping there.  Construction on an 8 megawatt solar project in South Korea will begin in early 2019.  The company is the top foreign solar module source in South Korea.  The two projects are exemplary of Canadian Solar’s expansion in the global solar power sector.

Canadian Solar earned an operating profit of 7.9% on $3.4 billion in total sales in 2017.  The company is well leveraged with a debt-to-equity ratio of 234.82.  This has helped drive return on equity to 10.5%.  Fundamental successes have helped drive the CSIQ stock price to a level just off the company’s 52-week high.

As CSIQ  price movement reveals, growth prospects alone cannot be the early indicator for investors.  Relative value may be as important.  In our next post we look at company that offer strong value.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

The post Rapidly Growing Alternative Energy Companies appeared first on Alternative Energy Stocks.

By Jim Lane

Over the years we’ve all seen a lot of curveballs in the advanced bioeconomy. You see companies like Valero, which lobby the United States Congress with unbridled intensity to get rid of the Renewable Fuel Standard, on the verge of becoming the single-biggest producer of RINs in the United States (with news that they might take capacity at Diamond Green Diesel up to 540 million gallons).

You see companies like Solazyme which love the Renewable Fuel Standard and drive up to nearly a billion-dollar post-IPO valuation based on delivering fuels at volume, then announcing that there are even more exciting opportunities in nutrition and changing the name of the company to pursue that, only to sell themselves for $20 million to Corbion.

There are quite a number of examples of the Chutes and Ladders kind. Companies rise up, then inexplicably plunge. Companies that have plunged into total obscurity, finally put together the critical JV or first commercial financing. Everyone heading for Brazil, then no one heading for Brazil. Many fleeing California for Texas, citing high production costs. Then many pouring back into the California market, citing the high prices.

It’s been a decade of chutes and ladders, curves and slides and curveballs and a lot of slide decks. But lately there’s been a spate of curves offered up of the economic chart kind that offer some real insight into where the advanced bioeconomy might head next when it comes to early-stage venture opportunities and models.

First, some curves offered over the years that give you the necessary backgrounding.

The RFS Curve

Here’s what was expected. Falling biofuels costs and rising production would sustain a Renewable Fuel Standard that was rapidly expended in 2007.

The Price Curves

Here’s the basic one that drove the bioeconomy towards fuel production. A spate of curves suggesting a long-term oil price at or above $100.

But then there was this forecast in 2009, which hasn’t been all that far off when you think about it. What you might consider that happened is that the global petroleum market started out in 2009-2013 as if it were in the high or med-range scenario, but down-shifted to the low-end scenario around the beginning of 2015.

With expectations of $100 oil and an enhanced Renewable Fuel Standard passed in 2007, here’s the expectation that we saw in projection after projection of the volume in renewable fuels.

What actually happened was that the biomass-based diesel and corn ethanol sectors produced what was expected, more or less. The Cellulosic sector has fallen wildly short of expectations on volume — producing in the hundreds of millions rather than the billions of gallons.

In part, that was driven by the oil price scenario — the prospect of lower prices crushed investment in many technology developers and technologies starved.

Long before the oil price debacle, there was the natural gas price crash — and that was a fundamental reason that many investors stayed away from renewables. Cheap methane arrived in volume while cheap sugar did not. A number of bio-based players — especially those in gas fermentation — shifted focus from syngas fermentation based on biomass feedstocks to methane fermentation based on fossil fuels. They were counting on the delta between oil and natural gas prices to persist — providing markets with a cheaper route to fuels by using cheap methane as a feedstock instead of cheap petroleum.

But for bio-based technologies, oil prices hurt, a lot — but it was more than that. Those that did get out into the market struggled to meet expectations on deployment speed or production rate. Plants that were designed to produce 25 million gallons of fuel struggled to produce more than a small fraction of that, causing capex costs (on a per gallon basis) to soar beyond the point of project viability.

The Cost Curves

Here’s a slide typical of the early 2010s — biobased companies like Solazyme , Amyris (AMRS), Gevo (GEVO) and others expected to be driving very quickly down the cost curve, opening up more and more markets and moving from small specialty niches like advanced foods and nutraceuticals into specialty chemicals and then fuels.

The Innovation Curve

There’s been revived optimism of late, though, especially among those investing in earlier-stage renewable chemicals that the advanced bioeconomy has been passing through what is known as the Gartner Curve of innovation. Generically, that’s this: the idea that there’s a rush of enthusiasm over new technology that leads to a trough of disillusion and ultimately to a slope of enlightenment.

A surge in unreasonable exuberance from 2008-2012 gave way starting in 2013-14 or so to the trough of disillusionment. Sofinnova Ventures managing partner Denis Luquin offered this slide a few years back, suggesting that the peak of inflated expectations came in December 2011 and that the trough of disillusionment was reached in 2015.

At ABLC Next 2017, Luquin updated his slide to suggest that the Trough of Disillusionment has lasted far longer than expected, and has been reached in 2017.

But we’re not sure. We think that it might have been reached in 2015 or 2016 after all, following the realization that oil prices would not rebound and that the expected wave of cellulosic fuel technologies would not deliver anywhere near as fast as hoped. That crushed expansion hopes for fuels — which had the Renewable Fuel Standard to assure a market but lacked the investment drivers. Chemicals lack an assurance of market, so they’ve simply been crushed or delayed by persistently low oil and gas prices, excepting in selected cases where they can compete against tremendously complicated and expensive production processes from oil or gas (such as selected nutraceuticals and one-step organic acids), or where they offer functional advantages over traditional molecules (such as PEF’s functional advantages over PET as a clear plastic).

But there have been so many project announcements this year that it would be impossible to label 2017 as the Trough of Disillusionment’s low point. Even Valero, which rails against the Renewable Fuel Standard in DC, is tripling production with Darling (DAR) at their Diamond Green Diesel renewable diesel plant in Louisiana. We have LanzaTech deploying, Synvina under construction by BASF and Avantium, two projects underway with Clariant’s technology, Fulcrum’s first commercial under construction, Licella’s first project underway in Canada, Ensyn expanding fast, Neste considering expansion, Aemetis (AMTX) and LanzaTech deploying cellulosic at scale in California. Just to name a few.

That feels much more like the Slope of Enlightenment than the Trough of Disillusionment. So we think that the Gartner curve looks more like this.

But for early-stage investors, there remains the puzzle of how to make a successful market entry with a disruptive technology. It’s proven too tough to rely on fuels or chemical commodity markets and on the proposed rate of development and deployment. The markets have been priced too low and the technologies proceeding too slowly to offer the kind of rates of return that venture investors require.

So, where has our perfect storm left us?

Moving way, way, way up the value curve, that’s where.

Here’s a chart that looks like today. This is where Amyris’ investors are pointing that technology. Former Cobalt CEO Rick Wilson used to say, Why make a $3 fuel when you can make a $5 chemical,” and it was a good question at the time. But these investor’s aren’t looking any more for $900 per ton markets, not $1500 per ton markets — they’re leaving those to the strategics who need them or have the patient capital to weather the storms.

Why make a $3 fuel when you can make a $1744 nutraceutical?

Rather, they are looking for $10,000 per ton, even $100,000 per ton markets — or simply looking for service models which make money by selling, in many cases, to people chasing $10,000 per ton or $100,000 per ton markets.

It looks like pharma all over again, in many ways. If you think about active ingredient volumes in therapeutics and the price we pay for them, the opportunities are astronomical.

Only one difference. The investment group is looking to get as close as they can to pharma price points without incurring pharma’s ruinously long approval timelines or the narrow set of therapeutics that find big global markets.

Hence, nutraceuticals and advanced foods. People who will never pay more than $3 per gallon for algae fuels are more than happy to pay $25 at GNC for 45 grams of algae oil as a nutraceutical. That equates to $1,744 per US gallon, by volume — in case you wondered. Or $555,000 per metric ton.

Or, consider the burger. $17 is not unheard of for a quarter-pound Impossible Burger, and after subtracting perhaps a third for the other ingredients by weight, consider that a burger made with biotechnology checks in at a value of something like $845 per gallon equivalent (if we did equivalent weights), or $202,985 per ton. And the Impossible Burger is said to be gearing up to ship a million pounds a month right now.

The Super-High Value Expectation Curve

Yes, those are retail not wholesale rates — but consider the point. Venture investors aren’t looking necessarily for “higher-value markets”. They are looking for Super-High.

Only in those cases are they seeing that the timelines and risks associated with industrial fermentation scale-up are justified by the margins — and they sure like the commodity price swings of food more than they like commodity fuels and chemicals. Food is volatile, but not nearly as volatile as energy.

Larger markets — they make sense if there’s a strategic doing corporate venturing, and they want a venture investor to help them with early-stage technology risk.

Think of venture investors almost like accelerators these days — when it comes to commodity markets. Probably one of the reasons that Tech accelerators and venture investors are working so closely together. It’s no longer a question of investing from early-stage and going for the IPO when there is deployment at scale (i.e., the construction of the first commercial is underway). Markets are too leery of crashes like Amyris and Gevo.

Rather, in bulk commodity markets its about a hand-off through strategic acquisition to a partner or JV that can bear the costs and brings expertise to the scale-up.

Something like what we’ve seen with Virent, or REG Life Sciences (REGI), or lately with Corbion’s acquisition of TerraVia.

That model may well be the winner in terms of moving through the Slope of Enlightenment to the Peak of Productivity.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

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In Washington, the Environmental Protection Agency released its final Renewable Fuel Standard renewable volume obligations for 2018. The agency finalized a total renewable fuel volume of 19.29 billion gallons , of which 4.29 BG is advanced biofuel, including 288 million gallons of cellulosic biofuel.

As the Renewable Fuels Association explained: “That leaves a 15 BG requirement for conventional renewable fuels like corn ethanol, consistent with the levels envisioned by Congress in the 2007 Energy Independence and Security Act. The 2018 total RFS volume finalized today represents a minor increase (10  million gallons) over the 2017 standards, and a modest increase (50 million gallons) over the 2018 volumes originally proposed by EPA in July.”

Your takeaway:  a flat-line from 2017 for advanced biofuels and an upward revision from EPA’s original proposal, after four months of hoo-hah and industry protest, of 50,000 gallons.

How small a number is 50,000 gallons? Let me put it this way. That’s, on average, one teaspoon of fuel for every 85 Americans.

So, the EPA has given its annual RFS volume obligation burp and it was about as foetid as it usually is, and once again the biofuels industry, looking at its vile and inadequate bowl of gruel, is humbly asking the Beadle for “more please, sir” in a scene right out of Oliver Twist.

Child as he was, he was desperate with hunger, and reckless with misery. He rose from the table; and advancing to the master, basin and spoon in hand, said: somewhat alarmed at his own temerity:

“Please, sir, I want some more.”

…The master aimed a blow at Oliver’s head with the ladle; pinioned him in his arms; and shrieked aloud for the beadle.

The Industry response

The level of disappointment is generally linked in a linear fashion to amount of low-carbon, advanced biofuels you are capable of making. If you can make very little, this year’s RVO was OK, if not great. Corn ethanol is just fine.  If you can make lots of low-carbon fuels, you were somewhere between ‘meh’ and apoplectic.

That the blows to low-carbon, low-emission fuels are being rained down on industry by the Environmental Protection Agency is an irony that perhaps only God in his Heaven, or Ford in his Flivver, can comprehend the meaning of.

The industry response, which is published in excerpt form below, reminded us here in Digestville of the words of Lord Norwich when he resigned from the British cabinet in 1938 in a protest of appeasement and the Munich Agreement.

“The Prime Minister has believed in addressing Herr Hitler through the language of sweet reasonableness. I have believed that he is more open to the language of the mailed fist…we have taken away the defenses of Czechoslovakia in the same breath that we have guaranteed them, as through you were to deal a man a mortal blow and at the same time insure his life.”

The response in detail

The National Biodiesel Board – Doug Whitehead, chief operating officer

“EPA Administrator Pruitt has disappointed the biodiesel industry for failing to respond to our repeated calls for growth. These flat volumes will harm Americans across several job-creating sectors—be they farmers, grease collectors, crushers, biodiesel producers or truckers—as well as consumers. Nevertheless, we can’t thank our members and our biodiesel champions at the state and federal levels enough for their tireless advocacy and education efforts. We’ll continue to work with the administration to right this wrong for future volumes.”

The Advanced Biofuels Association – Mike McAdams president

“The Advanced Biofuels Association applauds EPA for releasing the final 2018 Renewable Volume Obligation mandates on time and for adjusting the proposed volumes for the cellulosic and advanced pools.  The announcement demonstrates strong, continued support for the Renewable Fuels Standard (RFS). It will also signal to industry that investment in this space is recognized and rewarded with increasing RFS mandates. Given all of the challenges of this year, ABFA is delighted that we were able to hold the line for the biomass-based diesel pool.

“We look forward to working with EPA further to finalize the biointermediates section of the pending Renewable Enhancement and Growth Support Rule, a much-needed regulatory fix that will expand the success of the advanced industry. ABFA appreciates EPA’s continued support of the RFS as our members bring new advanced biofuels production to America and deliver increasing volumes of low-carbon fuels to American consumers.”

The Renewable Fuels Association – Bob Dinneen, CEO

“We are pleased that the final rule maintains the statutory 15-billion-gallon requirement for conventional renewable fuels like corn ethanol. Under the RFS, ethanol has helped to lower prices at the pump, reduce greenhouse emissions, displace harmful toxic gasoline compounds, reduce crude oil imports, and boost local economies. Maintaining the 15-billion-gallon conventional biofuel requirement will accelerate investments in the infrastructure necessary to distribute mid-level ethanol blends like E15 and E30, and flex fuels like E85.

“It is also encouraging that EPA appears to have absorbed the tens of thousands of comments from American ethanol producers, farmers, consumers, veterans, and others who suggested the proposed rule was unnecessarily pessimistic with regard to the total renewable fuel volumes, and cellulosic ethanol volumes specifically. The final rule is a marked improvement, increasing both total renewable fuel and cellulosic biofuel volumes by 50 million gallons over the proposed levels. Still, we would encourage EPA to closely monitor the commercialization of new cellulosic technologies, particularly regarding corn kernel fiber conversion, because we believe greater cellulosic production is likely. The RFS needs to remain a forward-looking program, driving investment in these new technologies.”

Renewable Energy Group (REGI)– Randy Howard, interim CEO

“The Administration heard us when we said the Advanced Biofuel RVO should grow in 2018, not be cut as EPA originally proposed.  While we would have liked to see a larger increase, we consider this a crucial win – signaling a policy of continued RVO growth under the Trump administration.

“It would have been even better if EPA continued that policy of growth with the 2019 Biomass-Based Diesel RVO as we advocated.  We feel the Administration missed an opportunity in not continuing a sensible and consistent growth trajectory for biomass-based diesel. We firmly believe the US industry is fully capable of delivering increasing volumes of biomass-based diesel to meet a growing RVO as Congress intended when it created the RFS.  We will continue to work with EPA in 2018 to develop workable plans for additional growth in 2019.”

POET – Jeff Broin, CEO

“Biofuels are a critical component of the US fuel supply, and today President Trump and the EPA confirmed that fact. With starch-based biofuels remaining at full volumes, Americans will continue to benefit from cleaner air by replacing harmful cancer causing chemicals in gasoline, and stronger energy security by offering homegrown fuels that cost less. Unfortunately, this final rule fails to recognize the enormous opportunity before us to harness our nation’s vast cellulosic resources for higher performing and lower cost fuels.”

Novozymes (NVZMY)– Adam Monroe, President, Americas

“The EPA’s final 2018 RVO ruling acknowledges the benefits of today’s biofuels, but fails to look to the future and the coming development of advanced manufacturing facilities for cellulosic biofuels, which have the potential to radically improve our nation’s domestic fuel supply. We thank the Trump Administration for maintaining the targets for starch-based ethanol, but the EPA must do more to realize President Trump’s vision of a revitalized RFS that creates more jobs across America and strengthens U.S. energy security.”

Growth Energy – Emily Skor, CEO

“We applaud the administration for standing up against efforts to destabilize the Renewable Fuel Standard. The EPA’s on-time announcement upholds the statutory targets for conventional biofuels, which will provide much-needed certainty for hard-pressed rural communities. We would like to have seen a boost to the target blending levels for cellulosic biofuels, and we will continue to work with the administration to advance the RFS goal of further stimulating growth and showing U.S. leadership in 21st century fuels. The RFS remains America’s single most successful energy policy and continually works to save consumers money, protect the environment, drive rural growth, and secure U.S. energy independence.”

Advanced Biofuels Business Council – Brooke Coleman, Executive Director

“The Trump Administration deserves credit for rejecting political pressure to destabilize the RFS, but EPA’s failure to appreciably increase advanced biofuel levels brushes aside a huge opportunity to promote rural jobs and energy innovation. Unwarranted cuts to cellulosic biofuel targets send the wrong signal to global investors in this emerging industry. The cellulosic biofuels industry is growing and stands ready to drive the next great wave of manufacturing jobs across the heartland. There are things EPA can do quickly to unleash the full potential of cellulosic biofuels. We are not there yet with this rule, but we look forward to working with the Administration to get there.”

Biotechnology Innovation Organization (BIO) – Brent Erickson, executive vice president of BIO’s Industrial & Environmental Section:

“We are disappointed that EPA did not significantly raise the advanced biofuel volumes in line with the industry’s ability to produce them. The agency is arbitrarily limiting growth for low carbon biofuels in 2018 and into the future by looking backward, rather than forward. The cellulosic biofuel industry is positioned for continued growth in 2018. EPA has begun to make progress in approving new cellulosic biofuel technologies and production facilities, such as those that use corn kernel fiber as a feedstock. Unfortunately, EPA did not adequately account for the potential of new technologies as it set the 2018 cellulosic volumes.”

Americans for Energy Security and Innovation (AESI) Co-Chairs Jim Talent and Rick Santorum:

“The EPA’s biofuel targets preserve a vital market for homegrown fuels. The administration deserves credit for protecting U.S. energy investments and rejecting deeply flawed arguments from a few refinery owners looking to pad their pockets at the expense of rural jobs.

“Proposals to shift the Point of Obligation or create new categories of biofuel credits, exported or otherwise, were designed to undermine 12 years of investment, limit competition, and increase the cost of fuel. The administration was right to protect the Point of Obligation last week, and it was right to uphold the RFS today. But the EPA can do much more to realize the president’s vision for a strong and growing RFS that creates new economic opportunities across rural America and solidifies U.S. energy security. We cannot sacrifice this opportunity to accelerate growth, particularly on cellulosic biofuels.”

Iowa Renewable Fuels Association – Monte Shaw, Executive Director

Many people are saying the RFS numbers released today, while disappointing, were expected,” stated Iowa Renewable Fuels Association Executive Director Monte Shaw. “I disagree. Based on the 2018 biodiesel level finalized a year ago, biodiesel producers had every right to expect a 100 million gallon increase for 2018. But the EPA failed to raise the advanced biofuels level by an equal amount, resulting in only a 33 million gallon potential increase for biodiesel in 2018 – a cut of 67 million gallons from what was signaled a year ago.”

Iowa Corn Growers Association – Mark Recker, President

We are pleased to see the EPA hitting the statutory target for corn ethanol. This comes as good news for Iowa corn farmers who now face tough economic times and for consumers who want affordable, homegrown fuel choices. We thank U.S. Senators Grassley and Ernst for their steadfast, unwavering support of maintaining a strong RFS through this rule making process.

Iowa Biodiesel Board – Grant Kimberley, executive director

“We have always pushed for steady biodiesel growth under the Renewable Fuel Standard, fulfilling both the potential of the industry and the intent of the law. We have consistently met and exceeded the volumes set by EPA. We believe we will exceed expectations again, but these flat volumes send a weak signal to the market at a time when our plants could significantly increase production and expand capacity. Many plants in Iowa and beyond stand ready to make new investments in boots on the ground and brick and mortar projects, which would create jobs and spur growth in agriculture and rural America.

“The RFS decision now brings a heightened urgency to extending the federal biodiesel tax credit, which will augment U.S. demand and could re-energize economic growth. It’s up to Congress to advance this good policy.

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