By Tom Butcher, Director of ESG, Van Eck Associates Corporation, & Antonio de Pinho, Senior Research Analyst, Van Eck Associates Corporation
Summary
Renewable diesel market supply is expected to grow significantly by 2025, and governments are setting policies to enable further growth of this fuel.
In this two-part series, we are exploring what renewable diesel is and how it is produced, the raw materials involved and the essentials for successful refineries. We are also looking at the potential greenhouse gas savings of renewable diesel versus other fuels, its growth prospects and the current leaders in the market. Finally, we explain why we believe renewable diesel to be such a compelling story.
The first article looked at how renewable diesel turns common waste into clean fuel, as well as its potential to revolutionize mobility by reducing greenhouse gas emissions by up to approximately 80% over the lifecycle of the fuel compared to fossil diesel.
In this second article in the series, we will look not only at how renewable diesel stacks up against Ultra Low Sulfur Diesel (“ULSD”), but also at the prospects for future growth. We will also take a quick look at what’s needed for success in the space, some of today’s main players and, finally, why it is such a compelling story.
Renewable Diesel vs. Biodiesel
Myth: renewable diesel is not the same as biodiesel. While they may both use similar feedstocks, they are produced differently and carry different chemical properties. Renewable diesel is produced through a hydrotreating process, where the addition of hydrogen allows the extraction of oxygen (removes formed water). This makes renewable diesel a stable fuel in extremely cold temperatures, while preventing corrosion from microbial growth during storage in a fuel tank. It also provides better ignitions. Unlike biodiesel, renewable diesel can be used straight out of the pump allowing its value and growth not to be limited to any blending restrictions.
Renewable Diesel vs. Ultra Low Sulfur Diesel
The lifecycle (“everything that goes into making a product”) green house gas (“GHG”) emissions for renewable diesel produced from used cooking oil (“UCO”) are approximately 77% less than for Ultra Low Sulfur Diesel (“ULSD”). The most significant differences between the two products’ lifecycles are the carbon intensity from the feedstocks (<1 g/MJ (gram per megajoule) vs 11 g/MJ) and the approximately 75% reduction in GHG emissions that comes from combustion of renewable diesel in vehicles (i.e. tail pipe emissions).
According to both the Intergovernmental Panel on Climate Change (“IPCC”) and the U.S. Environmental Protection Agency (“EPA”), any carbon emissions derived from a biological (renewable) source are considered carbon neutral. This assumes that all CO2 emitted from a vehicle tailpipe is either reabsorbed from the atmosphere (by plants) or, in the case of UCO, there is an avoidance of emissions since we are preventing the incineration or decomposition of the waste and residues used instead for feedstock, within a short timeframe during the lifecycle of the fuel. In addition, non-CO2 tailpipe emissions from the use of renewable diesel amount to less than 1 g/MJ (gram per megajoule) and are attributable primarily to methane (CH4) and nitrous oxide (NO2) (these are also present in ULSD combustion). It should be noted that the lifecycle analysis in the following figure is for the California market, where the transportation costs for diesel (based on the assumption of an 80% pipeline and 20% truck combination) could be lower than for renewable diesel, in a scenario where it is transported from overseas to California in an ocean tanker.
Lifecycle Assessment of Renewable Diesel and Ultra Low Sulfur Diesel
Lifecycle Assessment of Renewable Diesel and Ultra Low Sulfur Diesel
3/11/22 Sources: California Air Resources Board (CARB) and VanEck. This infographic contains numerical values for illustrative purposes only.
Significant Growth Ahead for Renewable Diesel
Taking a renewable diesel supply and demand base case forecast, which assumes a mid-20s% compound annual growth rate (“CAGR”) from 2018 to 2025 and balances out by 2025, we ran a 10% sensitivity model to build the low and high demand forecasts. The high case scenario accounts for a world where electricity, and later on hydrogen, penetrates the transportation market at a slower pace, especially in the truck, marine and aviation sectors, a faster mandate adoption from countries in North America, Asia and South America and steeper regulatory mandates in Europe. The low case forecast tries to model a more conservative view of the assumptions than the upside case.
The renewable diesel market supply is expected to grow from approximately 5 million tons per year (MTon/yr) in 2018 to approximately 25 MTon/yr by 2025 and 30 MTon/yr by 2030 (risked for both project ramp up and plant utilization):
Europe is anticipated to transition from an exporter to an importer of renewable diesel over the next five years. It is currently responsible for approximately 50% of total renewable diesel supply. And while this is expected to drop to approximately 30% by 2025, its share of global demand is estimated to remain consistent at 50%.
North America is expected to produce enough renewable diesel to satisfy its needs over the next five years, with its share of global supply and demand averaging approximately in the mid-40s% by 2025, and it may even sprinkle a few barrels back into the global market (California and Oregon were the early adopters, but it is now expanding to the rest of the country with other states also fast-tracking the switch to renewable diesel and adopting similar initiatives to support refiners). Canada is also becoming an active participant in the demand chain.
Renewable Diesel Supply and Demand
Renewable Diesel Supply and Demand
3/11/22 Sources: Barclays (demand bottom-up base case model), VanEck (supply bottom-up model), BNEF and company and country data.
The technology developed to produce renewable diesel for road applications can also be used to produce renewable jet fuel (i.e., sustainable aviation fuel, “SAF”), renewable and recycled plastics and renewable chemicals.
IATA (International Air Transport Association) member airlines passed a resolution, in October 2021, committing to achieve net-zero carbon emissions from their operations by 2050 in order to bring air transport in line with the objectives of the Paris Agreement to limit global warming to 1.5°C. This plan contemplates a potential scenario where 65% of carbon emissions would be abated through SAF. New propulsion technology, such as hydrogen or electric aircrafts for short duration flights, would take care of another 13% towards 2035. Efficiency improvements would account for a further 3% emission reduction and carbon capture and storage and carbon offsets would contribute with 19% of emission reductions needed in 2050.
SAF has chemical properties almost identical to conventional jet fuel, and it can be blended up to 50% with traditional jet fuel with no modifications required to the design of the airplane. It can reduce carbon emissions by up to 80% over its lifecycle compared to traditional jet fuels and it also contains fewer impurities (i.e., sulfur). It can be produced from 100% renewable waste and residue feedstocks.
Our internal estimates, integrated with other industry forecasts, see SAF global supply as growing to approximately 3 MTon/yr by 2025 and, according to Neste (0.51% of VanEck Global Resources Fund (GHAAX) net assets and 2.33% of VanEck Environmental Sustainability Fund (ENVAX) net assets), which currently owns the majority of SAF available in the market, it could exceed 12 MTon/yr by 2030. Our estimates take into consideration plant utilization and project ramp up. This demand growth trend is also supported by an increasing number of airlines collaborating with airports striving to achieve goals in line with IATA’s plan.
Net SAF Supply
Net SAF Supply
3/11/22 Sources: VanEck, BNEF, Barclays, company data.
Number of Airlines with Net-Zero Targets, by Month Announced
Number of Airlines with Net-Zero Targets, by Month Announced
3/11/22 Sources: VanEck, BNEF, Barclays, company data.
Who Are the Current Market Leaders?
Neste is a truly global refiner and “first mover” in the renewable diesel market and its project pipeline is primarily defined by newly built plants. Its renewable diesel basket of feedstocks is a leader in the market, with 80% composed of waste and residues and that proportion scheduled to become 100% by 2023. It is certainly the only renewable diesel refiner that integrates its technology across three distinct product lines: renewable road transportation, renewable aviation and renewable and recycled plastics and biochemicals—all made from recyclable raw materials. It is also the largest producer of renewable diesel and jet fuel in the world.
In North America, Diamond Green Diesel, the market leader, is a joint venture between Valero Energy Corporation (2.65% of VanEck Global Resources Fund net assets), a leading conventional oil products refiner operator) and Darling Ingredients Inc. (0.96% of VanEck Global Resources Fund net assets and 2.38% of VanEck Environmental Sustainability Fund net assets), a global feedstock company. Its market share of global renewable diesel is approximately 10%. Other U.S. refiners, such as Marathon Petroleum Corporation, Phillips 66 Company and HollyFrontier have been motivated to convert their less commercially economic facilities into renewable diesel plants.
Integrated oil companies like TotalEnergies and Eni in Europe and Chevron (2.68% of VanEck Global Resources Fund net assets) in North America, are also focusing on the conversion of their existing conventional refineries as an important factor in their ambitious renewables agendas.
Renewable Diesel is a Compelling Story
We estimate that project returns could range between 20-40%. These meaningful returns and margins demonstrate the importance for an operator of accessing markets with regulation in place that rewards the use of feedstocks with the lowest carbon intensity (and higher incentives), reaching geographies with access to the cheapest feedstocks and having the most efficient operations.
It is evident from our analyses that governments worldwide recognize the value of renewable diesel’s circular economy in recycling the world’s trash and are willing to set policies and mandates that increase our dependency on this fuel and allow the continued development of new technologies that reduce both the cost of feedstocks and operations.
Conclusion
The circular economy of renewable diesel is more of a “marathon” than a “sprint” and a tradeoff between acceptable payback periods and more resilient and sustainable margins will survive the macro cyclicality. There is a delicate balance that makes this business very challenging for new entrants; an operator needs to be able to secure the cheapest feedstock (both source and trade), transport it to a plant that has the technology to convert it, then ship the renewable diesel to a country or region that offers the highest incentives and, finally, ensure access to a market with the highest demand growth.
Steeper regulatory mandates from an increasing number of governments worldwide will continue to increase demand and replace the dependency on incentives. Growth within the aviation and the chemical industries (hard to decarbonize spaces) will increase profitability and also reduce dependence on incentives.
From our experience in the renewable energy space, we see a number of striking similarities between renewable diesel and solar. One of the most obvious is the use of incentives, in the early days, to motivate market development. When solar was in its infancy, many thought it would never take off, not least because of incentives; without them, it could never stand on its own. In order to survive and thrive, you not only need to have a leading technology, you also need to have an exceptional business, i.e. it needs, at the very least, to be profitable! And that means when there are no incentives to provide support.
Whilst it is now a case of waiting to see just how the renewable diesel market develops, we are optimistic. We shall be sure to keep you up-dated with any exciting news!
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