Navigant Research Blog

Renewable Diesel’s Big Surge

Mackinnon Lawrence — October 23, 2012

Biodiesel production in the United States fell 61% from its 2008 high of 678 million gallons per year (MGY) to 263 MGY by January 2010.  Precipitated by the lapse of a key $1 per gallon producer’s tax credit that had enabled biodiesel producers to recoup the cost of production and offset feedstock costs, this drop forced producers to idle capacity and set off a wave of bankruptcies across the country.  Amidst the doom and gloom, the industry was largely written off as a peripheral player in EPA’s rejiggered Renewable Fuel Standard (RFS2).

Today, with the producer’s tax credit reinstated, biodiesel has become a lone bright spot under RFS2 and an early success among advanced biofuels.  Production capacity is expected to expand over the next few years. U.S. biodiesel production currently exceeds 1 billion gallons per year (BGY), thanks in part to expanding production of renewable diesel.  Assuming adequate feedstock access, Pike Research’s forecasts suggest that renewable diesel production could continue to surge in the United States over the near-term.

A Crude Replacement

To understand renewable diesel’s surge, it is important to note the difference between conventional biodiesel and renewable diesel.  Solazyme explains:

The molecules in biodiesel are primarily FAMEs (fatty acid methyl ester), usually obtained by transesterification. Renewable diesel is hydrocracked and refined, and is nearly molecularly indistinguishable from standard diesel that comes out of the pump.

A superior product to conventional biodiesel, renewable diesel is fully fungible with existing diesel infrastructure.  This means that it can be used in place of crude oil-based diesel without any corrosion of pipelines or loss of performance in existing engines.  This makes renewable diesel particularly attractive.  For investors and project developers, it means end-market access while sidestepping many of the regulations and approvals that have confined conventional biodiesel to “cottage” status in the United States.

Meanwhile, biodiesel’s past troubles demonstrate that subsidies matter in commodity-dependent industries.  In the high-volume fuel business, scale and low-cost production drive success.  Consumers have proven unwilling to pay premiums for “green” or “renewable” fuels, forcing producers to compete with petroleum-based diesel on price.  Biodiesel production collapsed in 2008 and 2009 – not because of any inherent technological shortcomings, but because it was crippled by wildly fluctuating feedstock costs and a simultaneous loss of subsidy support.

Largely dependent on soy and canola as feedstocks, North American producers manage thin profit margins while competing for these soft commodities on the open market.  Dramatic price increases are the industry’s Achilles heel.  Since tax credits help offset price surges, a lack of financial support can leave biodiesel producers with excess supply on the market and no way to recoup production costs.

This partly explains why fats, oils, and greases (FOGs) have been such a hot feedstock in recent years.  A waste byproduct of restaurants and animal processing, FOGs offer producers a relatively price-stable alternative insulated from the demand pressures of vegetable oils and other food-based feedstocks.  Although collecting used cooking grease from restaurants has proven logistically difficult at scale, chicken fat, pork lard, and beef tallow from the food processing industry have driven a mini-renaissance in renewable diesel production.  Dynamic Fuels, a joint venture between food processing giant, Tyson Foods, and Syntroleum, has demonstrated the efficacy of this approach at its 75 MGY capacity Geismar Plant in Louisiana.

Renewable Diesel Comes Cheap

Superior performance and FOGs are only part of renewable diesel’s recent success.  Renewable diesel has also led among peer advanced biofuel production pathways with competitive capital costs.  Based on public data, renewable diesel facilities are currently being built at between $2 and $4 per gallon, compared to more than $10 per gallon for many cellulosic and thermochemical-based pathways.  With petroleum refineries being sold for less than $0.10 per gallon, lower capital expense matters.

Renewable diesel facilities also boast larger average capacities, taking better advantage of economies of scale.  Neste Oil led the way globally with 200-plus MGY facilities in Rotterdam and Singapore.  Emerald Biofuels and Diamond Green Diesel are expected to join Dynamic Fuels with 85 MGY and 136 MGY capacity plants under construction, forming a renewable diesel corridor along the Mississippi River in Louisiana.

Although Pike Research’s report, Clean Diesel Vehicles, forecasts that clean diesel vehicles will capture a slightly higher percentage of new light and medium duty U.S. vehicle sales than hybrids, even with sustained growth in renewable diesel production, volumes are likely to still be a drop in the overall fuel bucket.  With diesel confined to niche vehicle fuel status, renewable diesel producers’ future is likely to be in the heavy duty vehicle and aviation biofuel markets.  As conversion technologies developed by Honeywell’s UOP and Eni have demonstrated, hydrotreatment of traditional biodiesel feedstocks like fat can produce a range of distillates like renewable diesel and aviation biofuels at competitive costs.  With costs and performance competitive for these applications, feedstock access will dictate how long the industry can replicate its early success.

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