Biobased Diesel by the Numbers

Renewable diesel and biodiesel production capacity may soon exceed domestic feedstock availability and demand, but this doesn’t mean a crisis is looming.

While electric vehicles (EVs) make headlines, the renewable fuels industry offers a more immediate and impactful disruption to the energy industry, and more specifically, to the market for liquid fuels used in cars and trucks. With petroleum companies showing new interest, renewable diesel supply is poised to possibly triple, shaking up energy and transportation markets, and offering fresh and exciting opportunities for investment.

Transportation is the No. 1 cause of greenhouse gases. EVs have the potential to reduce road carbon emissions by about 50 percent. At current rates, it would take 15-plus years to turn a U.S. fleet of more than 290 million vehicles. EVs only captured 10 percent of sales in 2021 and are projected to comprise around 60 percent of sales in 2050, according to analysts. The upshot: Cars and trucks will need liquid fuels for at least the next 50 years—not to mention the global airline industry, which burns more than 100 billion gallons of fuel a year.

The fossil-fuels industry has opposed every government program designed to encourage renewable fuel production. Times are changing. Petroleum companies are investing in renewables to satisfy consumers, shareholders, and boardrooms seeking to decarbonize their product offerings.

That is leading to a big expansion of capacity. Ocean Park analysis indicates that 11 renewable diesel plants will have a high probability to bring 3 billion gallons of capacity online by the end of 2024. Nine of these are backed by eight petroleum-refining companies. Behind these, there are an additional 15 announced renewable diesel projects with 3.3 billion gallons of potential capacity that are in the early development stages.

For perspective, there was 3.1 billion gallons of biomass-based diesel produced in 2021, of which almost 600 million gallons was through imports. The first highly probable renewable diesel tranche would double 2021 production of biomass-based diesel and the second tranche would triple 2021 production. Total diesel consumption for transportation in the U.S. is approximately 45 billion gallons. The renewable fuels industry could meet around 20 percent of this demand if all this capacity comes online.

Change takes time. It took biodiesel 20 years to achieve around 6 percent diesel market share, and ethanol 30 years to gain around 9 percent market share.

To be sure, the growth of renewable diesel is limited by the availability of feedstock. Biobased feedstocks are limited by arable land and water, whose primary purpose is growing food and feed. Proven fossil reserves, on the other hand, keep growing while wind and solar are almost infinite.

Ocean Park analysis indicates that if only the first tranche of highly probable renewable diesel capacity comes online and is added to current run rates for biomass-based diesel, they would consume all domestically available feedstocks leaving none for food, feed and other industrial uses. Obviously, this cannot and will not happen.

So what is the solution? Biomass-based diesel costs more than fossil diesel, therefore government policy sets both the upper and lower demand bounds. Today, almost all renewable diesel heads for California due to the combination of federal Renewable Fuel Standard mandates and blenders tax credits (BTC), and state Low Carbon Fuel Standard incentives. In 2022, the lower bound is around 2.7 billion gallons set by the RFS and the upper bound is around 3.5 billion gallons considering waterfall impacts from flexibilities built into RFS and incentives from the LCFS and BTC.

We are also seeing a “great rotation” from biodiesel to renewable diesel. In the past two years, domestic renewable diesel production as a percentage of biomass-based diesel nearly doubled from 26 to 48 percent. We expect this trend to continue because returns on renewable diesel production exceed returns on biodiesel production. Thus, renewable diesel producers can outbid biodiesel manufacturers for limited feedstock supplies.

The reasons for higher renewable diesel returns are due to the integrated logistics owned by refiners, the drop-in replacement advantages of renewable diesel, and refiners being able to capture the entire $1-per-gallon BTC benefits while biodiesel producers may only capture 50 percent. Petroleum refiners have decided that it is better to internally solve the RFS compliance expense than to purchase renewable identification number (RIN) credits or liquid gallons from third parties. It allows them to use their own assets, thereby bringing greater efficiencies and flexibility. It also responds to their decarbonization pledges and international carbon-accounting standards.

Renewable diesel developers understand the feedstock challenge they face. Ocean Park has tracked 19 feedstock transactions between renewable diesel producers and feedstock providers since 2018. Tying up the feedstock or developing new feedstocks are necessary corollaries of renewable diesel development.

The only large domestic pool of available feedstock is soybeans. The U.S. exports about 1 billion bushels to be crushed for protein meal and oil in other parts of the world. Domestic soy crushers have responded with new greenfield plants and expansions to existing plants, some in concert with renewable diesel developers and others independently. Ocean Park estimates that these new plants and expansions will add around 600 million gallons of soy-oil feedstocks.

Renewable diesel and biodiesel capacity will exceed domestic feedstock availability and the upper bound of demand. However, Ocean Park’s view is that feedstock supplies will be adequate given the upper and lower bounds of demand set by government, and the rotation of feedstocks from biodiesel and renewable diesel, along with new crushing capacity and options for international sourcing of feedstock.