SASKATOON — The renewable diesel math does not add up, says an economist.
The U.S. Environmental Protection Agency issued a final rule in June 2023 establishing a mandate for four to 4.5 billion gallons of renewable diesel and biodiesel by 2025. In the meantime, the U.S. biofuel industry has announced plans for six billion gallons of capacity by 2025 and 7.4 billion gallons in the years that follow.
“Something has got to give,” said Scott Irwin, agricultural economist at the University of Illinois, during a recent presentation at the Farm Assets Conference.
Either some of those renewable diesel plants will not get built, or they will operate well below capacity, or existing biodiesel plants will be driven out of business.
“Trust me, I have had some interesting conversations with investment bankers who have been putting money into this sector,” he said. “Some of them get very heated when I make my argument.”
They refuse to believe the math, he said, but they have no counter argument.
Irwin thinks the investors fail to comprehend that the EPA’s renewable volume obligations (RVOs) created both a minimum and a maximum mandate for the fuel.
That is because there is a “yawning gap” between biodiesel and conventional diesel prices. Biodiesel sells at a premium that averages between US$1.50 and $2 per gallon.
“This stuff is expensive to make,” he said.
That gap has been as high as $5 per gallon recently and it is even greater when comparing renewable diesel prices to conventional diesel.
Biodiesel and renewable diesel are simply uncompetitive fuels if regular market forces were at work. It is a market solely driven by government policy and that policy is dictating no more than four to 4.5 billion gallons of annual demand by 2025.
“That is what all the investment bankers missed,” said Irwin.
The only other plausible explanation is that oil companies that are building these massive renewable diesel plants are content incurring huge losses until the EPA unveils the next round of RVOs for 2026 and beyond, in the hopes that new mandates will better match the capacity under construction.
That is a huge gamble for a company like Phillips 66, which is building a $1.25 billion plant in Rodeo, California, that will be capable of producing 800 million gallons per year when it opens in the first quarter of 2024.
The fate of the renewable diesel industry has big ramifications for soybeans and other feedstocks like canola.
U.S. soybean crush is set to expand by one-third in response to the announced renewable diesel capacity.
Critics who say Irwin is being “ridiculously bearish” on the outlook for renewable diesel argue that even if production capacity doesn’t reach its potential, they can rely on sustainable aviation fuel (SAF) demand to make up the difference.
Irwin believes SAF is the true future for the biofuel sector and will ultimately be the driver of grain and oilseed prices. But it is in its infancy.
“We have hardly even gotten to the starting line,” he said. “It is not going to be a large impact on our agricultural markets certainly for five years and it may take 10 years.”
The good news for farmers is that the U.S. Department of Treasury announced on Dec. 15 that it is using an updated model of the U.S. Department of Energy’s Greenhouse Gases, Regulated Emissions and Energy Use in Transportation (GREET) model to calculate SAF tax credits.
That ensures crop-based SAF will be eligible to claim the credit, which ranges from $1.25 to $1.75 per gallon.
That was an early Christmas gift for many U.S. and Canadian crop organizations.
“With this guidance supporting soy and other plant-based feedstocks going into sustainable aviation fuel, the sky truly is the limit for soy,” Josh Gackle, president of the American Soybean Association, said in a press release.
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