The Global Solution of Renewable Fuels

Nate Heywood, CFA 

Renewable forms of energy have been widely discussed for the past century but have focused more on conventional renewable technologies such as solar, wind, hydro, and batteries. Given the limitations of batteries for renewable energy dispatchability for large-scale transportation, renewable fuels have stepped in as alternatives to carbon-based diesel, jet fuel, and natural gas. In this report, we broadly examine the current and future outlook for renewable fuels, including renewable diesel (RD), sustainable aviation fuel (SAF), and renewable natural gas (RNG). In addition, we look at key market drivers for renewable fuels, which include the implementation of favourable policies, unique adaptability, and feedstock considerations. In the near term, growing renewable fuel demand should in general be supported by growing corporate demand, social awareness, and increased fuel pricing; however, in the long term, we expect emission reduction targets to be key to the success of renewable fuel developments. 

Appetite for Renewable Fuels: 
The momentum behind broader adoption of sustainable fuels has grown with technological advancements and increased social awareness. Of course, some motivation to explore alternative fuel sources has been driven by government regulation, but we should be aware that recent increased transparency for Environmental, Social, and Governance (ESG) practices have also driven capital allocation changes at large corporate players across many sectors. Referencing the adoption of small-scale EV adoption, stewards of the energy transition in larger commercial or industrial settings have looked to renewable fuel utilization to achieve similar emission targets that align with corporate, national or global sustainability targets.  

Robust Demand Growth Could Drive Significant Industry Investment:
It is estimated that global market demand for RD and SAF is currently ~8.4 billion gallons (551 mbbl/d) compared to a 2030 demand estimate of 20.4 billion gallons (1,334 mbbl/d). Broadly, we have estimated that the incremental investment in new production through 2030 could fall in the range of $40bn-$60bn, based on a $55mm-$75mm per mbbl/d development cost. Given the supportive regulatory framework and access to feedstocks, we highlight North America as an attractive market for renewable fuel development. We expect RD and SAF project feasibility and development to also be incentivized by demand for low carbon fuel alternatives and regulatory frameworks with associated credit market incentives, with some facility developments providing ~2x-3x investment multiples. RNG project development is expected to vary widely by project and feedstock source; however, demand growth and feasibility can largely be attributed to regulator blending targets and blended fuel pricing options from utilities for end-users.

Where to Look for Renewable Fuel Exposure:
We view entities with refining experience and logistics expertise as best suited for success in renewable fuels. The market is in its infancy and is subject to regulatory uncertainty, but entities with the infrastructure and experience to deliver products to market will be positioned to unlock the value of low carbon fuels in dynamic markets.

Nate Heywood, CFA 403.703.7506