Demanding More from the Biofuel Sector
(Biofuels International) Olivier Mace, owner of Broadmanor Consulting, looks into his crystal ball to analyse the state of the biofuels market as the industry powers ahead into the new year.
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More complexity of target setting and sub-targets, more sectors, more sustainability requirements and feedstock categorisations, more complicated GHG escalation mechanisms. More (in fact last year, much more) volatility of pricing, and market conditions described by many participants as “crazy”. More technologies and feedstock choices.
More countries coming on board, more differentiated attitudes between governments, caught between high energy prices and the geopolitical need to improve energy security. More, more, more…
Of course, all this is brilliant news for experts like myself, whose job is to master complexity and attempt to make a very complex field easier to navigate. However, it is much less welcome by investors, desperate to take part in the energy transition but often befuddled by the multiple uncertainties of our Industry.
I see this as currently the greatest paradox of a sector already full of them: The disconnect between the ambition for biofuels – in particular for Renewable Diesel and SAF – and the pace at which investment is being unlocked, beyond the usual suspects (sorry, the “Strategics”).
The ambition is best illustrated by reference to some of the well-known forecasts of the energy transition, such as the IEA World Energy Outlook or the BP Outlook.
Scenario-based and focused on the road to 2050, they provide a range of possible outcomes for biofuels demand but in general, they depict very attractive growth prospects, especially for bio-based hydrocarbons such as bio-naphtha, renewable diesel and above all SAF. However, it should be noted that the more bullish of these possible futures are goal-seeking rather than an extrapolation of current reality – in other words, they describe “what needs to happen” rather than “how are things going”.
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Given such great expectations, it should be no surprise that providers of large-scale project financing, from banks to PE firms and infrastructure funds, are all looking at our sector with hope and keen interest. Just as well, when you consider the trillion dollar (order of magnitude) necessary to convert even a minority of our combined road, air and marine fuel demand to bio.
However… as of today, more often than not, the risk profile of the sector is acting as a powerful deterrent….
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Those with a higher risk tolerance can of course take their pick from a vast array of technology start-ups or asset projects, available in many shapes and forms. But for those – and they speak for the majority of the money – who require reasonably secure returns, they are struggling with the triple layer of risks of an advanced biofuels project:
Market risk (always there in any Industry) PLUS technology risk PLUS regulatory risk.
In these investment conditions, the aforementioned usual suspects are still going ahead, in particular the Oil & Gas majors. With their big balance sheets and ability to self-finance, their technical and commercial capabilities, and their appetite for risk (borne from a legacy of huge, high-risk / high-return Exploration & Production projects), they are arguably the only investor type who is able to move forward at present. Consequently, they look poised to carve out a really nice market share for themselves. But by their own admission, the Oil Majors cannot do it all.
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Regulation is of course often seen as the main lever to provide a modicum of certainty in a chaotic world. In this respect, the progress made in the coming year on the key Fit-for-55 dossiers will be critical. Also very important will be to finalize the new Annex IX list, which is driving not just investor confidence in the feedstock availability for HVO / HEFA projects, but as a corollary is also impacting the prospects and needs for the more advanced pathways such as AtJ, gasification or pyrolysis. Last but not least, the Great Debate around the role of eSAF using power-to-liquids technology will receive a very important signal from EU Regulators, potentially triggering the scale-up of units from pilot scale to commercial scale – or bringing things to a grinding halt.
Looking beyond Regulation, technology advances also have a critical role to reduce the risk profile of the sector.
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2022 was a year of real progress, where a small number of significant 2nd gen projects reached the all-important milestone of commissioning the first commercial-scale unit. It would be unrealistic to expect these new plants to deliver stellar returns – that’s typically not their purpose – but operability, and the achievement of target KPIs (be it yields, production costs or on-stream time) from these first-of-their-kind facilities will be key to determine how far the tech developers have gone in de-risking their respective pathways. READ MORE
