Renewable Diesel: Where’s The Value?

April 01, 2021

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by Steve Roberts and Michael Reecher (Opportune/Biofuels Digest) If companies want to capture value and ultimately profit from the projected growth in renewable diesel, they must understand their netback. The demand and price for renewable diesel is on the rise and bringing familiar and new market participants to the market. Domestic production of biomass-based diesel has struggled to keep up with demand, which is primarily focused on the U.S. West Coast. The U.S. domestic refining industry is moving quickly to fill the market need, with planned production capacity forecast to increase four-fold in the next three years. However, if companies want to capture value and ultimately profit, they’ll need to understand their netback for renewable diesel.

Understanding Your Renewable Diesel Netback

According to the U.S. Energy Information Administration (EIA), net imports of biomass-based diesel rose from 25% in 2019 to 50% in 2020. Demand will continue to rise into 2021 due to low carbon-based regulations spreading at the state level from Washington and Minnesota to Iowa and New York. In Canada, British Columbia has led the way, but Canada’s national “Clean Fuel Standard” is also setting regulations that will increase renewable diesel use.

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Calculating the netback, a non-GAAP measure of operating profitability used to measure efficiencies, takes on a slightly different flavor when used to calculate renewable diesel value. While the basic components are the same for renewable diesel as its fossil fuel counterpart, the varied regulations surrounding renewable fuels, the markets that determine their value, and the new feedstocks for traditional refiners require updates to the netback calculation and overall value capture.

Netback is traditionally calculated by taking the revenue from the sale of product and then subtracting transportation costs, production costs, administrative expenses (including working capital), and revenue (or loss) from trading and hedging activities. For the netback calculation of renewable diesel, there’s an added wrinkle—a tax credit component. READ MORE