by Alexander Koukoulas, Henna Poikolainen, and Esa Sipilä (AFRY/Biofuels Digest) The second half of 2022 is shaping up to be a watershed year for the advanced fuels and bio-based chemicals industries. New regulatory frameworks to address climate change are providing a catalyst for what will be unprecedented growth in these sectors. In the US, the Inflation Reduction Act, through the Energy Infrastructure Reinvestment Financing Program, will inject $250 billion in loans to repurpose energy infrastructure and $40 billon for projects eligible under section 1703 of the Energy Policy Act of 2005. Across the Atlantic, the European Commission recently approved $5.2 billion in public funding for hydrogen projects, including the development of large-scale electrolyzers. To meet the targets of its Green Deal, countries in the European Union (EU) will allocate €584 billion in new investments. Perhaps, at least in terms of available incentives, the Golden Age of Advanced Fuels has finally arrived.
HVO Leading the Way
Arguably the most active sector in biofuels is the hydrogenated vegetable oil (HVO) or renewable diesel market.
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The Promise of Advanced Biofuels?
In comparison, the current global advanced biofuels supply is a relatively modest 1.0-1.2 Mtoe. While comparatively lower in terms of volume, it too is expected to see significant growth in the coming decade ….
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Will high prices trigger new investments?
Price development of biofuels and especially advanced biofuels has been a rollercoaster ride during the past year driven first by the turmoil in global commodities, followed by new biofuel regulations and war in Ukraine. A few years back, all feasibility studies were painting long-term price levels for advanced biofuels at around 1500–2000 USD/mt, which by late 2021 and 2002 turned into 3000–4000 USD/mt.
Elevated price projections are giving a huge boost to the profitability of new projects, while also highlighting the high risks in regulatory-driven markets.
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Lessons Learned
US and European regulations have created a very large market for advanced biofuels. Companies are racing to build out HVO capacity but are facing the harsh reality that feedstock availability is the key driver for growth and that feedstock control is key for long-term success. In comparison, lignocellulosic biofuel technologies are still at “flagship stage.”
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We believe that adherence to five basic principles will be needed:
- Proven technical concept. The appetite for jumping the queue when it comes to technology readiness is long gone. Early-stage companies must demonstrate their technology platforms at the appropriate scale and only then consider deployment at commercial scale.
- Competitive feedstock supply chain. A critical element to success. Vertical integration in feedstocks will likely be a best practice amongst future participants.
- Strong balance sheet. Commercialization plans will inevitably succumb to cost overruns and start-up delays. Companies that do not have a strong balance sheet will be unable to stay the course.
- Disciplined approach to project management. Given the complexity of advanced biofuels projects, the ability to create cross-functional teams that can address all critical business functions—research and development, design and engineering, operations, regulatory, and sales, as well as environmental, social, and governance (ESG)—with clear purpose and accountability is a must. Adherence to best practices will accelerate project delivery. Cutting corners will lead to failure.
- Off-take partners. Another critical element is the ability to secure off-take agreements. However, given the insatiable demand for low-carbon fuels, attracting off-take partners is probably the least concern for projects that adhere to principles 1 through 4.
Long-term Competitiveness
As prices are and will remain volatile and depend on uncertain regulations and commodity markets, relative competitiveness against other players will be one of the critical means to assess new project viability. An advantaged cost position among the future leaders is the best way ensure competitiveness in the long term. READ MORE