THE TD COWEN INSIGHT
The renewable diesel and sustainable aviation fuel (SAF) market faces near-term downside as supply growth overtakes demand, underpinned by government incentives. We see potential for margin stability to re-emerge in 2025 and strengthening into the second half of the decade as new markets ramp up incentive programs and as the world demands more low carbon fuels. Alcohol-to-Jet (AtJ) is an emerging technology, though requires carbon capture and storage infrastructure. Power-to-Liquids (PtL) could be a long-term opportunity.
ESTIMATING NEXT-GEN FUEL MARGINS
We began our next-gen fuels coverage with a primer on U.S. renewable diesel, followed by an industry launch and alternative technology study. Since 2020, we have seen supply expand against an increasingly complex set of government programs that set demand. The complexity makes predicting industry dynamics difficult. We do just that in this report, concluding significant downside to margins in 2024, margin differentiation based on feedstocks from 2025, and a more supportive environment thereafter.
ANALYZING RENEWABLE DIESEL AND SUSTAINABLE AVIATION FUEL SUPPLY & DEMAND
We built renewable diesel and sustainable aviation fuel supply & demand balances using our project tracker. Demand incorporates proprietary analysis of low carbon fuel standard for North America, U.S. state incentives, U.S. renewable fuel standard, and European mandates. We build economics for currently used technology – hydroprocessed esters and fatty acids (HEFA). We also derive Renewable Identification Number (RIN) prices and SAF premiums needed to incentivize new capacity. Lastly, we analyze emerging technologies, including AtJ and PtL.
RENEWABLE DIESEL & SAF MARKET FORECAST
Renewable diesel margins for plants using vegetable oil could approach 0 in 2024. Waste-oil based product could earn $0.30/gal. EBITDA in 2025 could improve to $1/gal for operators using waste oils but stay low for veg oil given carbon intensity differences.
Long-term renewable diesel EBITDA of at least $0.50/gal is required to incentivize new capacity, while SAF needs an added price of at least $1.25/gal. Margins could be stronger than these levels after 2025. RIN credit prices should weaken in 2024, hurting US refiners that capture RIN cost passed through in the crack. Overall, we see a weak 2024 and more constructive environment from 2025.
UPCOMING CATALYSTS & MILESTONES
We expect a decline in U.S. biodiesel production from low RIN prices in 2024. The pace of that response could dictate how long margins remain weak. California should finalize a Low Carbon Fuel Standard amendment early 2024, which will have implications for sector profitability. AtJ needs CO2 pipelines, which could come online in the second half of this decade, to support development given required alcohol decarbonization. We estimate AtJ plants could earn $1.80/gal EBITDA with a capex or EBITDA multiple of 5x. Capex improvements will be critical to PtL given high upfront spend, though may not materialize prior to 2030.
IMPACTS ON THE COMPETITIVE LANDSCAPE
Lower 2024 margins are a headwind for independent producers and refiners, the same refiners who would also be affected by lower RIN prices. Independents could see ~25% downside to EBITDA in 2024 (partially reflected in our estimates) while refiners could see a similar amount. However, the refiner downside could be offset by a $2/bbl crack increase, which is not a major increase relative to recent market volatility. Long-term, biofuel margins for independent producers should strengthen ~20% above expectations.
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