Sustainable Growth in Sustainable Fuels

THE COWEN INSIGHT

The biofuels industry is on the cusp of an investment inflection driven by the need to decarbonize air travel, which should present new investment opportunities. We evaluate potential technologies and feedstock sources. We also discuss companies with exposure to various technologies.

THE PATH TOWARDS DECARBONIZATION

The aviation industry’s likely decarbonization path forward involves biofuels, presenting an >100B gal opportunity. The current renewable diesel/sustainable aviation fuel (RD/SAF) industry will grow to 9B gal by 2025, though this will largely be utilizing technology that processes feedstocks with finite availability and geared toward diesel production. We expect the industry to evolve by utilizing a wider array of technologies and feedstocks to support SAF growth, presenting a variety of investment opportunities.

EVALUATING THE GROWTH OF SAF

We see demand driving growth in second-generation fuels as Cowen’s airlines analyst suggests airlines are a willing buyer for SAF. We evaluate the economics and commerciality of five technologies and four feedstock groups that can support “second generation” industry growth. We assess capital and operational costs, feedstock costs, yields, feedstock availability, and revenue generation from regulatory schemes.

UTILIZING THE EXISTING AVIATION INFRASTRUCTURE

The industry currently utilizes fats and oils using one technology, though growth is limited by feed availability. Currently, cover crops present an interesting avenue to increase that feedstock potential. Gasification/Fischer-Tropsch using Municipal Solid Waste (MSW) screens as the best second-generation opportunity given the feedstock’s low cost and low carbon intensity, though upfront capital is high. There is potential to utilize existing infrastructure to reduce upfront capital with several paths towards realizing that potential.

• Alcohol-to-Jet utilizing corn is economically attractive though it has poor carbon intensity and feed diverted from food
• Pyrolysis using lignocellulosics taps the largest feedstock pool though generates a biocrude end-product that needs further upgrading
• Power-to-Liquids screens poorly given the highest upfront capital needs, though this could be an interesting way to monetize hydrogen if production costs decline

WHAT TO WATCH

Government support will be key to industry growth. In particular, we are watching the US government’s passage of a SAF-specific Blender’s Tax Credit (BTC) and EU passage of Fit For 55, both of which could galvanize additional investments. The airlines have their own emission scheme, CORSIA, which starts in earnest in 2024, though we wonder if airlines will opt to purchase carbon offsets as a cheap way to meet obligations.