Friday, December 02, 2011

Biodiesel vs. Renewable Diesel

The last post “Biodiesel Rollercoaster” about biodiesel production reminded me that the terms biodiesel and renewable diesel can be a bit confusing.  The key is the production process.  There is nothing stopping us from using the term biodiesel or renewable diesel for a wide range of fuels made from organic materials.  However, the industry itself has set a narrower definition of what qualifies as biodiesel or renewable diesel.  The effort has helped get producers in line with standards for fuel and fuel additives set by the American Society of Testing and Materials (ASTM). 

According to the National Biodiesel Board, biodiesel means “a fuel comprised of mono-alkyl esters of long chain fatty acids derived from vegetable oils or animal fats.  Biodiesel producers aim to meet ASTM standard D6751.

Renewable diesel on the other hand is produced with a process called “thermal depolymerization.” Producers of renewable diesel aim for entire different fuel specifications found in ASTM standards ASTM D975 (petroleum diesel fuel) or ASTM D396 (home heating oil).

Does it really matter?  From an investor’s viewpoint the nuances between biodiesel and renewable diesel may not seem to matter.  According to the National Renewable Energy Laboratory engine manufacturers and fuel consumers are concerned that biodiesel is not of adequate purity and quality for engine and fuel system component durability.   So for the producer, meeting the ASTM standards can make the difference in getting product sold. 

Furthermore, the differences in the two processes have significant economic ramifications that affect profits.  In September 2011, the largest producer of renewable diesel Neste Oil published updated production cost figures.  Neste Oil (NES1V:  FH) revealed its estimated production cost, not including feedstock, of NExBTL renewable diesel is $220 a ton (approximately $0.70 per U.S. gallon). That's up significantly from the firm's 2009 estimate of $175 a ton (roughly $0.56 per gallon).  Neste blames rising utility and hydrogen costs on the higher cost per unit.  A study completed by the University of Alberta in Canada, determine that average cost of biodiesel was near $0.92 per gallon excluding the costs of feedstock.

It also has implications for federal tax credits.  The JOBS Act of 2004 provided a $1.00 per gallon tax incentive for biodiesel produced from virgin oils and $0.50 from recycled oils. The Energy Policy Act of 2005 extended the biodiesel credit through 2008 and added a new $1.00 per gallon tax credit for renewable diesel.  Since renewable diesel is produced through different processes it was ineligible for the biodiesel credits. The tax credits were extended to 2009, left to expire in 2010 and then reinstated in 2011.  The pending decision by Congress to renew the tax incentives or allow them to expire as schedule requires could potentially lead to a the renewal for one and not the other.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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