20/20 by 2020


Originally Published in The Jacobsen on April 4, 2016
California Biodiesel Industry Commentary

The Low Carbon Fuel Standard (LCFS) has created a very favorable environment for biodiesel and other biofuels in the current California fuel market. But that’s driven a significant over-supply of biodiesel into the state without sufficient wholesale outlets. As a result, biodiesel in California is being heavily discounted, which is unfortunate because the LCFS was designed to help promote the use of low carbon alternatives to fossil fuels, but not necessarily by discounting their value. But the market often does not do what regulations intend. In this case they have successfully encouraged the use of biodiesel – which is a good thing – but they’ve created a very competitive environment for in-state producers who have to make their fuel in the most expensive business environment in the country, if not the world.

Growing support for an in-state biofuels production initiative, which would drive full utilization of California production capacity and encourage investment in new in-state production facilities, would level that playing field, but only if state biofuels producers and their supporters are successful in convincing Governor Brown to include the roughly 7% of his Cap & Trade Greenhouse Gas Reduction Funds (GGRF) in his budget that they’re asking for. That’s right – only 7%! Seems like a no-brainer, since biofuels are generating close to 90% of the LCFS credits so far, and likely will continue to do so well into the future. But to date he’s only about 30% of the way there. So hopefully he’s a subscriber of this publication and reads this commentary religiously…

If the biofuels coalition is successful in its efforts and the LCFS remains strong, a tremendous market for in-state bioenergy crops would likely develop, which should receive enthusiastic support from the strongest agricultural economy in the country. These low-carbon bioenergy crops could generate another 300-400 million gallons of biofuels feedstock right here in the Golden State.

So, we know that biofuels are delivering close to 90% of LCFS credits being generated, along with the associated GHG reduction that represents. We also know that the diesel substitutes category has by far the largest potential to grow volume deployment at very low carbon intensity (CI) profiles. Let’s take a closer look at biofuels in the diesel-substitutes category. Specifically, biodiesel and renewable hydrocarbon diesel (RHD). As many of us know, there is controversy and competition between these two outstanding products. I believe there’s a tremendous opportunity for both products to thrive. In fact, I’ll go so far as to say they need one another. There might even be a symbiotic relationship between the two. Here’s what I mean:

The state of California understands that in order for the LCFS to work well the diesel substitutes category must thrive. In other words, most of the increased carbon reduction in transportation fuels in the next several years will come from diesel substitutes.

There are currently between 75 and 100 million gallons per year of biodiesel production capacity in California, and at least 2.7 billion gallons per year (Bgpy) of capacity in the US. In California the utilization rate is 40%, which means there are roughly 50 Mgpy of un-tapped capacity, and in the US the rate is just over 50%, which means there are roughly 1.3 Bgpy available.

RHD has a far better utilization rate, but there is much less production capacity – just under 1 Bgpy globally – about 40+ Mgpy in California, 200+ Mgpy in the rest of the US and about 700 Mgpy outside the US. Realistically, only about 30% of non-domestic RHD production can be deployed in the US due to other commercial commitments and logistics limitations. But LCFS could eventually drive all domestic US production into the California market, unless other states adopt LCFS programs, which is actually happening.

RHD production infrastructure cap-ex costs are much higher than for biodiesel and it’s much more complex technology, so planning, financing, permitting, building and deployment of RHD infrastructure can take years, as opposed to months for biodiesel capacity. That being said, I don’t think it’s unrealistic to assume that we can expect to see more RHD capacity being planned than biodiesel capacity. But that makes sense given utilization rates we are seeing. The question is, in what timeframe? How many RHD plants will come on line before 2020? I would guess not many.

So California’s pragmatic solution for growing the diesel substitutes category in the near-term seems pretty straightforward. Deploy a strategy I call, “20/20 by 2020”. With the right priorities and investments now, California can be blending 20% biodiesel and close to 20% RHD into the diesel supply by the year 2020. Here’s how:

The state currently uses about 3.5 Bgpy of diesel and it’s anticipated to be close to 4 Bgpy by 2020. 20/20 by 2020 would require that we deploy 800 Mgpy each of biodiesel and RHD by 2020. As noted earlier, there are close to 100 Mgpy of biodiesel capacity in California and another 1.3 Bgpy of un-utilized capacity in the US. That means that we could easily hit the biodiesel target today, not to mention by 2020, and if we want to increase the in-state production portion to 40% (320 Mgpy) as outlined in the California Bioenergy Action Plan, we have a few years to make that happen. I know of several companies that would be eager to build or expand plants in California given the right policy signals, and we know that there could be plenty of in-state low-carbon purpose-grown feedstocks to support a thriving industry.

It’s anticipated that roughly 250 million gallons of RHD will be used in California this year, mostly imported but also produced at the new Alt Air Fuels plant in Paramount, CA. There are another 200 Mgpy of domestic US capacity that is either available or could be, so we are 30% of the way to solving the RHD portion of this strategy and could easily be more than half way there within a year.

There is the matter of the Alternative Diesel Fuel (ADF) regulation that would theoretically limit biodiesel blends in California to 5 or 10% beginning in 2018, depending on time of year. But it is expected that additives, New Technology Diesel Engines (NTDEs) and other mitigation strategies will be in force by then which will enable blends up to 20%.

This is not a “pie-in-the-sky” proposition. We can realistically accomplish this goal with the right leadership and policy objectives. It would also provide enough incentive to both biodiesel and RHD to stop any competitive behavior that only serves to harm both interests.