The Case For More California Biodiesel Production

Is there a case to be made to build more in-state biodiesel production in California? After all, with 1.3 Bgpy of unutilized production capacity nationally, and California’s own existing production capacity at only about a 50% utilization rate, why would anyone build a new plant or expand an existing plant in the Golden State?
Here’s why:

The Low Carbon Fuel Standard (LCFS) is driving demand for all low carbon fuels in California and as a result the demand for biodiesel is greater here than practically anywhere else on earth. Carbon values created by the LCFS are incentivizing biodiesel producers all over the planet to send their fuel to California markets, but the truth is that in-state bio-refiners have a logistical edge over importers.

It’s also true that the cost of doing anything is more expensive in California than anywhere else, so in-state producers have an economic disadvantage, and dis-incentive, to build plants and produce biodiesel in the state.

But given the commitment to LCFS shown by the governor, legislators and regulators, I believe an investment in production infrastructure in California is a smart bet, although certainly not without risk.

As I mentioned in an earlier article, storage and blending infrastructure at bulk terminals and racks in California is sadly lacking. But that creates an advantage for local producers, especially those with extra storage. There is an inherent logistical advantage that local producers have versus importers. There is also a preference among many obligated parties and other blenders to use locally produced fuel whenever possible, primarily because of that logistical advantage.

The state has a vested interest in seeing local production thrive. Jobs, tax revenues, secondary and tertiary economic benefits are all positively impacted when local industry thrives. A rising tide raises all boats!

We can certainly argue about how the state will meet its LCFS targets between now and 2020 (and beyond), but the fact is that we all know that demand will be ratcheting upward, and quickly. And the most realistic near-term solution is the expansion of low carbon diesel substitutes – Biodiesel and Renewable Hydrocarbon Diesel (RHD). From a sustainability and logistical perspective, and considering the state’s and blenders’ preference for local production, building or expanding in-state biodiesel production would appear to make a lot of sense, especially if projects are managed by professional and experienced companies with successful track records and efficient technologies. The market has matured and is becoming much more efficient.

What about RHD production in the state? AltAir’s plant in Paramount is up and running. Other plants are very likely in the planning stages, although have yet to prove themselves. But the cap-ex costs for RHD production are several orders of magnitude greater than for biodiesel production. Not to mention California permitting requirements which are still prohibitive. I fully expect to see more RHD bio-refineries come on line in the state for the same reasons that in-state biodiesel production makes sense: local and logistical advantage and preference. But cap-ex costs and permitting requirements present significant barriers to entry. Biodiesel simply offers a quicker and cheaper bang for the buck.

The primary risk, and it’s non-trivial, is whether government support will remain in place for long enough to allow investors to recoup their investments, make some profit and give these businesses a chance to become sustainable enterprises. These ventures are not for the feint of heart but they are laying an important foundation for the emerging carbon economy.