The Path to Drawdown: Synthetic Fuels in Zero-Carbon Transportation
A big part of reaching a zero-emission economy consists of decarbonizing the transportation sector. While electric vehicles have rightfully commanded the public attention, some segments of transportation can’t be easily electrified, like freight and delivery trucks, trains, buses, boats, as well as heavy-duty farm, construction, and military vehicles.
Radically reducing carbon emissions from these types of vehicles would mean switching from predominantly burning fossil fuels to other types of low-emission fuels. Biodiesel is among the most promising candidates for drastically cutting emissions.
Diesel fuel is the common term for the distillate fuel oil, and it’s often refined from crude oil at petroleum refineries. Biodiesel, on the other hand, is obtained from biomass like vegetable oil or animal fats. Common types of oil that’s used to make biodiesel are rapeseed oil and soybean oil.
To reach net zero emissions by 2050, the IEA projects (p. 107) a mild increase in conventional and advanced biodiesel:
- 1.5 exajoules in 2020
- 5.82 exajoules in 2050
- This means CAGR of 4.53% between 2020 and 2050
Renewable Energy Group (stock ticker: REGI) is North America’s largest biodiesel and renewable chemicals producer. They utilize an integrated procurement, distribution, and logistics network to convert natural fats, oils, greases, and sugars into lower carbon intensity biofuels. Headquartered in Ames, Iowa, the company operates 13 biorefineries and a feedstock processing facility.
REGI's Role in Drawdown
REGI primarily offers three types of diesels (p. 11):
- Biodiesel: made from renewable resources that are byproducts of other processes, including recycled cooking oil, grease recovered from wastewater, animal fats and vegetable oils. It can reduce engine emissions, including total hydrocarbons, by up to 70%, particulate matter by approximately 60% and carbon monoxide by up to 35% compared with ultra-low sulfur diesel
- Renewable diesel, made from the same feedstock as biodiesel, but leveraging a different production process. It can reduce engine emissions including total hydrocarbons by over 10%, particulate matter by up to 40%, carbon monoxide by approximately 25% and nitrogen oxides by approximately 15% compared with ultra-low sulfur diesel
- REG Ultra Clean: a proprietary low-carbon diesel replacement that is a premium, easy-to-use solution for fleets and comes in different blend levels. A blend of 80% renewable diesel and 20% biodiesel. Can reduce engine emissions, including total hydrocarbons, by over 20%, particulate matter by approximately 40%, carbon monoxide by over 25% and nitrogen oxides by approximately 10% compared with ULSD.
In 2020, approximately 65% (p. 3) of REGI’s total feedstock usage was distillers corn oil, used cooking oil or rendered animal fat feedstock. The remaining ~35% consisted of refined vegetable oils, such as soybean oil or canola oil.
In terms of gallons sold, REGI’s sales grew by 30% CAGR (p. 19) between 2010 and 2019. Despite a slight drop in sales in 2020, revenue from biodiesel sales increased by 4.9% annually between 2016 and 2019.
REGI: What We Like
REGI is poised to expand their biodiesel production in the next few years. In October 2020, they announced their plan to expand (p. 44) the production capacity in one of their refineries in Louisiana by 250 million gallons per year, which will push it to a capacity of 340 million gallons per year. Construction is set to begin in mid to late 2021 (p. 1) with a target completion date in late 2023.
On top of that, REGI is delivering on their plans (p. 1) to increase outlets for their products more downstream in their value chain:
- In September 2018 REGI acquired Keck Energy, a company that had been supplying fuel to central Iowa farmers, fleets, municipalities, and convenience stores
- REGI also opened their first REGi branded fueling station in July 2019 adjacent to their biorefinery in Seneca, Illinois to serve a variety of customers from trucking fleets to local diesel vehicle owners
- They entered into an agreement with a third party in which it agreed to exclusively sell REG branded fuels at certain of its cardlock locations.
We also like that REGI’s procurement strategy leads to cost competitiveness. REGI procures (p. 65) 14 types of feedstock from 132 suppliers from 5 continents. Feedstock diversity provides a competitive (p. 66) advantage by lowering the price paid per pound of feedstock compared to the industry average.