Can Biodiesel compete with diesel fuel prices?

Although we are a telecom-specialized consulting boutique, we regularly conduct renewal-energies-related projects, as the business thinking and the methodologies are similar. A specific topic of interest in this matter is the Biodiesel production dilemma taking place across Europe and US.

Just for the “new-to-the-class”, Biodiesel is a form of renewable energy that provides a less polluting fuel for diesel engines with minimal reduced engine performance as a result of a slight power loss and specific fuel consumption increase. To extend the use of biodiesel, the main concern is the economic viability of producing biodiesel.

Having worked for one the biggest producers in Spain, we identified that the price of the feedstock was one of the most significant factors. Also, glycerol was found to be a valuable by-product that could reduce the final manufacturing costs of the process up to 6.5%, depending on the raw feedstock used. So, we had to answer to this question: Can Biodiesel compete with diesel fuel prices?

On June 15, 2007, the Spanish Congress approved a new regulation that imposes mandatory biofuels blending beginning calendar year 2009.  The Government of Spain (GOS) was given the authority to change the renewable fuels use goals, which currently include: 1) Voluntary 1.9 percent blending of biofuels during 2008; 2) Mandatory 3.4 percent blending during 2009; and, 3) Mandatory 5.83 percent blending during 2010. According to the Spanish renewable fuels producer’s associations, the 1.9 percent voluntary blending target will delay the industry growth, previously expected during this 2007 and 2008.

The EU renewable fuels directive 2003/30/CE set indicative biofuels use targets for EU Member States at two percent by the end of 2005 and 5.75 percent by the end of 2010.  However, Spain reached only 0.44 percent use during 2005 and 0.53 percent during 2006.

Using publicly available data for our analysis, there are currently ten biodiesel and four ethanol plants operating in Spain. Also, there are important investment plans on the books that could have led to as many as 30 biodiesel and eight ethanol plants in production by the end of calendar year 2008.

Using the GOS biofuels use target/mandates as the most realistic forecasts of biofuels use, and the above noted plans for biofuels production, it appears that Spain could continue to have exportable renewable fuels surpluses for the next several years (please see table below).  So the answer to our previous question is NOT NOW.  For that reason, the recommedation for our client was to move within the value chain to extraction and feedstock production  structuring an offtake contract and in contacting potential partners, while defining the mid term strategy for obtaining a broader positioning capturing additional value along the value chain.

However, we think that new renewable fuels production plants, currently planned, will only be built if the economic incentives appear to warrant the investment and the dynamics have been made much more difficult with the current prices of grains and oilseeds.  Net, net,  our client has a real challenge in his hands.

Best regards, CVA

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