Biofuels plants make cents given the right incentive
Authored by Eugenia Romero
In recent news Phillips 66 announced plans to convert their San Francisco oil refinery into the world’s largest biofuel generation plant. The plant will cease from producing fuels from crude oil and instead will produce fuels made from used cooking oil (UCO), animal fats (tallow), greases and soybean oils. This announcement follows Marathon’s announcement of possibly converting two refineries into renewable diesel plants.
Demand for action stemming from environmentalists has led to an executive order subsidy that has pushed refineries towards renewables by way of the Low Carbon Fuel Standard (LCFS). Since 2007, the Low Carbon Fuel Standard executive order set a goal to reduce greenhouse gas emissions of at least 10 percent by 2020, or 86 grams of CO2 per megajoule of energy produced. This applied pressure to energy companies from the extraction process to the manufacturing of end-consumer transportation fuels assuring that fuel blends sold in California met criteria to stay operational. In January 2019, the California Air Resources Board extended the regulation to further cut the carbon intensity by 20% by 2030.
While refiners struggle with depressed fuel demand and a global over supply of refined products, the LCFS may help provide an additional stream of income through LCFS credits. LCFS credits subsidize each metric ton of carbon dioxide equivalent reduced, creating an incentive for refineries to produce and transport cleaner fuel. If a company complies with production standards, credits can be used to offset the production costs of producing cleaner fuel. Additionally, these credits can also be sold on a market to those producers who fail to meet these standards. In a LA Times article, Marign van der Wal, a biofuels advisor with Stratas Advisors, said that the LCFS coupled with the federal RIN D5 credits and the recently reintroduced Blenders Tax Credits generate about $3.32 per gallon in subsidies for renewable diesel producers. According to SRECTrade, between 2016 and 2019, spot market prices for LCFS credits in California hovered between $65 and $200 per credit.
Figure 1 - Total Renewable Energy Consumption (Quadrillion Btu)
California is the country’s sixth-largest oil producing state, but also the country’s fourth-largest biodiesel producing state as of 2019. As shown in Figure 1 above, the US Energy Information Agency reports show total renewable energy consumption has increased steadily over the past ten years—topping at 11.46 Quadrillion BTU for year-end 2019.
Figure 2 - Alternative Fuel Volumes and Credit Generation
In 2019, production levels for biodiesel fuel sat at 1.73 billion gallons, according to the EIA. Biodiesel, also known as bio-mass diesel made mostly from oils produced by vegetable oils (soybean and corn oil), animal fats, and used cooking oil, can be used in diesel engines as its chemical composition is identical and burns much cleaner than petrol-based diesel.
Figure 3 - Carbon Intensity of the Economy by State (1990-2017)
Amongst the top-five biodiesel producing states, California’s carbon-intensity is the lowest in economic comparison. For its entire economy—which hosts roughly 39 million people (as of 2017)— California has kept its pollution low relative to its size as shown in Figure 3 above.
Figure 4 - Total Credits and Deficits for All Fuels Reported
Phillips 66’s press release projects an expected annual production of 680 million gallons in renewable fuels compared to its 45.6 million bbls it currently produces together with the nearby Santa Maria refinery. The company stated that its San Francisco Rodeo production would be composed of 70% biodiesel, 10% gasoline, and 20% sustainable jet fuel by 2024. As claimed by the US Department of Energy, biodiesel emits 2,661 grams of carbon dioxide per gallon, compared to 12,360 grams per gallon for petrol-based diesel. This would reduce a whopping 1.81 million metric tons of carbon dioxide meaning, all else equals, the subsidy revenue could range between $117.7 million USD and $362 million USD. The decision by Phillips 66 to convert a crude refinery to a biofuel plant and the economic feasibility of the project puts into perspective the incentives needed for refineries in the US to produce renewable sources of energy. Without the incentives, these projects are not economically viable.
Edited by Ben Gonzalez