Biodiesel: Sleeper Fuel Comes of Age

September 4, 2013 10:24 PM
Biodiesel: Sleeper Fuel Comes of Age

Outlook brightens for continued growth

Until 2000, biodiesel was barely a blip on the fuel screen, with just 50,000 gallons produced a year prior. Today, the picture couldn’t be more different. At least 1.3 billion gallons will be produced this year—that’s a 26-fold increase.

While production has increased during the last 13 years, experts don’t agree on its profitability.

Some, such as University of Illinois ag economist Darrel Good, say that biodiesel blending is not profitable, even with the $1 per gallon biodiesel tax credit and the 1.28 billion gallon federal mandate.

But major biodiesel producers beg to differ and say their bottom lines prove it. "Producing biodiesel is profitable," says Jon Scharingson, executive director, marketing and sales, Renewable Energy Group (REG), Ames, Iowa. "We made $42 million in earnings before interest, taxes, depreciation and amortization in the second quarter."

REG’s revenues were up 42% year-over-year, and net income was 60% higher, he adds. REG, the nation’s largest biodiesel producer with 257 million gallons of capacity, recently opened a second plant in Texas, upgraded its facility in Minnesota and purchased another biorefinery in Iowa.

The combination of several factors make biodiesel profitable, explains Scharingson. The first is Congress’ reinstatement of the $1 per gallon biodiesel tax credit. Another is the value of Renewable Identification Numbers (RINs) or credits, which oil companies purchase to comply with the Renewable Fuels Standard (RFS). Values exceeded $1.45 per gallon earlier this year.

Scharingson says the industry is on target to exceed the fed­eral 1.28 billion gallon mandate for 2013.

"I’m cautiously optimistic for 1.6 billion to 1.7 billion gallons in 2013," he says. Biodiesel production has more than tripled in three years.

Biodiesel charts

New Capacity. U.S. Production set a new monthly record of 111 million gallons in May, slightly eclipsing the old record of 109 million gallons set in December 2011. The 2013 five-month total was 449 million gallons.

May’s output was 68% higher than January’s. At the same time, more positive economics have led the industry to add 79 million gallons of new capacity since January.

Justifiable optimism for future growth, perhaps, but biodiesel is even more linked to policy than ethanol. In 2010, biodiesel production tumbled 34% at the same time that ethanol production was increasing.

That’s partly due to the biodiesel tax credit expiring at the end of 2009, according to the U.S. Energy Information Administration. The decline reversed in 2012 due to the retroactive reinstatement of the tax credit in late 2010, coupled with increased demand.

Biodiesel has a long haul before it’s considered a major fuel player. It accounts for 2% of total fuel use compared to ethanol’s 10%.

Can biodiesel continue to mount a charge? "We expect a rush on biodiesel," says Paul Niznik, Hart Energy biofuels manager. He predicts the biofuels mandate will increase to 1.5 billion to 1.7 billion gallons within the next five years. Niznik also sees potential for an additional 500 million to 600 million gallons of biodiesel demand in excess of the mandate.

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