Greasing the Way to Sustainable Transport

just another example. Renewable diesel presents part of the solution. And on this week's podcast, Mark Taylor and I sit down with Daisy Morgebar, an oil analyst here at B and EF. She talks to us about a research note that she recently wrote titled Renewable Diesel a green Light for Refiners. You can find it at benof Go, on the Bloomberg terminal at BANF dot com and on BNF's mobile app. And our usual reminder, we do not provide investment or strategy advice, and we have a full disclaimer

at the end of the show. But now let's hear about renewable diesel with Mark and Daisy. So we're recording this the day after Thanksgiving, our American Thanksgiving Black Friday. For the rest of the world. I guess it's the official start to the well, the holiday season, I guess you could say. And Daisy are our guest today, was telling us this really cool story about this weird thing or interesting thing that happens in Finland. We're just going to pass to her to start off the show with

this story. So, in Finland, there's this initiative that has been running for the last few years now where basically households are in courage to drop off their fat from their Christmas ham to these recycling points and then nest Day, which is a big Finish renewable fuels producer, collects that waste fat and turns it into renewable fuel. Hey, they're collecting all of this stuff from you said. Ham is ham,

the traditional like Christmas holiday seasonal meal in Finland. So okay, So they're collecting all of this waste by product from the ham and instead of throwing it into some sort of a handpost heap, they're sending it off to become renewable diesel. So can you explain to us what renewable

diesel is. Renewable diesel is is a biofuel that can substitute fossil based diesel, and it's sort of big selling point I guess is that it's it's so chemically similar to regular diesel that it can be used as a

like for light replacement in a diesel engine. So other biofuels like ethanol biodies are quite different products, so they can only be blended into regular fuels in small amounts, and so that's kind of why there's a lot of interest in renewable diesel because it doesn't have that limitation. So being able to use renewable diesel in its pure form,

not blended into fossil diesel, is a huge advantage. It means obviously there's a lot of carbon savings, but it can also drop in seamlessly to the existing supply chain, so existing engines, transport infrastructure, and also the way it's produced has significant overlaps with convention or refining as well. Well.

I think I missed it. Can you explain why it's like for light brade Basically, it's it's so chemically similar to fossil based diesel, so it can be used in in the same engines or the same sort of pipelines. So this is new to me because when I think of this, when I first thought heard the term renewable diesel, immediately thought of biofuels, which actually have to be blended, do they not? And can you explain the difference between bio diesel and renewable diesel, So this is this is

a common kind of confusion. Bio diesel and renewable diesel are two very different products, so they have various similarities, but they also have differences. So on the similarity side, they both displace fossil based diesel and can both be used in diesel engines. And they also made from similar feedstocks, so that's anything any sort of organic oil based feedstock like vegetable oils or waste facts and greases can both

be used to make biodies or renewable diesel. But the difference is basically how you process those feed stocks, so

the production process results in very different products. You've got bio diesel, which is a chemically different product and therefore it needs to be blended in small amounts with regular diesel in order for it to to avoid kind of engine damage or performance issues in your diesel engine, whereas renewable diesel because it's so similar to fossil diesel, you can use it as a as a light foloight replacement.

And what are they each made of, so it really varies. Basically, it's any kind of oil based organic matter, So that can range from finish ham waste, yeah, exactly on one side of the spectrum, and then on the other you've got Traditionally, when people think of bio fuels, they think of crops like soybean or rape seed oil or palm

oil for example. And obviously in the past these have come up against a bit of scrutiny, not only because of creating high competition for food resources, but also it's land impact because presumably ramping up supply of these feed stocks for biofuels would necessitate kind of clearing of land, and that's why palm oil's got such a bad rep

for its associations with deforestation. But there's a kind of another area of feed stocks which is kind of growing in focus now because there's a heightened awareness around the environmental impacts of clearing land, and that is waste products.

So the ham fat Christmas ham is a great example of a kind of a leftover or waste fat being recycled into a fuel, and some other waste examples are used cooking, all that comes from restaurants, and any sort of waste animal fats or grease can be repurposed in this way to make a useful product. Is there enough of this to make a difference or are there are other feedstocks that will make a bigger dent in the supply. So this is a question we get a lot, especially

with production capacity and interest in renewable diesel really ramping up. Yeah, so question around where is all the feed stock going to come from is a really big kind of uncertainty in the market, and I think producers are acutely aware of this potential challenge, especially with rising competition in the

in the production capacity space. Producers are kind of taking steps to protect themselves from this potential kind of squeeze and supply, particularly where there's a much greater focus on waste based in Europe, for example, which has traditionally been based on on more crop based feed stocks like palm oil, like rape seed oil, but they're trying to move away from that and move more towards waste based feed stocks

because of their kind of lower environmental impacts. So there's a few things that producers can do to kind of protect themselves against this potential risk. Producers are still investing in R and D to kind of open up other ways of producing renewable diesel, so that would kind of open up a much broader range of fee stocks. So one example is something like algae. Another is household waste. So this is currently being pilot piloted on a on

a much smaller scale. That could be one pretty good avenue sort of supply in the future, which is essentially turning household waste into via a different process to what's currently most commercialized, but turning it into renewable diesel as well as renewable jet fuel as well. Okay, so in the process of making renewable diesel, hydrogen is one of the potential ways we can go about making renewable diesel. Can you explain a little bit more about how hydrogen

fits into this equation. There's many ways of making renewable diesel, but hydro treatment is by far the most the most commercialized production route, and that's actually a reason why refiners

are such big players in this market. So right now, more than of production capacity for renewable diesel is owned by all refiners, and a big reason behind that is that they already have hydro treatment capability as well as a well established supply of hydrogen, because most refiners are able to produce hydrogen in a refinery by reforming natural gas.

So making renewable diesel is a lot more hydrogen intensive than the conventional refining and so that actually kind of limits how much renewable diesel a refiner can produce from their existing setup, and renewable diesel production is much more hydrogen intensive than conventional refining, and at the moment, most of this hydro treating or renewable diesel production that refiners are going after will be conventional hydrogen that they've already

got the capability to produce. But there are kind of signs that refiners are entering the green hydrogen space as well, and this is particular clear the case in Europe. So there's a couple of refineries who are piloting projects to to produce green hydrogen in order to facilitate their renewable diesel production. Just to clarify, green hydrogen is making hydrogen

from electrolysis from power from renewable sources. So, Daisy, you know, you mentioned earlier that it was used as a feedstock for jet fuel, and that is you know, air travel is one of those extremely hard to evate sectors. Can we talk a little bit about the benefits from a carbon standpoint, because this looks like this could be a real viable option, there is it not. It's certainly, you know, one of the only few available options currently that's already available.

In terms of carbon savings, renewable diesel is between fifty and eighty reduction in carbon emissions, and that kind of range is basically based on the feedstocks, so that comes back to whether you're using a virgin vegetable oil like soybing or if you're using waste which has a much much lower carbon intensity. So yeah, the carbon savings are

really huge. The kind of challenge for the aviation sector is that currently renewable jet fuel, which basically kind of related to renewable diesel, and it can be produced in the same process. The challenge is that it's currently much more expensive than fossil based jet fuel. It's between three and four times more expensive, and this year has only exacerbated that issue because COVID has really weighed down on

demand for flying because of lockdowns. It's put a lot of financial pressure on airlines, so it kind of means they're probably less able or willing to voluntarily spend that extra money on fuel if they don't have to. If it is more expensive and more challenging for airlines in the current environment, what is driving the growth of renewable diesel? Policy is a really important driver for for this market

because it is more expensive. And this is the case both on road, so passenger cars and trucks, but also aviation. So historically aviation has kind of lagged behind in terms of policy support, but it is starting to catch up. So if we look at California for example, which I always use as a case study because it's got one of the most kind of comprehensive low carbon fuels programs

in place, called the Low Carbon Fuel Standard. Last year it introduced aviation biofuels into this program, so biofuels for aviation could start earning credits which are are really valuable as of last year, and since then, the supply of renewable jet fuel has has really grown in the state. So it just kind of highlights the importance of policy here.

And another important thing that's happened this year is a tax credit in the US which is basically a wand out one dollar peck Allen tax credit which is applied to renewable diesel, renewable jet fuel, and also bio diesel.

It seems to be a pretty big credit. Yeah, it's huge. Yeah, And this has been a really big factor as to why this year in particular, you've got the combination of COVID really weighing down on refining margins and creating a really difficult environment with low demand for fuels and low

margins for refiners. Combined with this new tax credit that got introduced at the start of this year and is now in place until the end of two you get this huge divergence in the potential margins whether you're producing conventional fuels or bio fuels, and simply because of of these huge policy incentives. So this is a really big reason why it's happening this year, and secondly why it's

happening in the US in particular. So the US in particular is having a lot of popularity for renewable diesel. Is this both both then in terms of production and in terms of consumptions. Yeah, definitely, So these policy mechanisms have really kind of spurred demand. But also it's not just domestic production, but even producers exporting into the US

are able to take advantage of these credits. So going back to nest Day with the Finnish company, they're actually the soul exporter of renewable diesel into the US right now and it all goes to California. So that again just highlights the kind of big draw of these policy and centers, and would you say they're the biggest player

in the market right now. Nest Day are by far the world's largest producer of renewable diesel and renewable jet fuel, and they're also working on really ramping up their production capacity, so they're working on a big expansion at the moment in Singapore. Is this a traditional refiner as well? Yeah, basically nest Day are originally an oil refiner of Finnish oil refiner, but they've really kind of evolved their business to be the world's largest producer of renewable diesel and

renewable jet fuel. So they have plants in Europe and they also have a plant in Singapore which they're currently working on a big expansion which will really ramp up their production capacity not just of renewable diesel, but also of renewable jet fuel. So is there a chance that I have at this point, whether a flying domestically in the United States or internationally, been on a flight that has been fueled by renewable diesel. Yeah, the chances are

that you that you have. And obviously at the moment it's just in small blends, but particularly in Europe and so Kleem are an airline who have been particularly active in the renewable jet fuel space, but more and more in Europe countries are looking to implement blending man dates on renewable jet fuel, just like we do on road. So on road it's not uncommon to have maybe a five or ten percent blend mandate in your gasoline or diesel.

This approaches is being slowly adopted for jet fuel. So Norway were the first country to implement a blending mandate of this type, which started this year. Sweden of following in their footsteps with a blend mandate starting next year, I believe, and there's a couple of other countries in Europe who are also considering a similar approach like France, for example, have set a target of two blend of

renewable jet fuel. So is it safe to say that we've not seen even the beginning of the potential growth in this space. It's definitely a market that has a lot of room to grow. You know that the pace of that growth I think will be kind of dependent

on policy. It's like I mentioned before about the cost, this is something that needs to be kind of supported through policy, which is not quite there yet, but we think that, you know, as policy starts to be implemented, this will really help the market take off take off unintended, So there's going to be still a carbon footprint to this, and there's still tailpipe emissions. So can you describe the kind of what the carbon savings are or or the

environmental impact. Yes, So the savings when you're looking at renewable diesel or renewable jet fuel is between fifty and eighty percent carbon intensity reduction versus fossil fuels. So it's by no means a zero carbon fuel, particularly for the aviation sector, because there are kind of few alternatives out there at the moment. So, you know, the two clean energy solutions that spring to mind for aviation would be

something like hydrogen or electric planes. And these two options are you know, either a couple of decades away at least, or in the case of electrification, probably only really feasible for short haul distances. So, while it's not perfect by any means, biofuels are considered to be one of the key solutions that are available now, able to drop into existing infrastructure without the need for a complete overhaul in refueling airports and also the aircrafts. So it is kind

of seen as a a big opportunity. Okay, I'm coming over. It sounds cool, sounds cool. Can I ask one more question about the European policies like two percent blending mandates, You know all that they're not as aggressive as the California policies. Are they having an effect? Are they having a similar effect of getting companies excited and getting getting

after it. Yeah, it's a good point in and let you say, two percent doesn't sound like much, and it's even lower right now in Norway and in Sweden they're starting really really low and gradually increasing every year with really small incremental steps. And it's it's worth noting here the size of the renewable jet fuel market right now is so small, so it currently accounts for zero point one percent of jet fuel, so point zero one percent

of Dana's ride on an airplane region my ride. Come on, Mark, you travel too? Were both expats. Yeah, I guess we're I guess we're expats on this island for the foreseeable future. So I think basically policymakers are kind of conscious of not creating mandates that are unachievable or too much too soon,

because it could potentially encourage the wrong sort of growth. So, you know, things like the EU are looking to phase out their use of palm oil in renewable fuels because historically they've been quite reliant on palm oil too as quite a big contributor to its feed tomas. So ramping up potential demand quicker than supply could potentially catch up. I think is a bit of a risk. Quite a bit of popularity at the moment for renewable diesel and

looking like potentially gaining popularity in the future. So as you started to research this topic, oftentimes we find a lot of answers which were therefore published in this research note. It raises more questions for US what were the sorts of things that were raised for you as kind of follow on questions that you weren't able to get to in the scope of your research for this particular research report.

I think the availability of sustainable feedstocks is a huge question that that keeps coming up, and it's one of the biggest questions that we get with regards to this big ramp up in in production capacity. So this is something that you know, I want to look further into. I think this is something that producers are really aware of, and you can see that by some of the actions taken by some of the big producers who was sort of trying to, you know, take these steps to shore

up certainty of supply, Like what are they doing? Yeah, So one of the kind of strategic moves that some of the big players are doing are kind of making these partnerships. So one example is Diamond Green Diesel, which is the biggest producer in the US right now, is actually a joint partnership between a joint venture between a US refiner, Valero and Darling Ingredients. So Darling Ingredients is a company that basically collects and recycles waste fats from

restaurants and things like Talo from slaughter houses. It collects all of this and recycles it. So this joint venture is really mutually beneficial because Valero or Diamond Green Diesel basically gets this priority access to this highly competed feedstock which has a really low carbon intensity and gets a lot of rewards. So I think that this could be a growing trend that we see where producers are increasingly positioning themselves to kind of get this priority access to

feed stock. So another example is nest Date, who are the world's largest producer. So in June this year, they announced a partnership with McDonald's in the Netherlands. So basically McDonald's will supply nest Date with all of the US cooking a used to make their French fries in all of its restaurants in the Netherlands. Nest they will then recycle this into renewable diesel and then that fuel will be then be used in the trucks that deliver to McDonald's.

And so, both from a kind of transport decarbonization perspective and also a circular economy, this is an area that I think we'll get a lot of attention going forward.

And it's like I said, a mutually beneficial partnership. So companies like McDonald's are looking to improve their sustainability and reducing their carbon emissions, and obviously from the biofuel producer's perspective, this secures supply of a highly sought after feed stock, so it's kind of a win win, and this model can be replicated over many times, not least looking just a McDonald's, who obviously have a huge global footprints, so they could kind of replicate this in other countries, but

other also, other similar restaurant chains could look to do something similar. And also this this sort of close loop concept can also be applied on a city level too, so looking at NESTA again, they launched a partnership with the city of Oakland in California, whereby basically all of the kind of waste cooking oils and greases and other kind of waste fats from the city was collected and supplied to nest Day, who will recycle it into renewal

diesel which will then fuel the city's fleet. So yeah, I think this is kind of a cool circular economy which, like I said, could be replicated many times over, and I think is is something kind of to keep an eye on. Yeah, so what it sounds like if we're going to see a lot more effort to collect any grease and oils and fats you know that exists anywhere in the market that can be taken up before Yeah,

finding other feed stacks. Yeah, that's crazy, that's cool. Yeah, definitely, I think it's I think it's an area that needs still needs a bit of work to kind of streamline, but there's definitely a lot of attention on it right now. And just the other day, in fact, I saw a bio fields producer and in the U a E has made an app to facilitate the kind of track and monitor the delivery and collection of use cooking on from

McDonald's restaurants. Again, so I think this is something that's really gonna continue going forward, trying to streamline this process and make it a lot more transparent. I know it's different, but this really reminds me of you know, the It reminds me back to the future and the DeLorean time machine. Yeah, I mean I could have a DeLorean that is now

renewable diesel. Yeah, there you go. On that note. On that note, back to the future, guys, On that note, let's see how this develops in Finland in the next couple of weeks. We are not too far from the Christmas holiday and the cash cow of renewable diesel coming in to Finland, and you know, maybe Oakland. Daisy, thank you so much for joining us today. Thanks for helping me. Today's episode of Switched On was edited by Rex Warner of Grace Stoke Media. Bloomberg an e F is a

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