A clear investment strategy and understanding the capital and risk tradeoffs is crucial
While profitable, renewable fuel projects come with a cost. The key to implementing a successful renewable fuels strategy is to de-risk potential investments as much as possible. This involves using the knowledge of industry leaders and technology suppliers for quick and efficient project execution with little to no re-work.
Project financials can be evaluated using a robust financial model and tools such as probabilistic risk analysis, sensitivity analysis, and business model selection. And technical risks can be reduced by developing supply chain or business partnerships with companies that have existing assets in refining, agribusiness, renewable fuels, etc.
Operators and investors have several investment options to enter the renewable fuels market:
Co-processing – favored as the lowest cost option, co-processing limits capital risk exposure. However, it requires an existing production asset (refinery) and may be limited by existing equipment constraints.
Revamping an existing unit – a great combination of low-medium capital cost while still producing a sizable amount of renewable fuels. In some cases, projects can leverage up to 80 percent of an existing unit’s processing equipment.
Developing a new unit adjacent to an existing facility – a medium-high capital cost option but enables more capability and higher reliability. This option is practical in cases where it’s more efficient to build a new unit and retrofit only some of the existing infrastructure.
Constructing a new standalone unit – generally the highest cost option, constructing a new standalone unit allows for maximum flexibility and reliability. Reliability is important. For many investments, minimizing unplanned downtime makes a major difference, especially within the first few years of investment.
All these options come with trade-offs. For example, paying higher capital costs tends to buy more processing capacity as well as feedstock flexibility. However, location and logistics costs impact the availability of feedstock. Various other factors such as available assets and capital, and risk tolerance may also sway companies towards different investment options.
How operators and investors can fund renewable fuel projects
Government guaranteed-loan programs and grants are available in some countries to help finance the required upfront costs and capital for studies and projects. This, along with the ability to claim credits, can generate a portion of the initial investment. Selling the credits later to the market can also help offset investment.
As for business model options, the traditional engineering procurement and construction (EPC), joint venture (JV), or build own transfer (BOT) models have different advantages that can strengthen investments in renewable fuels. To date we’re seeing multiple JVs around the world –in the form of multi-party consortiums and two-party arrangements – particularly in North America and Europe.
On the partnership front, proper structuring of junior and senior debt, and fair equity retention for resource contribution, can impact project finances. Pain-share/gain-share agreements can also strategically improve the investment outlook while mitigating risk for all parties.
Renewable fuels: a significant opportunity for investors
It’s early days and there’s no clear market leader. But those who can take quick and strategic action in the short term, identify the right technology options for their assets and navigate the legislation will emerge as a dominate player in this new market.
Read our full article Counting the cost of the shift to renewables published in International Biofuels.
- Soheil Razjouyan, Consulting Director
- Bill Keesom, Group Manager
- Andrew Sloley, Principal Consultant
- Armen Abazajian
1. “ADVANCED ENERGY NOW 2019 Market Report: Global And U.S. Markets By Revenue 2011-18 And Key Trends In Advanced Energy Growth". Info.Aee.Net, 2019.