When we talk about energy transition, most people think their investment options are limited to traditional renewable sources such as solar and wind. Anthony Okolie speaks with Mitchell Li, Energy Analyst, TD Asset Management, about why biofuels represent a big opportunity for renewable energy.
- Absolutely. So you may or may not have come across certain individuals running their cars on leftover cooking oil and then their exhaust smelling like french fries. And this is actually a really good starting point when you think about biofuel operations. So what biofuels are, is essentially you are taking oils, leftover oils and sometimes gas from number one organic sources, say vegetation or animal fats, and/or number two, waste resources, say a landfill, and then turning these into useable fuel products.
So these are some really great ways to get fuel from organic sources or recycling waste products into usable products. In some special cases where you source from, say, a landfill, your fuel source is actually already polluting, just sitting there. So when you turn that into a clean fuel you actually reduce emissions by over 100%. Finally, your engine won't smell like your local fast food restaurant leftover cooking oil, because when the industry participants do it, they do it very professionally and it's a very clean product.
- And what are some of the applications of biofuels?
- Right. So it's actually a really simple answer. And the way you think about how you use biofuel, it's the same way you would think about how you use traditional fossil fuels. So let's talk about the most popular biofuel being discussed today, which is renewable diesel. It's also seeing the most investment dollars.
And what's so great about renewable diesel is that you're taking it, you're sourcing it from a clean product, say soybean or corn, versus normal diesel which is from crude oil. But the end product is almost exactly the same. And why this is so great is, say you're a truck driver with a diesel engine, you don't have to make any changes to your diesel engine. You can pretty much seamlessly switch between the two.
Another growing biofuel product is renewable gas, or what we call RNG. And there are currently two main uses for RNG, which is in transportation and power. So RNG is working directly to displace dry natural gas. And, again, what's kind of interesting about RNG is that if you are sourcing it from methane from a landfill-- and by the way, methane is 25 times worse than CO2-- and you turn into a clean gas product, you essentially have a carbon negative fuel.
So in summary, think about biofuel applications as the way you think about normal fossil fuel applications.
- What would you say are some of the hurdles that biofuels need to overcome in order to become more mainstream?
- Yeah. So with any new technology, a key challenge is always profitability, or road to profitability. And as it pertains to the energy transition as I mentioned in the last video, green must always be green. So, currently, on its own, no biofuel operation is actually profitable. And what this means is, say, you purchase leftover cooking oil from a restaurant, you turn it to diesel and you sell it. Well, the cost of purchasing that oil is more than the diesel you can sell for. So that's a key problem. And there's a solution for it.
I'm going to throw in one more hurdle, and that's for the operators. And is that, well, everyone wants to grow their biofuel operations as fast as they can, move our entire society to clean fuel usages. Feedstock is a concern. So can I source enough, say, leftover cooking oil, or soybeans, to grow my biofuel operation. So those are two big hurdles.
- OK. Again, talk to us about some of the solutions.
- Right. So the first problem I mentioned is profitability. And while, on its own, they aren't profitable, with incentives they are. So one of the big solutions is our government and market incentives. And these are the only reasons these companies can make money right now. And, hopefully, within the next decade or in the future these companies can run sustainably without market incentives.
Now on feedstock, which is problem number two, that's up to the companies themselves, and the operators to secure it for themselves. And that's something that we look for when kind of determining the best companies.
- So how does TDAM currently play the biofuel space?
- Right. So the great thing about biofuels, from an investment perspective, is that you actually have publicly traded pure play companies, which means we can get direct exposure to these themes. We like biofuel operators that can build out their operations at attractive and competitive economics. And two criteria that we look for is, number one, security of feedstock. As a company, are you able to secure enough feedstock to match your growth plans?
And then, number two, build costs. These are relatively new technologies. Do you have the know how, do you have the experience, the expertise to build on your facilities at attractive economics? So we believe certain names in the renewable diesel space meets these criteria, which makes them a great fit for our sustainability mandates.
- Mitchell, great introduction on biofuels. I look forward to part three of our series next time.
- Thank you.