The demand and price for renewable diesel are on the rise and bringing familiar and new market participants to the market. Domestic production of biomass-based diesel has struggled to keep up with demand, which is primarily focused on the U.S. West Coast. The U.S. domestic refining industry is moving quickly to fill the market need, with planned production capacity forecast to increase four-fold in the next three years. However, if companies want to capture the value and ultimately profit, they’ll need to understand their netback for renewable diesel.
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According to the U.S. Energy Information Administration (EIA), net imports of biomass-based diesel rose from 25% in 2019 to 50% in 2020. Demand will continue to rise into 2021 due to low carbon-based regulations spreading at the state level from Washington and Minnesota to Iowa and New York. In Canada, British Columbia has led the way, but Canada’s national “Clean Fuel Standard” is also setting regulations that will increase renewable diesel use.
Calculating the netback, a non-GAAP measure of operating profitability used to measure efficiencies takes on a slightly different flavor when used to calculate renewable diesel value. While the basic components are the same for renewable diesel as its fossil fuel counterpart, the varied regulations surrounding renewable fuels, the markets that determine their value, and the new feedstocks for traditional refiners require updates to the netback calculation and overall value capture.
Netback is traditionally calculated by taking the revenue from the sale of a product and then subtracting transportation costs, production costs, administrative expenses (including working capital), and revenue (or loss) from trading and hedging activities. For the netback calculation of renewable diesel, there’s an added wrinkle—a tax credit component.
Like any good analysis, a company’s netback should start with a clear understanding of what’s being measured and how the result will be used. Ideally, stakeholders from across the value chain are involved in the development and, as the results are analyzed, a balanced view of how to continuously improve can be determined. Leaving out key participants can lead to finger-pointing over results, which negates the goal of adding value to everyone.
Below is a more detailed look at the main components of renewable diesel netback analysis:
Many of the components discussed above might sound easy to coordinate and execute on their own but reporting a clean netback value requires cross-company coordination and planning. Like any new business endeavor in the 21st century, long-term success in the renewable diesel market hinges on aligning three principal areas:
Renewable diesel is one of the many parts of the energy puzzle that will help move the country—and the world—towards a more sustainable future and facilitate the energy transition. Companies looking to support that future must plan now to ensure that they can capture maximum value from this new revenue stream.
When you choose Opportune, you gain access to seasoned professionals who not only listen to your needs, but who will work hand in hand with you to achieve established goals. With a sense of urgency and a can-do mindset, we focus on taking the steps necessary to create a higher impact and achieve maximum results for your organization.
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