Market Diversification and the Biofuel Start-up

Developers of new technologies for advanced biofuels production tend to focus naturally – and rightly – on the technical performance aspects of the business: How to either do things that other technologies cannot achieve – better yields, better product quality, the ability to process more challenging feedstocks – or do the same job as others but do it with less capital or operating costs. Often, they will have identified a target market for their product (usually their domestic market) and they will have a good understanding of the price point and regulatory incentives available to them in that market. They will also have an awareness that other markets are accessible, but may lack the capabilities and resources to understand deeply all the options available to them, especially in the early development phase.

The reality is that Europe (not to mention the world) is a mosaic when it comes to biofuels. Firstly, there are of course European countries outside of the EU – UK, Norway, Switzerland… – and these are not bound by the regulatory framework of the Union. They are free to create biofuels regulations as they see fit, to pursue national objectives. But even within the EU, the umbrella regulation for renewable energy and renewable fuels, the second Renewable Energy Directive (aka REDII), is only setting up the requirements on each of the Member States; they in turn have the job of designing national laws and regulations so that the targets set by the EU can be met in-country. Now, countries in Europe will have a large and diverse list of strategic aims when creating these regulations. Carbon abatement of course, but also – crucially – energy security, support for domestic agricultural or industrial sectors, jobs and wealth creation, etc… Not to mention the desire to look good on the international scene, or the relative influence of green parties and environmental NGOs when drawing a national line on Sustainability.

Add to this the fact that, like the entropy of the universe (and perhaps for the same reasons!), the complexity of biofuels regulations is seemingly on a path of constant, irreversible increase. Feedstocks caps or bans, additional incentives like sub-targets or multipliers, differing rules on chain of custody or sustainability requirements, inclusion or exclusion of various transport modes like Aviation or Marine, treatment of non-biological renewable fuels (“RFNBOs”) or non-recyclable plastics (“RCF”) … the opportunity for complexification is virtually infinite.

It isn’t a surprise therefore that those European directives are translated into 27 different versions of the Truth across the Union. Every country, perhaps in pursuit of specific nationalistic objectives, or frankly just trying to deal with the bewildering complexity of the subject matter, has come up with their unique set of regulations for the decarbonization of transport. Some are mandating renewable fuels by volume or by energy content, others are directly mandating emission reductions. Some are banning specific feedstocks (mostly palm oil, but also animal fat in Germany) or starting to question the feedstock categorization in the REDII. And all are making liberal use of the flexibility inherent in the text from Brussels – for example on double-counting or multiplier rules.

The result of all this is that a particular renewable fuel may fare very differently across Europe based on its characteristics (product quality of course, but also feedstock type, country of origin, GHG savings…).  Two seemingly comparable biofuels may hold spectacularly different values in neighbouring countries, with the added thrill that it might totally reverse the following year! For any start-up, it is quite unlikely that their domestic market is going to necessarily offer the best financial reward to the type of renewable fuel they are aiming to make. Some will proceed on the basis of having a “good enough” outlet in their domestic market. This is fine as a short-term strategy, but the benefits of “shopping around” for the best netback markets are obvious; in fact, the failure to do so leaves you exposed to the uncertainties of the regulation in your home country. Moreover, not understanding the full array of commercial options could make you miss a great opportunity, early on, to twig your technology development programme for different feedstocks, better GHG outcomes, or anything else which might open another market with significantly better returns. Another dimension here is of course product yield and range, for those technologies with the ability to deliver more than one type of fuel.

Accessing deep expertise in the European markets (and beyond) may not feel like the most pressing need when you are trying to solve hard technical challenges in the lab or at the demo plant. In fact, it may well feel like a huge distraction; but it is a real point of competitive difference. The likelihood is that someone else, somewhere in the world or perhaps not far from you, is trying to invent a solution to the same problem, and whatever IP you have secured might not be enough to ensure your competitive success. Could your main differentiator be a better understanding of all the local regulations, and the market options they enable for your technology?

Broadmanor Consulting offers expertise across the biofuels value chain, from feedstocks to technologies, regulations and markets.

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