Clarus: CleanTech industry news

Having led the $50 million IPO syndicate for Wellington Financial Fund III portfolio co. Biox (see prior post “Biox looks set to raise $50 million in IPO” Nov 28-09), investment bank Clarus Securities is playing close attention to developments in the biodiesel world:

Biodiesel Tax Credit Extension Postponed Till 2010

The U.S. Congress has postponed voting on extending the renewable fuel tax credit for the biodiesel industry until 2010. As a result, the US$1 per gallon blending credit will expire on December 31st. We had expected a favourable vote before the end of the year. However, we continue to believe the tax will be extended early into 2010 as both the Senate and the House have passed bills supporting the extension. Two bills currently in Congress – SB 1589 in the Senate and HR 4070 in the House – would extend the credit for five years. In the mean time, while the industry gets clarity on the extension, we expect production to drop further. However, we also believe biodiesel ASPs will increase to mitigate the temporary revenue loss of the incentive.

Background

The original biodiesel tax credit was passed in 2004 and has been extended twice (October 2008, most recently). Biodiesel produced from both virgin feedstocks (such as soybean oil) and non-virgin feedstocks such as yellow grease and animal fats qualify for the US$1.00 per gallon (US$0.26 per liter) excise tax credit. The tax credit is claimed when biodiesel is blended with conventional diesel fuel. The incentive can be used to offset the diesel fuel excise tax and it is refundable if it exceeds excise tax liability. The blender receives the incentive and pays a portion of it to the producer according to demand for the fuel. We estimate payment to producers varies between US$0.12-$0.18 per liter (US$0.45-US$0.68 per gallon).

The tax credit effectively reduces the price of B100 by $1.00 per gallon, or simply put, it allows B100 to be $1.00 per gallon more expensive than petroleum diesel without impacting the retail price of the blended fuel. The incentive was estimated based on the difference (~US$1.20 per gallon) between the soybean oil cost (US$3.02) to produce a gallon of biodiesel and the equivalent cost of crude oil to produce a gallon of distillate fuel (US$1.82).

Implications

We believe with the temporary halt of the tax-incentive, the greatest affected will be soybean oil based producers. Over the past two and a half years the average premium for biodiesel has been $1.15 per gallon, slightly more than the tax credit. Iowa State University estimates that a typical 30 million gallon per year biodiesel plant using soybean oil as the feedstock had a return US$0.26 per gallon (over variable costs) over the same period. In the absence of the incentive the estimated loss is $0.68 per gallon (assuming B100 prices do not increase as a result of the halt on the incentive). Animal fats/yellow grease based suppliers are likely to be less impacted as these feedstocks are 30% less expensive.

Canadian producers will continue to capture the ecoEnergy incentive at C$0.20 per liter (C$0.75 per gallon); potentially making those profitable even under a non-U.S-tax-incentive scenario. We continue to believe the tax-incentive will be extended; however, we expect that in the absence of the incentive, the B100 selling price will increase to allow soybean oil based producers to breakeven. We expect demand to further increase as mandates both in Canada and the U.S. are implemented.

MRM
(disclosure – Fund III owns warrants in Biox)