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Energy transition fuels present an increasingly attractive alternative to fossil fuels and are playing a growing role in the decarbonization of the global transportation sector. The adoption of cleaner fuel alternatives is accelerating, bolstered by increasing demand, technological developments, broader decarbonization tailwinds and supportive policy.
As the energy transition fuels sector continues to expand, cost-efficient access to low-carbon feedstocks is becoming a central challenge. The agribusiness industry, which is experiencing a remarkable period of innovation and technological advancements, has a key role to play in helping to overcome this challenge and scale the availability of cleaner fuels.
Growing Demand for Energy Transition Fuels
The adoption of energy transition fuels globally is still in its early stages and has significant room for growth. Today, energy transition fuels represent approximately 4% of the total energy consumed in worldwide transports, with 95% coming from fossil fuels and the remaining 1% from electricity (Source: International Energy Agency World Energy Outlook 2022). Decarbonizing the transportation sector, which accounts for about a quarter of worldwide energy consumption, will require a multipronged strategy involving electrification, biofuels, low-carbon hydrogen and other alternatives.
Advanced biofuels are experiencing a particularly high increase in demand due to their lower carbon profile and ability to function as direct replacements to traditional fossil fuels. This stands in contrast to first-generation biofuels like ethanol and biodiesel, which must be blended in with conventional gasoline or petroleum diesel and typically offer lower carbon reduction potential.
Renewable diesel and sustainable aviation fuel (“SAF”), which can generally be produced from the same bio-refineries, offer compelling pathways to reduce greenhouse gas emissions from transportation sectors that are harder to electrify, such as trucking, aviation and marine transport. Notably, SAF is currently the only direct alternative for airlines to meet their substantial decarbonization commitments, aside from purchasing carbon offsets — since 2019, close to 40 airlines have announced “net-zero” targets (Source: BloombergNEF
Sustainable Aviation Fuel: 2022 Outlook), with most of the industry aiming to achieve a neutral carbon footprint by 2050.
Rapid Expansion of Energy Transition Fuels Production Capacity
On the supply side, the energy transition fuels sector is attracting increasing participation from traditional energy companies and refiners looking to reposition their legacy asset bases and increase their exposure to ESG-friendly categories. Feedstock providers, including large agribusiness players, are also expanding their presence in the sector as an opportunity to pursue new revenue streams not previously available in their legacy business models.
Production capacity of advanced biofuels is rapidly expanding, supported by government incentives related to greenhouse gas reduction targets, including the Renewable Fuel Standard federal program and California Low Carbon Fuel Standard in the United States. The U.S. Inflation Reduction Act enacted in August 2022 has also provided a supportive framework for renewable fuels and acted as an accelerant to domestic supply expansion across several key verticals, including SAF. Renewable diesel/SAF production capacity in the United States is expected to more than double by the end of 2025 (Source: BloombergNEF, International Civil Aviation Organization, company press releases) based on announced traditional refinery conversion, expansion and greenfield projects, assuming they all materialize as planned.
Access to Feedstocks Becoming a Central Challenge
The dramatic increase in anticipated production capacity is raising concerns around feedstock pricing and availability. Renewable diesel, biodiesel and SAF often compete for the same types of feedstocks, including soybean and other vegetable oil, used cooking oil, animal fats and oils derived from agricultural and other types of waste.
Aside from vegetable oil, most other current types of bio-feedstocks are effectively derived from waste, which creates a de-facto limit to their utilization potential based on the size of their respective underlying waste pools. Fuels made from waste and residues are in particularly high demand due to their attractive carbon profile; however, their underlying feedstocks are relatively close to being fully utilized. By 2027, the International Energy Agency estimates that the global demand for used cooking oil and animal fats will nearly exhaust all available supply (Source: International Energy Agency Renewables 2022).
Significant investments are also being made towards the development of alternative feedstock sources including woody biomass, algae, and non-food crops. These alternative categories are not available at scale today and generally require further technological and manufacturing process developments. Notably, woody biomass is emerging as a promising feedstock source for SAF, with several commercial initiatives underway towards developing production at scale.
Feedstocks based on food crops, such as soybean and other vegetable oil, remain the primary source of bio-feedstocks going into energy transition fuels today. These types of feedstocks are subject to ongoing “food versus fuel” concerns related to the risks and ethics of diverting farmland and food crops away from the global food supply.
Elevated food and energy prices caused by the war in Ukraine are amplifying those concerns and resulting in mounting pressures on policymakers to intervene and find a delicate balance between food security, sustainability, and cost of fuel. On the flip side, the need for low-carbon feedstocks also creates a unique opportunity for farmers and the broader agribusiness ecosystem to generate and capture incremental value while taking an active role in the energy transition.
Agribusiness Sector Has a Key Role to Play
The fast pace of innovation and rapid adoption of new technologies, products and solutions are resulting in significant step changes throughout the agribusiness industry and unlocking unprecedented ways to improve farming sustainability and efficiency.
Advancements in seed breeding and gene editing are enabling the design of plants with increased oil and protein content, greater ability to capture nutrients, better resiliency against pests, and enhanced carbon sequestration properties. Advanced biological sciences are enabling the development and commercialization of new biological crop protection and nutrition products that significantly reduce the need for traditional inputs including agrochemicals and fertilizers. Precision agriculture systems leveraging sensors, drones, robotics, satellite imaging and data analytics tools are enabling farmers to minimize waste and maximize earnings. These innovations are significantly reducing the carbon cost of growing crops and resulting in materially improved feedstock options for energy transition fuels.
Cost-efficient access to low-carbon feedstocks and supply chain control are – and will – continue to be the key differentiators across energy transition fuels. This realization is driving a growing wave of encouraging collaboration and convergence between the broader agribusiness and energy sectors, as well as investments in agribusiness innovations all the way back to “seed level” to create better feedstock options.
As the broader agribusiness ecosystem becomes more efficient and sustainable, it presents opportunities for agribusiness players, energy companies and innovators to rise to the challenge of satisfying the global demand for both food and cleaner fuels in a way that inures to the benefit of all participants across the value chain, and reduces our global dependency on fossil fuels.
Article by Guillaume Ortiz, Director, Lazard Agribusiness & Nutrition & Mark Lund, Director, Lazard Oil & Gas, LAZARD
You can connect with Guillaume and the Lazard team directly at the World Agri-Tech Innovation Summit where they’ll be hosting the breakout session ‘Agriculture and the Energy Transition: Unlocking Opportunities’ on March 15, at 11:00am (PST).
About Lazard
Lazard one of the world’s preeminent financial advisory and asset management firms, operates from 43 cities across 26 countries in North and South America, Europe, Asia and Australia Celebrating its 175th year, the firm provides advice on mergers and acquisitions, capital markets and other strategic matters, restructuring and capital solutions, and asset management services to corporations, partnerships, institutions, governments and individuals
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