New clean fuel standards from the Environmental Protection Agency are good news for renewable natural gas companies like Opal Fuels and Clean Energy Fuels, but appear to be less favorable for companies more focused on renewable diesel, like Neste.
The EPA sets standards that force oil refiners to mix a certain amount of renewable fuels—made from things like plants and animal waste—into the fuel supply, or otherwise pay for credits from renewable fuel companies like Opal. In a release Wednesday, the EPA said the new standards...
Renewable fuels are made from things like plants and animal waste.
Scott Strazzante/The San Francisco Chronicle/Getty Images
New clean fuel standards from the Environmental Protection Agency are good news for renewable natural gas companies like Opal Fuels and Clean Energy Fuels , but appear to be less favorable for companies more focused on renewable diesel, like Neste .
The EPA sets standards that force oil refiners to mix a certain amount of renewable fuels—made from things like plants and animal waste—into the fuel supply, or otherwise pay for credits from renewable fuel companies like Opal. In a release Wednesday, the EPA said the new standards would reduce the amount of foreign oil that the U.S. has to import by 130,000 to 140,000 barrels per day between 2023 and 2025.
The credits can make up a substantial portion of earnings for companies that make renewable fuels. Several clean fuels companies have struggled in the past two years, however, because credit values have fallen sharply due to less-favorable government policies.
The new standards specify volume requirements for a range of clean fuels, with different volume mandates depending on the source of the fuels. Some fuels are likely to fare better than others.
The latest rules “featured strong volume mandates for renewable natural gas (RNG) but disappointing figures for renewable diesel (RD),” wrote Matthew Blair, an analyst at Tudor, Pickering, Holt.
As a general rule, it’s better for renewable fuel companies when the government mandates high volumes of the fuels that they produce, because it forces refiners and other producers to pay up more for credits. Opal (ticker: OPAL) makes renewable natural gas, or RNG, at seven sites in the U.S., including at landfills—where decaying waste emits methane—and at dairy farms.
Prices for Renewable Identification Numbers (RINs)—the credits associated with the fuel standard—have risen 40 cents per gallon this week, Blair notes. He calculates that every increase of 50 cents per gallon in the RINs boosts Opal’s Ebitda (earnings before interest, taxes, depreciation and amortization) by $15 million, “which is quite significant for a company with consensus Ebtida of $73 million this year.”
Another beneficiary of the new standards could be Clean Energy Fuels (CLNE), which also produces RNG and has 590 fueling stations around the country. Oil major BP (BP) could also benefit, because it bought landfill RNG producer Archaea Energy in 2022 and plans to expand its production.
But renewable diesel RINs prices fell after the new standards were released Wednesday, because the volume mandates were lower than the industry had expected. Renewable diesel and biodiesel power trucks around the country, particularly on the West coast, where they receive extra subsidies.
The Diesel Technology Forum, a nonprofit trade group, wrote in a statement Wednesday that the new rules “will delay the important opportunity for reducing greenhouse gas emissions from the use of low carbon biodiesel and renewable diesel fuels.”
Among the companies that make renewable diesel are Finnish firm Neste (NTOIY), which also sells into the U.S. market. Irving, Tex. company Darling Ingredients (DAR) also makes renewable diesel, including through a joint venture with refiner Valero (VLO). Blair says that Darling stock is still attractive, given its valuation and because it can still profit from California credits.
Corrections & amplifications
Write to Avi Salzman at avi.salzman@barrons.com