Renewable Fuels: Investing Essentials

Crude oil produced by algae offers great potential as a renewable fuel. Source: Sapphire Energy.

The world is getting bigger and more energy-hungry. By 2035, it's estimated there will be another 1 billion people on the planet. At the same time, the supply of fossil fuels is only growing smaller, with new discoveries more scarce and increasingly difficult and expensive to extract. In short, demand is increasing and supply is tightening. 

The result? A growing need to develop and produce renewable fuels to drive the global economy. 

The subject of renewable fuels is relatively broad, with fingers in biotechnology, chemistry, and physics. Even if you're not an expert in any of those fields, renewable fuels' vast opportunity for growth in coming decades makes this space a compelling place to invest. 

What are renewable fuels?

Cows can be a source of renewable fuel. Source: Dirk Ingo Franke.

A renewable fuel is any fuel that comes from a readily replaceable source. There are multiple replaceable sources, basically divided into two groups: biofuels and other renewables, which include hydrogen, solar, and wind. 


The most common renewable fuel in active use in the U.S. today is ethanol, which is largely produced from corn. Ethanol production in the U.S. has risen from 175 million gallons in 1980 to 13.3 billion gallons last year, essentially all of which offsets consumption of gasoline, because ethanol is blended with gasoline in order to reduce emissions. Ethanol must make up 10% of gasoline sold in the U.S., and E10 is probably what you put in your car. Other common blends include E15 and E85, which are 15% and 85% ethanol, respectively. 

Soybeans and waste oil are common feedstocks for biodiesel.

Other common renewables include biodiesel, which is produced from organic feedstocks such as soybeans, as well as plant and animal waste oils. The challenge with these kinds of biofuels, though, is arable land. It would take all of the available farmland in the U.S. just to replace consumption of diesel and fuel oil, leaving no room for food production.

Because of this, oil-producing algae is an attractive source of biofuels. While still in early development, algae can produce significantly more biofuel in a smaller space than plant-based alternatives, and it can be located in places where farming isn't an option, like deserts or industrial fermenters. 

Another source of renewable fuels is biogas, or biomethane. The sources of biomethane are waste, in the form of landfills and animals raised for food. Methane is a powerful greenhouse gas, and 36% of human-related methane emissions in the U.S. are produced by agriculture. Systems to take waste products and capture the methane -- which can then be used to power vehicles or make electricity -- are a significant potential source of renewable fuel. Additionally, several major landfill operators have begun capturing landfill gas in the same way, reducing pressure on fossil fuels and cutting down on pollution. 

Hydrogen, solar, and wind

Industrial hydrogen plants often use natural gas as feedstock.

Hydrogen is the most common element in the universe, and the energy source that powers the sun. While hydrogen is readily available, it's not found as molecular hydrogen and must be separated from other elements to be usable.

The challenge is that the most simple and economic way to produce hydrogen today, "steam methane reforming," uses natural gas and creates CO2 and carbon monoxide as byproducts -- in greater levels than just burning the gas as a fuel. Additionally, the amount of energy required to produce hydrogen in this manner is greater than the energy the hydrogen produces, another strike against commercial hydrogen today

An alternative (and growing) option to produce hydrogen is with electrolysis. By running an electrical current through water, the hydrogen and oxygen molecules separate, and the hydrogen can be harvested. If renewable sources such as solar and wind provide the electricity for electrolysis, the resulting hydrogen -- which produces water as its byproduct when used as a fuel -- is as green as any renewable fuel can be. 

The Hydrogen Challenger produces hydrogen via electrolysis with wind power. Source: Hannes Grobe.

Additionally, wind and solar can be used to produce electricity, which is stored in conventional chemical batteries, such as lead acid and lithium ion. The benefit of a battery-powered electric vehicle is that it can use any existing electrical infrastructure to recharge, while hydrogen-powered vehicles are tethered to the nearest hydrogen reseller. 

How big is the renewable fuels industry?

Source: Archer Daniels Midland, with IEA data.

Corn-based ethanol is by far the largest renewable fuel in the U.S., with some 13 billion gallons consumed annually as a gasoline additive. About 1 billion gallons of biodiesel are consumed annually as well, while hydrogen and biomethane are used in the millions of gallons for transportation. As a comparison, petroleum product consumption in 2012 (the most recent year for which U.S. Energy Information Administration data is available) was 283.5 billion gallons, meaning renewable fuels met just over 4% of U.S. demand. 

The most common argument against renewable fuels is that they are rarely more cost-effective than traditional fossil fuels, without regular significant government subsidies or tax credits to bridge the gap. While that has been historically true, this argument ignores the major advances in both efficiency gains and cost per unit of power, across the board, with renewable fuels. During the past three decades, the cost to produce energy from wind and solar has declined some 90%, which has helped lower the cost of hydrogen production by electrolysis. However, hydrogen still costs more than three times as much to produce in this manner than using natural gas as a feedstock. 

Similarly, biofuels have historically cost more to produce than their "conventional" counterparts, requiring government subsidies for viability. However, just as with any manufactured good, improvements in technology and the advantages of scale will continue to drive the costs down. At the same time, increased demand for the limited resources on the planet will likely lead to higher prices for oil, coal, and gas. Combined, this will reduce the need for tax and subsidy incentives for renewable fuels. 

How do renewable fuels work?

It depends on which renewable you're talking about. Most biofuels, such as corn ethanol and biomethane, are used to replace their molecular similars that are produced from fossil fuels. This is one aspect of biofuels that offers so much potential. Algal oils -- whether they are crude oil or custom distillates like algal diesel -- are being designed to work in the existing oil refining infrastructure and with existing engine technology. The ability to leverage existing systems, while still having a strong "green" footprint, is a powerful combination. 

Hydrogen and battery-based renewable fuels face different challenges. Battery-based electric vehicles, or EVs, are limited by range -- though technology is addressing this -- but are the most efficient in terms of getting the most miles out of every drop of energy potential. Additionally, EVs can be powered from the existing grid, meaning there isn't a big need to add infrastructure. There are some concerns about EVs in large numbers adding too much demand to the grid, but technology can offset the impact. Lastly, consumers using solar or wind to power their EVs have the smallest total emissions impact, when factoring in emissions from power production. 

Hydrogen has the most headwind as a renewable fuel for transportation, due to its expense and lack of a significant supporting infrastructure. However, there are still a number of applications in which hydrogen works well today, such as indoor engine needs and remote power generation. Given time, technology advances will help bridge some of the gaps. 

What are the drivers of the renewable fuels industry?

In short, economic and environmental. Essentially everything in the energy world is driven by these two things: Consumers and businesses are growing more interested in reducing their carbon footprint, and renewable fuels are a way to make a major impact. As the cost of conventional fuels has increased, technology and growing scale have led to a reduced cost of renewables, making renewables more feasible. 

Geopolitical pressures could play a role in further development of renewable fuels. Many of the world's fossil fuel reserves are in countries that are fraught with political corruption and social repression, and there's evidence that some oil states actively fund terrorist organizations. 

Added together, there are many tailwinds for renewable fuels that, combined with the advances in technology and growing demand, will fuel big growth in this industry.

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