Clean Energy (CLNE)

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SA article..

http://seekingalpha.com/article/3980147-clean-energy-fuels-become-one-americas-leading-low-carbon-fuel-producers?auth_param=gdu:1bldp4g:8d27f47dd41e1603dd899375977e9814&uprof=45&utoken=aaa390974bc8cdc125ae775107fd3383

Clean Energy Fuels Has Become One Of America's Leading Low-Carbon Fuel Producers

Jun. 6, 2016 11:12 AM ET

About: Clean Energy Fuels Corp. (CLNE)

Tristan R. Brown

Alternative energy, long/short equity, commodities, energy

Alternative Energy expert Tristan Brown offers his first analysis on Clean Energy Fuels.


•Alternative fuel company Clean Energy Fuels has become an important contributor to U.S. energy policy as it has broken the longstanding deadlock of cellulosic biofuel production.

•The company's renewable natural gas achieves 90% reductions to greenhouse gas emissions relative to gasoline, allowing the company to generate valuable environmental credits along with the fuel.

•These credits more than offset the negative impact of low fuel prices in Q1 on the company's retail fuel margins.

•At current values, the environmental credits will provide the company's annual earnings with substantial support in 2016 due to its position as a rare large producer of cellulosic biofuels.


This article's title is one that I never expected to write. Not because Clean Energy Fuels (NASDAQ:CLNE) doesn't produce low-carbon fuels; natural gas vehicles [NGV] do achieve slightly lower lifecycle greenhouse gas emissions than gasoline vehicles. Rather, I never expected to write it because in the seven years that I have been closely following advanced biofuels commercialization in the U.S., renewable natural gas [RNG] never showed up in the production figures until relatively recently.

There was a reason that RNG wasn't on the radar screen, of course. When the U.S. Congress created the revised Renewable Fuel Standard [RFS2] in 2008 and mandated that 16 billion gallons of cellulosic biofuels (transportation fuels produced from lignocellulosic biomass that achieve lifecycle greenhouse gas emission reductions of at least 60% compared to fossil-based gasoline) be blended with fossil-based transportation fuels by 2022, the expectation was that cellulosic ethanol and cellulosic hydrocarbons would meet the demand. Liquids were expected rather than gases.

Cellulosic ethanol production has been heavily researched since at least the 1970s. While cellulosic hydrocarbons are a more recent development, the latter's "drop-in" compatibility with the existing transportation infrastructure meant that would-be producers such as KiOR (OTCPK:KIORQ) and Gevo (NASDAQ:GEVO) were quick to raise millions from the public markets despite a comparable lack of R&D. (Gevo produces fuel butanol that, as an alcohol, is technically not a hydrocarbon, but it avoids many of fuel ethanol's blending restrictions).


While cellulosic biofuel production quickly fell behind the schedule established by the RFS2, as late as 2013 there were still plans for roughly 500 million gallons of capacity to be in existence by 2015. Even this estimate proved to be overly optimistic, however. The rise of shale gas caused a number of planned projects to abandon biomass feedstock for natural gas. Production problems and the subsequent collapse in gasoline prices contributed to the bankruptcy of KiOR and a 99% post-IPO decline to Gevo's share price. The production of liquid cellulosic biofuels in 2014 didn't even reach one million gallons as a result, let alone that year's blending target of 1,750 million gallons.

Liquid cellulosic biofuels production in 2015 and 2016 to date has still remained exceedingly low despite the completion of commercial-scale cellulosic ethanol facilities by companies such as POET (OTCQX:POETF), Abengoa (OTCPK:ABGOY), and DuPont (NYSE:DD). Only 2.2 million gallons of cellulosic ethanol and 275,000 gallons of cellulosic diesel were produced in 2015. Yet the U.S. Environmental Protection Agency, which oversees the RFS2's implementation, reports that 142 million gallons (ethanol-equivalent) of qualifying cellulosic biofuels were produced last year. What happened?

In 2013, the EPA, among other things, expanded the definition of cellulosic biofuels to include fuel produced from landfill gas. Methane is formed via the decomposition of biomass in landfills that, if not captured, escapes into the atmosphere where it functions as an especially potent greenhouse gas. Methane, of course, is also the primary compound found in natural gas. This landfill gas can be captured, scrubbed, and then used as fuel in NGVs in either compressed or liquefied form. The extra 140 million "gallons" of cellulosic biofuels that were blended and used as transportation fuel in 2015 took the form of this renewable natural gas. This in turn was an increase from 32.5 million gallons of RNG that were sold under the RFS2 in 2014.


RNG has continued to dominate the cellulosic biofuels market in 2016 to date, with EPA records showing that 42 million gallons were sold under the RFS2 through April compared to a mere 1.4 million gallons of cellulosic ethanol and no cellulosic diesel. In a continuation of past trends, approximately 67% of the RNG sales have taken the compressed form while the balance has been liquefied.

The 140 million gallons ethanol-equivalent of RNG (or 94 million gallons of gasoline-equivalent) that was sold in 2015 was admittedly a tiny fraction of the roughly 140 billion gallons of gasoline that was consumed in the U.S. in 2015. It is notable, however, in comparison to the amount of electricity that was consumed by all of the country's battery electric vehicles [BEV] in the same year. The U.S. had a stock of 450,000 plug-in EVs as of April 2016. Let us assume that all of these vehicles were BEVs (in reality many were hybrids capable of also utilizing gasoline) and that each one was driven for 12,000 miles during the year. Finally, let us assume that the average fuel efficiency of each was 30 kilowatt-hours per 100 miles, or 300 watt-hours per mile, which has been reported for the Tesla Model S. Based on these assumptions, all U.S. BEVs in 2015 consumed:

450,000 BEVs x ((12,000 miles/year) x 30 kWh/100 miles)) = 1,620,000,000 kWh of energy

By comparison, based on a conversion rate of 22.3 kWh per 1 gallon of ethanol, RNG contributed:

140,000,000 gallons ethanol-eq. x (22.3 kWh/1 gallon ethanol-eq.) = 3,122,000,000 kWh of energy

In other words, even if we make some very optimistic assumptions about the amount of electricity consumed by BEVs in 2015, U.S. wheeled vehicles consumed roughly twice as much energy in the form of RNG as it did in the form of electricity via plug-in EVs. Despite this, a Google search for "renewable natural gas" yields only 111,000 results while a search for "battery electric vehicle" yields 352,000 results.

Enter Clean Energy Fuels

This comparison isn't perfect: CNG and LNG vehicles achieve different fuel mileages than BEV, especially since RNG is frequently used in heavy rigs whereas electricity is primarily used to power small, light-weight plug-in vehicles. I was still surprised to discover how much more transportation energy the U.S. derives from RNG than from electricity, though, not least because of how much more attention the media has paid to the latter in recent years.


This discrepancy even extends to the equity markets. Clean Energy Fuels is one of the largest producers of RNG under the RFS2 under its Redeem brand. The company's RNG sales increased from 20 million gallons gasoline-equivalent in 2014 to 50 million gallons in 2015 to 15.2 million gallons in Q1 2016 alone. This equates to 75 million and 23 million gallons of ethanol-equivalent in 2015 and Q1 2016, respectively. Clean Energy Fuels was therefore responsible for a majority of both the RNG and total cellulosic biofuel produced under the RFS2 in those same periods, making the company the country's largest producer of cellulosic biofuel. Despite this, the company has only 27,500 followers here on Seeking Alpha compared to 322,700 followers for Tesla (NASDAQ:TSLA).

Clean Energy Fuels is doing more than just contributing to an ambitious national target by being such a large producer. Its production also makes it the largest producer of cellulosic biofuel Renewable Identification Numbers [RIN]. A RIN, as the RFS2's tradable blending credits are called, is created when a gallon (ethanol-equivalent) of qualifying biofuel is produced. It is separated for resale when that biofuel is blended and sold for consumption in the transportation sector.

RIN prices have been relatively high in 2016 (see figure) following a December 2015 increase to future mandated blending volumes by the EPA. While Clean Energy Fuels's management didn't break out the exact value of the RINs that it generated and sold in the most recent quarter via its RNG production, instead reporting them in combination with the credits also generated under California's Low Carbon Fuel Standard, the combined value averaged $0.72/gallon gasoline-equivalent. For comparison, New York RBOB gasoline averaged $1.16/gallon over the same period.

Source: EcoEngineers (2016).

Conclusion

Clean Energy Fuels has become a major producer of U.S. cellulosic biofuels in the form of its landfill-derived RNG, which can be used in both compressed and liquefied NGVs. This has been an unexpected development given that RNG is a relatively recent contributor to the RFS2, and certainly not one that was expected to play such a role prior to a favorable regulatory decision permitting its use for the first time in 2014. The credits that the company generates via its RNG production have become especially valuable of late, more than tripling in combined value in the most recent quarter and offsetting the negative impact of the current low fuel price environment on the company's retail fuel margins. Indeed, the company is currently on pace to generate credits worth $44 million in FY 2016 compared to a TTM EBITDA of $32.8 million. Investors should expect RNG to be a large contributor to Clean Energy Fuels's annual earnings this year.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.