Renewable Fuels: How the ‘lucky country’ could power ahead

Earlier this month the Australian Federal Government outlined a range of initiatives in the 2024-25 Budget to support the development of the green hydrogen and low carbon fuels industries.

The announcement acknowledges Australia’s inherent resource advantages and the critical role of molecules - as opposed to historical focus on electrons - in the race to net zero emissions.

As an investor we welcome the support and believe Renewable Fuels could become the largest part of our investment pipeline over the next decade.

According to the International Renewable Energy Agency (IRENA), cumulative investment in transition technologies must represent $35 trillion by 2030 for global average temperature rises to keep below 1.5°C.

The McKinsey Sustainable fuel supply tracker found more than $150 billion of capacity investments have already been planned.

 

Electrification has long overshadowed renewable fuels in the energy transition, but there are some hard-to-abate sectors that cannot be electrified.

The headliners are heavy transportation, whether it be aviation (Sustainable Aviation Fuel or SAF) or shipping (Renewable Methanol), but there is also a very real need for renewable diesel which can be used as a direct substitute for fossil fuels in industrial equipment and vehicles. This could drive immediate reductions in Scope 1 emissions without the need to change fleets.

The challenge with Renewable Fuels from an investor’s perspective is the earlier-stage nature of the industry and the need to find the right risk-reward tradeoff.

Having evaluated dozens of projects across Australia we make the following high-level observations.

• Green hydrogen is the rock star of the industry, but it plays better in a band than as a solo act. We are yet to see a credible project where green hydrogen is the final output product. Conversely, there are several projects where it is part of a broader production process to create renewable liquid fuel.
  
• Being cost competitive with fossil fuel equivalents will take time and scale. The ultimate success of the industry requires output products to be sold at a price that provides investors with an appropriate risk adjusted return. In the interim we need transitionary policies that could include a Renewable Energy Target for fuels and associated certificate system (it worked for electricity), renewable fuel quotas or direct subsidies.
  
• Scalable technology and finding a genuinely low carbon feedstock is perhaps the biggest challenge. The only proven way to make a renewable liquid fuel in commercial quantities is via hydrotreating used cooking oils and animal tallows in a process known as HEFA. Unfortunately, there is just not enough feedstock to make a dent in the problem. The good news is that next-generation technologies that can process a much broader array of abundant feedstocks are emerging every day including alcohol-to-jet, gasification, hydrothermal liquefaction and power-to-liquids.
  

Unfortunately the renewable natural gas industry continues to get left behind in both the public relations and policy debate. Biomethane should be playing a critical role in hard-to-abate industries and the technology, feedstock and customers are all here and now. The industry could benefit from all the industry measures mentioned above and will hopefully receive greater government support in the future.

Conclusion

At Palisade Impact we’re big believers the race to net zero needs to embrace what we have in front of us right now.

Whilst we are interested in all renewable fuels, we particularly like the double-impact of creating renewable natural gas whilst keeping Commercial & Industrial (C&I) food waste out of landfill.

That was a key motivator for the Palisade Impact Fund acquiring a controlling interest in Repurpose It late last year, whose experience and incumbency in the Victorian organics market ideally positions us to take on this challenge.