The Opportunity in This Market is “Eye-Opening”
As we shift into the “post-oil age,” one thing is very clear: This is no longer a zero sum game.
While crude will continue to be the star, other sources of energy will start to gain market share.
A new energy balance will begin to take hold, and it will have less and less to do with crude.
As I discussed in the last issue, this new world will include a massive move into renewables like wind and solar power.
But the truth is bigger than that.
In fact, the projected future size of this market is nothing short of eye-opening…
A Market Poised to Take the Next Big Leap
According to a recently released report entitled “Global Second Generation Biofuels – Size, Industry Analysis, Trends, Opportunities, Growth and Forecast, 2013 – 2020,” the second generation, or “advanced,” global biofuels market is expected to reach $23.9 billion by 2020, registering a 49.4% compound annual growth rate (CAGR) between 2014 and 2020.
And with more than 50% of the globally installed capacity base, North America is now poised to generate the largest share of revenue.
These “second generation biofuels” have been developed to overcome the limitations commonly associated with traditional biofuels. These limitation include the threats they pose to biodiversity and a range of “food versus fuel” objections.
The persistent criticisms of corn-based ethanol are a perfect example of what I’m talking about.
Conversely, second generation biofuels are produced from a range of non-food crops and waste biomass, and is also more energy-efficient than conventional fossil fuels. And, as a side benefit, these new biofuels minimize greenhouse gas (GHG) emissions by over 90%, making them environmentally attractive.
Along with the benefits offered by second-generation biofuels, financial incentives and new regulations in the U.S. and Europe have been instrumental in driving the commercial production and adoption of these advanced biofuels.
One such initiative is the U.S. Renewable Fuel Standards (RFS), which requires that 36 billion gallons of renewable fuel be used by 2020. By comparison, just 9 billion gallons were required in 2008.
However, complexities associated with the production process and with high initial capital investment and land usage in the vicinity of feedstock have impeded the growth of the biofuel market.
Currently, biodiesel garners the largest share of the second generation biofuel market. However, it’s now expected that the latest and most commercially viable cellulosic ethanol will surpass biodiesel and eventually lead the market by 2020… driven primarily by the ease of producing it.
Given its economy of scale, the cellulosic ethanol market is now forecast to grow at a CAGR 52.2% from 2014 to 2020, due largely to the rapid growth in the technologies that allow for greater mass production.
A New Class of Great Investments
At the moment, North America accounts for about 82% of the global market share, as various market players prefer the U.S. for plant operations due to the supportive regulatory environment.
Recently, Procter & Gamble Co. (NYSE: PG) announced a collaboration with DuPont (NYSE: DD) to use cellulosic ethanol, replacing corn-based ethanol in its Tide detergent in North America.
Now no fewer than six other major North American players are following suit with similar initiatives.
But that’s just the beginning of where this market is headed.
Other key findings of the aforementioned report include:
- The global market for second generation biofuel is gaining traction with production and supply of cellulosic ethanol and biodiesel as prime growth drivers during the forecast period (2014 to 2020).
- Among all feedstock used (corn stover, corn cob, algae, bagasse, straw, wood waste, cellulose, mixed biomass, hardwood, forest residue, animal waste), a high volume of second generation biofuels will be produced from algae, due to its oil content, resulting in high-yield production.
- Most of the market players are mainly focused on partnership and collaborations, along with seeking approvals, as key parts of their developmental strategies.
All of these are major market-moving initiatives. That means we are going to see some fantastic investment-grade opportunities develop in short order.
So while the drop in oil prices has caused energy stocks to fall across the board, it’s been painting with far too broad a brush.
The truth is, a new class of investment is beginning to emerge in the “post-oil age,” and this is just the beginning of a long and profitable ride.