Biodiesel boom heading toward Wall Street

Total biodiesel production shot up from 25 million gallons in 2004 to 250 million gallons last year.

By Katherine Ellison, Business 2.0 Magazine contributing editor

(Business 2.0 Magazine) -- Way back in 2006, John "Bish" Neuhauser was the poster child of the biodiesel business. The shaggy-looking snow groomer for the Canyons ski area near Park City, Utah, starred in the acclaimed Sundance Film Festival documentary on global warming, "Everything's Cool," in which he made his own biodiesel out of restaurant grease and converted all of the resort's vehicles to run on it. In 2007, however, Neuhauser no longer has to brew his own fuel - he just drives to nearby Salt Lake City, where manufactured soybean biodiesel is now available at seven pumps. "Making it is fun and liberating," he says, "but I'm just too busy."

These days biodiesel isn't just good for the environment - it's good for the bottom line. The U.S. market for the combustible stuff has more than doubled every year since 2004 and will hit $1 billion this year. The number of retail pumps nationwide has grown from 350 in 2005 to more than 1,000 today. A couple of biodiesel IPOs are in the offing - and opportunities abound. "Biodiesel is the rock star of fuels," says Will Thurmond, author of Biodiesel 2020: A Global Market Survey. "It has moved from Woodstock to Wall Street."

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It's getting easier and easier being green. Biodiesel isn't just good for the planet, it's good for the bottom line.
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Fuel of the Future: With the help of government subsidies and a wide production base, biodiesel is expected to bring in $10 billion by 2010.
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Oil baron Adawi's processor makes fuel out of discarded restaurant grease.

It's not hard to see why. Biodiesel is 30 percent more fuel-efficient than gasoline, which in turn is 30 percent more efficient than ethanol. And while most ethanol produced in the United States comes from a single feedstock - corn - biodiesel has many sources: the oil of seed plants, such as soy and canola, french-fry grease and animal fat. That means the market can weather a price increase in any one raw material. Solazyme, a South San Francisco biotech firm, has even started making biodiesel from genetically modified algae.

Better yet, biodiesel can be manufactured in large quantities today - unlike fuels such as hydrogen. Total production shot up from 25 million gallons in 2004 to 250 million last year. Nearly 100 new plants are now under construction; even Chevron has joined in, cutting the ribbon on a 20-million-gallon plant in Galveston, Texas, in May.

The biggest player in the biodiesel market is Renewable Energy Group, an offshoot of a 3,000-member Iowa farm cooperative. REG accounts for 27 percent of U.S. biodiesel production and, thanks to its relationship with the soy growers, says it can increase its total capacity to 340 million gallons by the end of 2008. The company sells branded SoyPower fuel through a nationwide network of stations, some operated by grocery giant Safeway (Charts, Fortune 500). REG should be the first biodiesel company to hit Wall Street, having filed for an IPO in July. But REG won't be the last: Also mulling a stock offering is Seattle-based Imperium Renewables, founded three years ago by former commercial-jet pilot John Plaza. Imperium operates the largest U.S. biodiesel plant and plans to cut a production deal with Washington's canola farmers.

For all that production capacity, biodiesel is still an infant industry - it currently accounts for less than 0.5 percent of the total U.S. diesel-fuel market. So there will likely be plenty more REGs and Imperiums. "It's such an entrepreneurial success story," says Jenna Higgins, communications director at the National Biodiesel Board, a trade association. "Most of the companies out there are small businesses. There really aren't any traditional paths to success."

Take Philadelphia-based Fry-o-Diesel, founded by Yale business graduate Nadia Adawi. The startup has a patent pending on a process it developed to make fuel from trap grease, which restaurants currently pay to have hauled off. An estimated 495 million gallons of trap grease gets trashed every year. "We're working with something that's essentially a pollutant," Adawi says. "But it makes a great fuel." She is currently talking to investors and hopes to build a 3-million-gallon plant in 2008.

Adawi is in good company. The past few months have seen plenty of major corporations rush to hop on the biodiesel bandwagon. Oil giant ConocoPhillips (Charts, Fortune 500) has inked a deal with Tyson Foods (Charts, Fortune 500) to make diesel out of animal fats. In July, U.S. Steel announced that it will use a 10 percent mix of biodiesel at its plant in Gary, Ind. And Berkeley-based Clif Bar has started subsidizing employees who drive biodiesel cars.

Any diesel car can run on biodiesel, with no conversion necessary. This year just 4 percent of U.S. passenger cars run on diesel, but analysts expect that number to rise fast, in lockstep with rising oil prices. J.D. Power Automotive Forecasting predicts that diesel's share of the market will increase to more than 10 percent by the middle of the next decade - fueled in large part by the surge in biodiesel's production and popularity.  Top of page

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.