Biofuels, Renewable Diesel, and Refinery Conversion Economics

Introduction

Renewable diesel has emerged as one of the most significant growth areas in downstream energy, representing a convergence of traditional refining infrastructure, agricultural feedstock markets, and policy-driven incentive programs. Unlike biodiesel (which is produced through a transesterification process and has blending limitations), renewable diesel is a hydrocarbon-identical, "drop-in" replacement for petroleum diesel that can be used in any diesel engine at any blend ratio without modifications. The production technology, called HEFA (hydroprocessed esters and fatty acids), uses existing refinery hydroprocessing units to convert vegetable oils, animal fats, used cooking oil, and other lipid feedstocks into a finished diesel product that meets all ASTM D975 specifications.

For energy bankers, the renewable diesel space generates deal flow across several dimensions: refinery conversion project finance, joint venture structuring between refiners and renewable fuel specialists, feedstock supply agreements, tax equity partnerships to monetize federal credits, and M&A as the sector matures and consolidates. Understanding the technology, the economics, and the policy framework is increasingly important for downstream coverage.

The HEFA process converts lipid-based feedstocks (soybean oil, canola oil, animal tallow, used cooking oil, corn oil, and other waste fats and greases) into renewable diesel through catalytic hydroprocessing. The key steps are:

Pretreatment. Raw feedstocks are cleaned to remove contaminants (metals, phospholipids, free fatty acids) that would damage hydroprocessing catalysts. This step is critical because renewable feedstocks are much more variable in quality than crude oil. Phillips 66's Rodeo facility operates a dedicated 40,000 bpd pretreatment unit to prepare raw feeds.

Hydroprocessing. The pretreated feedstock is reacted with hydrogen in the presence of a catalyst at high temperature and pressure, removing oxygen and converting the triglyceride molecules into straight-chain hydrocarbons (paraffins) that are chemically identical to the hydrocarbons in petroleum diesel. This is the same basic chemistry used in refinery hydrotreating units, which is why existing refinery infrastructure can be repurposed.

Isomerization and fractionation. The straight-chain paraffins are isomerized (branched) to improve cold-flow properties (so the fuel does not gel in cold weather) and fractionated into finished renewable diesel and renewable naphtha.

HEFA (Hydroprocessed Esters and Fatty Acids)

The dominant commercial technology for producing renewable diesel and sustainable aviation fuel. HEFA uses catalytic hydroprocessing to convert lipid-based feedstocks (vegetable oils, animal fats, waste greases) into drop-in hydrocarbon fuels. The process requires significant hydrogen input and existing hydroprocessing infrastructure, which is why traditional petroleum refineries are well-positioned to convert to HEFA production. HEFA-pathway renewable diesel currently accounts for the vast majority of US renewable diesel production.

Several US refineries have converted from petroleum refining to renewable fuel production, driven by the convergence of declining petroleum refining margins in certain regions, strong renewable fuel policy incentives, and the strategic desire to reposition assets for the energy transition.

Phillips 66, Rodeo, California. The most prominent conversion, Phillips 66's Rodeo facility stopped processing crude oil in February 2024 and completed its conversion to process only renewable feedstocks. The renamed "Rodeo Renewed" facility can produce more than 800 million gallons per year (approximately 50,000 bpd) of renewable fuels, processing pretreated feedstocks including used cooking oil, fats, greases, and vegetable oils. The multi-year, billion-dollar conversion project leveraged existing hydroprocessing infrastructure while adding dedicated pretreatment capability.

Marathon Petroleum, Martinez, California. Marathon converted its Martinez refinery to renewable diesel production through a 50-50 joint venture with Finland's Neste, a leading global renewable fuels producer. Neste contributed approximately $1 billion to cover half the projected development costs. The Martinez facility expanded its renewable diesel production capacity in late 2023 and represents a different conversion model: a joint venture that combines Marathon's refining infrastructure with Neste's renewable fuel expertise and feedstock sourcing network.

The economics of renewable diesel production depend on a multi-layered "value stack" that combines physical fuel revenue with several distinct policy-driven revenue streams. Understanding each layer is essential because the total realized price per gallon can be 2-3x the physical fuel value alone.

Value Stack (Renewable Fuels)

The total realized price per gallon of renewable diesel (or SAF), calculated by aggregating multiple distinct revenue streams: the physical fuel commodity price, federal tax credits (45Z Clean Fuel Production Credit), RFS RIN credit revenue, and state-level LCFS credit revenue. The value stack concept is unique to biofuels and does not apply to petroleum refining, where the refiner simply sells product at market price. Understanding each layer of the value stack, and the policy risk associated with each credit, is essential for modeling renewable diesel project economics and evaluating conversion investments.

Physical fuel price. Renewable diesel sells at a modest premium to petroleum diesel based on its chemical equivalence and carbon reduction benefits. The wholesale price tracks petroleum diesel closely, typically within a few cents per gallon.

Federal tax credits. The Inflation Reduction Act established a two-phase incentive structure. Through 2024, the Biodiesel and Renewable Diesel Blender's Tax Credit provided $1.00 per gallon. Beginning January 1, 2025, the Clean Fuel Production Credit (Section 45Z) replaced the blender's credit, providing up to $1.00 per gallon for non-aviation renewable fuel (and up to $1.75 per gallon for SAF) for facilities meeting prevailing wage and apprenticeship requirements. The "One Big Beautiful Bill" Act (H.R. 1), enacted in July 2025, extended the 45Z credit through 2029, providing multi-year visibility for producers.

RFS RIN credits. Under the EPA's Renewable Fuel Standard, every gallon of renewable diesel generates Renewable Identification Number (RIN) credits that obligated parties (petroleum refiners) must acquire to demonstrate compliance with blending mandates. The biomass-based diesel RVO (Renewable Volume Obligation) was set at 20.95 billion RINs for 2025. RIN values fluctuate based on supply-demand dynamics and policy uncertainty, but they represent a meaningful additional revenue stream for renewable diesel producers.

When you aggregate all revenue layers, the total realized price per gallon of renewable diesel can exceed the physical fuel value by $1.60-2.60 per gallon, depending on feedstock CI score, credit market conditions, and the specific incentive programs available. The table below summarizes each layer of the value stack.

The primary cost driver in renewable diesel production is feedstock, which represents 70-85% of total production costs. The key feedstocks are soybean oil, used cooking oil (UCO), animal tallow, corn oil, and canola oil. As renewable diesel capacity has expanded rapidly, feedstock competition has intensified, driving up prices for waste oils and fats.

In 2024, wholesale biodiesel prices were approximately $2.00 per gallon higher than petroleum diesel, and renewable diesel prices were approximately $2.30 higher, reflecting the feedstock cost premium. This feedstock cost escalation is the primary risk to renewable diesel economics: if feedstock prices rise faster than the incentive stack can support, margins compress.

Renewable diesel and refinery conversions create advisory mandates across the energy banking spectrum. Project finance for new builds and conversions requires structuring debt and equity around incentive-dependent cash flows, with particular attention to policy duration risk (what happens if credits expire or are reduced). Joint venture structuring (as in the Marathon-Neste partnership) involves allocating capital contributions, technology licensing, feedstock sourcing responsibilities, and economic returns between partners with different capabilities. Tax equity partnerships allow producers to monetize federal credits through structures familiar from renewable energy finance. M&A advisory is growing as the sector matures and operators with sub-scale or poorly positioned assets seek acquirers.

Renewable diesel represents the most tangible example of how the energy transition is reshaping traditional downstream assets. The conversions at Rodeo and Martinez demonstrate that existing refinery infrastructure can be repurposed for lower-carbon fuel production, but the economics remain policy-dependent. For energy bankers, the renewable diesel space offers a growing set of advisory mandates that require combining traditional refinery valuation skills with an understanding of environmental credit markets, feedstock supply chains, and the legislative dynamics that determine whether the incentive stack remains economically viable.