Velocys (LSE:VLS) shot up by nearly a third in early trading after the Renewable Identification Numbers (RINs) produced at its joint venture ENVIA Energy’s plant in Oklahoma City received government verification. The RINs were approved by Weaver, an independent third-party auditor operating under the Quality Assurance Program (QAP) approved by the US Environmental Protection Agency (US EPA).
RINs are serial numbers assigned to a batch of biofuel to track its production, use, and trading, as required by the US EPA.They are used to track the compliance of obligated parties like oil companies which the EPA requires to process certain volumes of biofuel every year in its efforts to drive US energy independence and clean fuel production. Like a currency, the credits are generated by renewable fuel producers, traded by market participants and then purchased by obligated parties like gasoline companies. These obligated parties then ‘retire’ the RINs into compliance and supply the attached biofuel into the wider fuel market.
Today’s news is a landmark for Velocys because the diesel produced at ENVIA made from the landfill gas portion of the feedstock can be used by obligated parties to meet their environmental requirements. This opens up its market greatly, with ENVIA already signing an agreement with TransMontaigne Product Services which will see it purchase all of the available RINs generated by ENVIA for six months from April.
Based on 2017 RIN values, the possible revenue from RINs attributable to ENVIA’s mixed feedstock fuel was equivalent to $2.4/gallon or above throughout 2017. As a result, Velocys said a significant contribution of ENVIA’s revenues could be derived from the ongoing sale of RINs.
Most importantly, today’s news provides a commercial proof of concept for the company. Velocys is planning to turn woody biomass into renewable fuels at its large Mississippi-based biorefinery, which is slated to reach final investment decision around the middle of 2019.
The Mississippi biorefinery is expected to produce 20m gallons of renewable fuel a year, with Velocys generating $6.90 of revenue for every gallon against opex costs of £2.50 a gallon. Not bad for a business with a current market cap of just £26.05m and additional plans to develop renewable jet fuel with British Airways up its sleeve.
David Pummel, chief executive of Velocys, said today’s news will help progress in Mississippi: ‘This is a significant landmark for ENVIA and represents a further validation step for Velocys’ strategy to build biorefineries that convert woody biomass to renewable fuels. ENVIA demonstrates that we have the capability to produce verified RINs that will enable Velocys to unlock the attractive US renewable fuels market and, in time, grow a material supply position. This milestone is also important to our ongoing Mississippi biorefinery project, being one of the key requirements that will support building a consortium of strategic investment partners into the project.’
With today’s news being highly anticipated by the market, shares rose by as much as 30pc in early trading. At the time of writing, they were up 9.5pc, or 1.3p, to 15p. With plenty of news flow on the way regarding Velocys’s Mississippi biorefinery, the firm could still be undervalued at this price.
Author: Daniel Flynn
Disclosure: The author of this piece does not own shares in the company mentioned