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1、Electric Power&Natural Gas PracticeHow traders can capture value in sustainable fuels The sustainable-fuel market is nascent,complex,and growing fast.Traders that develop an in-depth understanding across different fuels,feedstocks,and regions can gain a competitive advantage.October 2023by Tapio Mel
2、gin,Agata Mucha-Geppert,Xavier Veillard,and Andrew WarrellAs countries around the world seek to limit their carbon emissions,sustainable fuels will play an important role.This category consists of a broad range of low-carbon fuels,including biofuels,e-fuels,and chemical by-products(see sidebar,“Know
3、 your sustainable fuels”).Because sustainable fuels can fill gaps in decarbonization and complement electrification,demand is expected to triple over the next 20 years,reaching approximately 600 million metric tons(Mt)by 2050(Exhibit 1).1 To date,completed advanced-biofuels 1 Based on the Achieved C
4、ommitments scenario from the McKinsey Global Energy Perspective 2023(forthcoming).For more on the market outlook,see Nathan Lash,Tapio Melgin,Agata Mucha-Geppert,and Ole Rolser,“Charting the global energy landscape to 2050:Sustainable fuels,”McKinsey,July 7,2022.2 McKinsey Sustainable Fuels capacity
5、 tracker,May 2023.projects and announced investment pipeline in sustainable-fuel capacity have reached$100 billion.2The sustainable-fuel market is still mostly nascent,characterized by complex regulations and interdependencies across sectors.Physical and regulatory constraints on feedstocks have res
6、ulted in price volatility;supply chain and infrastructure bottlenecks,variations in pricing across regions,and import and export rulings have added to this volatility.The mix of fuel types will evolve through 2050:road fuels have represented most of the Exhibit 12019 2025 2030 2035 2040 2045 2050128
7、44916022019 2025 2030 2035 2040 2045 20508374491602Road transportAviationMaritimeOther3EthanolFAME1Drop-in diesel2Drop-in kerosene2Drop-in gasoline2MethanolSustainable-fuel demand by energy carrier,million metric tonsSustainable-fuel demand by sector,million metric tons1Fatty a
8、cid methyl ester.2Drop-in fuels include 100%blend fuels,such as hydrotreated vegetable oil(HVO),hydrotreated esters and fatty acids(HEFA),and power-to-liquid(PtL)diesel or kerosene.3Rail,building,chemicals,industry,and other.4Per annum.Source:McKinsey Sustainable Fuels Cost Model,Achieved Commitment
9、s scenario,Apr 2023The contribution of sustainable fuels to liquid-fuel demand could double by 2030.McKinsey&CompanyShare of total liquid fuel demand,%.2%p.a.44.0%p.a.42How traders can capture value in sustainable fuels Know your sustainable fuels1 Hydrotreated esters and fatty acids(syno
10、nymous with the hydrotreated-vegetable-oil process).2 Biogenic carbon is CO2 sequestered from the atmosphere during the growth of feedstock and released during biofuel combustion.Sustainable fuels differ by feedstock,application,and production methods.Conventional biofuelsBiofuels produced from orga
11、nic matter,including food crops and organic-residue materials,are typically blended with conventional fossil fuels at low percentages(given the constraints of engines to accommodate fuel with certain properties).Ethanol is produced through fermentation of plant-based materials.First-generation ethan
12、ol uses feedstocks such as corn,while second-generation ethanol is produced from residues such as bagasse,which requires more processing.Ethanol is used primarily in gasoline blends(for example,E10)and additives(for example,ethyl tert-butyl ether),improving fuel characteristics such as octane number
13、 and lowering greenhouse gases(GHGs)at a modest cost(for first-generation ethanol).Fatty acid methyl ester(FAME)is a type of biodiesel derived from renewable sources such as vegetable oils or animal fats.FAME is commonly blended with fossil diesel fuel(such as B7 and B20).Traded products on the mark
14、et reflect the underlying feedstock:for example,FAME and cooking oil can combine to create used cooking oil methyl ester,or UCOME.Biomethanol is a type of methanol produced from biomass or renewable feedstocks,such as agricultural residues,woody biomass,or side-stream extracts from pulp mills.It can
15、 be used as a fuel in dedicated enginesfor example,as a gasoline additive(methyl tert-butyl ether)or as a feedstock for the production of chemicals.Biogas is produced through the anaerobic digestion of waste streams such as corn stover,manure,wastewater sludges,or food waste.It is often produced on
16、a small scale,contains roughly two-thirds methane and one-third other gases,and can be combusted to produce electricity and heat.When upgraded to biomethane,it becomes a drop-in fuel and tradable commodity.Drop-in sustainable fuelsDrop-in sustainable fuels can be produced from edible or residue biom
17、ass sources by using low-carbon hydrogen or by synthesizing sustainable captured carbon and low-carbon hydrogen.They are compatible with existing engines and fossil-fuel infrastructure.Drop-in fuels have already been a replacement for diesel,jet fuel(currently,the blend limit is 50 percent),and comp
18、ressed and liquefied natural gas.In addition to having a positive impact on GHG emissions and a low carbon-intensity score,these fuels typically have lower particulate-matter and nitrogen oxide emissions.Products currently on the market or expected to go to market soon include renewable diesel(hydro
19、treated vegetable oil)or e-diesel,sustainable aviation fuel(such as HEFA1 and e-SAF),biomethane and synthetic methane(sustainable natural gas),and e-gasoline.These fuels are often traded and blended with conventional fuels in the country of use.E-fuels or hydrogen-based fuels(non-drop-in)E-fuels are
20、 manufactured using hydrogen from low-carbon electricity sources(such as renewable or nuclear energy)and captured carbon.The production of low-carbon hydrogen through electrolysis based on renewable or nuclear energy can be traded as gaseous hydrogen or liquid hydrogen.When hydrogen is combined with
21、 acceptable sources of carbon(such as biogenic carbon2 or carbon derived from direct air capture)or nitrogen,it can form e-fuels such as e-methanol or e-ammonia.However,some hydrogen derivatives are not compatible with existing engines and infrastructure.3How traders can capture value in sustainable
22、 fuels demand and growth to date,but in the 2020s categories such as sustainable aviation fuel(SAF),renewable natural gas and synthetic natural gas,and bio-and e-methanol will make up a larger share.During the 2030s,technological advancements could spur growth in new advanced-biofuel pathways and e-
23、fuels,complicating the global market while injecting much-needed capacity and liquidity.With such complex market fundamentals,sustainable-fuel traders should seek to understand which markets will increase in liquidity,which arbitrage plays to explore across products,which storage hubs to invest in,a
24、nd which offtakes to secure to gain access to supply.Winning traders will build and enhance selected capabilities to keep pace with the markets evolution.Current market and development factorsA fascinating but challenging aspect of the sustainable-fuel market is the broad range of categories it enco
25、mpasses(Exhibit 2).Biofuels account for the vast majority of the current market,but drop-in sustainable fuels and hydrogen-based e-fuels could reshape the landscape in the coming decades.The development of these fuels will be nonlinear:they will mature at different paces,and their specific uses coul
26、d replace fossil fuels at different rates.Several factors will shape the markets development over the next few decades.Winning traders will build and enhance selected capabilities to keep pace with the markets evolution.4How traders can capture value in sustainable fuels Exhibit 2Overview of sustain
27、able liquid and gas energy carriersNote:Pure hydrogen and other decarbonization vectors do not meet the“drop in”requirement.1Bio-based with compatibility restrictions(blend walls)with existing combustion engines.2Fuels that require new infrastructure or engines.3Fuels that are fully compatible with
28、existing infrastructure(blended up to 100%)and that can be produced from either bio-based or hydrogen-based sources.Liquid and gaseous hydrogen only includes green and blue hydrogen.4Methanol can be upgraded to various drop-in fuels but is not a 100%drop-in fuel by itself.5Fatty acid methyl ester.6R
29、enewable natural gas.The market for sustainable fuels includes a broad range of categories.McKinsey&CompanyBio-methanol40Ethanol84Bio-or e-jet0Renewable and e-diesel5FAME5 biodiesel39E-methanol40Bio-or e-gasoline0Biogas2Bio-or e-methane612Liquid H20Ammonia0Gaseous H20Biofuels13%Drop-in sustainable f
30、uels217%E-fuels and hydrogen-based fuels341%LiquidsGasesCarbon-based fuelsxx%Representative market CAGR in Achieved Commitments scenario,2030(projected)xx 2019 demand in million metric tons per annum5How traders can capture value in sustainable fuels The rise of e-fuelsIn the coming years,constraint
31、s on sustainable biomass feedstocks are expected to create a gap between demand for and supply of fuels with existing technologies.Although biomass feedstocks,notably lignocellulosics,have significant potential 3 Gran Berndes et al.,“Chapter 2:Bioenergy”in Renewable energy sources and climate change
32、 mitigation,Intergovernmental Panel on Climate Change,2011.for energy production,3 practical constraints on their collection mean the global community likely wont be able to achieve net-zero targets without a shift to e-fuels and dedicated biomass production on marginal lands or surplus agricultural
33、 land(Exhibit 3).Exhibit 3Web Exhibit of 2019FeedstockEnd productsFeedstockEnd productsEdible oil Sustainable aviation fuelDrop-in dieselEdible sugarsDrop-in gasolineWaste oils(Annex IX part A)1Sustainable methane3Waste oils(Annex IX part B)1Sustainable methanol4Lignocellulosic and other2EthanolIndu
34、strial(biogenic)point source CO2 or direct air captureFAME5Edible oil Sustainable aviation fuelDrop-in dieselEdible sugarsDrop-in gasolineWaste oils(Annex IX part A)1Sustainable methane3Waste oils(Annex IX part B)1Sustainable methanol4Lignocellulosic and other2EthanolIndustrial(biogenic)point source
35、 CO2 or direct air captureFAME520501Availability could potentially be expanded with purposely grown volumes of low indirect land-use change and cover crops.See Renewable Energy Directive(2018/2001),European Commission,Dec 2018.2Includes all relatively unconstrained feedstock technologies;ie,power-to
36、-X(PtX),gasifcation,alcohol-to-jet(AtJ),bio-based or synthetic methane,green hydrogen for refnery use,or more hydrotreated vegetable oil(HVO)if more feedstock is unlocked.Decreasing demand for ethanol from edible sugars could result in retroftting ethanol plants to AtJ,practically meeting part of“Li
37、gnocellulosic and other”demand.3Sustainable methane includes synthetic methane,biomethane,and biogas.The biogas demand estimation is based on McKinseys Global Energy Perspective 2022 outlook.4Includes methanol as a fuel in transport and as a feedstock in chemicals.5Fatty acid methyl ester.Source:McK
38、insey Sustainable Fuels Cost Model,Achieved Commitments scenario,Apr 2023Over the next 30 years,achieving net zero will require a fundamental shift in the way sustainable fuels are produced.McKinsey&Company6How traders can capture value in sustainable fuels E-hydrocarbon markets could still emerge i
39、n the late 2020s,but volumes will likely not become significant compared with bio-based production until the following decade.In addition,the cost competitiveness of different production pathways continues to be uncertain given the limited adoption and the potential to reduce production costs of som
40、e of the pathways over time(Exhibit 4).EU regulators have taken the strongest long-term view on the role of e-fuels,introducing proposals to mandate the use of RFNBOs4 in the transport sector with specific quotas for the aviation and marine 4 Renewable liquid and gaseous fuels of nonbiological origi
41、n,a category defined by the European Unions Renewable Energy Directive.5 Proposal for a directive of the European Parliament and of the Council amending Directive(EU)2018/2001 of the European Parliament and of the Council,Regulation(EU)2018/1999 of the European Parliament and of the Council and Dire
42、ctive 98/70/EC of the European Parliament and of the Council as regards the promotion of energy from renewable sources,and repealing Council Directive(EU)2015/652,Council of the European Union,July 15,2021.sectors.5 These mandates seek to create a market for those products.The business case and loca
43、tion choices for e-fuel production are affected by access to affordable renewables,availability of sustainable carbon(e-ammonia,which doesnt contain carbon,is an exception),and integrated production costs of hydrogen derivatives(which are affected by rules such as temporal correlation,requiring stor
44、age of electricity or hydrogen to produce compliant fuels).Classifications vary by type of hydrogen(for example,carbon intensity or whether electricity Exhibit 4Unit cost projections for sustainable aviation fuel in European OECD countries,$per metric ton(t)of kerosene1Reverse watergas shift via FT
45、process.2Hydrogen costs are a range because of high uncertainty in cost-down trajectory and the impacts of regulation(eg,EU correlation on frming costs).3FischerTropsch process.4Hydroprocessed esters and fatty acids produced from used cooking oil.Source:McKinsey Sustainable Fuels Cost Model,Achieved
46、 Commitments scenario,Apr 2023Many emerging advanced aviation fuels could become cost competitive with HEFA in the 203040 period.McKinsey&Company2025203020352040204505001,0001,5002,0002,5003,0003,5004,0004,5005,0005,500E-fuel:Power-to-liquid RWGS-FT1(CO2 pulp and paper)2 Biofuel:Gasifcation-FT(fores
47、try residue)3Biofuel:HEFA-UCO4Fossil-based kerosene+$100/tCO2 taxFossil-based kerosene205020227How traders can capture value in sustainable fuels source includes nuclear in addition to renewables)and carbon(such as carbon derived from fossil,biogenic,or direct-air-capture sources)and can affect a pr
48、oducts value in the market.Currently,future producers are concentrating primarily on nonfossil carbon sources such as ethanol,pulp and paper,and waste-to-energy plants.Production can provide opportunities in regions with a high potential for renewables and biogenic-carbon availability,such as Latin
49、America,North America,and parts of Asia and Europe.Africa,Australia,and the Middle East could be major producers of e-ammonia and potentially e-hydrocarbons for markets that allow the use of fossil carbon in e-fuels.The high cost of direct air capture needs to fall dramatically to be competitive wit
50、h carbon capture from industrial sources.Competing policy approaches to support market developmentMultiple countries and regions are active in the global sustainable-fuel market.The European Union and North America are at the forefront in drop-in sustainable fuels.Meanwhile,an established significan
51、t market for conventional biofuel has experienced growth over the past 30 years,with bioethanol in Brazil,China,and India and biodiesel(fatty acid methyl ester FAME)from palm and soybean oil in Latin American and Southeast Asian countries.6 AsiaPacific,Australia,China,Japan,India,Singapore,and South
52、 Korea are emerging as potential demand hubs for drop-in fuels such as SAF as well as e-methanol and e-ammonia to serve as energy carriers or fuels for the marine sector.An examination of the EU and US markets highlights the complex and varied landscape across regions as 6“Biofuels,”in Renewables 20
53、21:Analysis and forecast to 2026,International Energy Agency,December 2021.7“Council and Parliament reach provisional deal on renewable energy directive,”Council of the European Union,March 30,2023;“Interinstitutional File:2021/0218(COD),”Council of the European Union,June 19,2023.8“Infographic Fit
54、for 55:Increasing the uptake of greener fuels in the aviation and maritime sectors,”Council of the EU and the European Council,last reviewed July 26,2023;“Fit for 55:Parliament and Council reach deal on greener aviation fuels,”European Parliament,April 25,2023.9“Biofuelsupdated list of sustainable b
55、iofuel feedstocks:Annex,”European Commission,May 12,2022.10“Commission sets out rules for renewable hydrogen,”European Commission,February 13,2023.11“Directive(EU)2023/958 of the European Parliament and of the Council of 10 May 2023 amending Directive 2003/87/EC as regards aviations contribution to
56、the Unions economy-wide emission reduction target and the appropriate implementation of a global market-based measure,”Official Journal of the European Union,May 16,2023,Volume 66.well as different approaches to spurring adoption of sustainable fuels.European Union.The European Union has set ambitio
57、us targets for reducing carbon emissions and is using legislation to support demand.For example,the“Fit for 55”package of legislation,which aims to decrease the European Unions greenhouse-gas emissions by at least 55.0 percent by 2030,establishes targets for the use of renewable energy in the Renewa
58、ble Energy Directive amendment(29.0 percent for the transport sector by 2030)and specific feedstocks(5.5 percent for advanced biomass and RFNBO by 2030,of which minimum 1.0 percent RFNBO).7 Proposed legislation would lay the foundation for SAF demand,mandating a 2 percent share of SAF supply in 2025
59、,6 percent in 2030,and 70 percent in 2050(of which 35 percent would be RFNBO).8 By providing long-term demand signals,including compliance mechanisms,EU leaders have sought to create prerequisites for investment decisions.On the supply side,the European Union and its member states have imposed bans
60、and restrictions on feedstocks that can be used for biofuels.The region is shifting from food crops(such as palm,soy,and corn)to waste and residue streams for advanced biofuels.9 In addition,it is defining sustainability criteria for e-fuels,favoring biogenic or direct-air-capture carbon and green o
61、r low-carbon hydrogen that meets stringent criteria(as laid out in the RFNBO delegated act).10 A recent proposal to allocate some EU Emission Trading System(ETS)funds from aviation to support SAF adoption could also introduce incentives similar to those found in the US Inflation Reduction Act(IRA).1
62、18How traders can capture value in sustainable fuels North America.The passage of the IRA in 2022 signaled a dramatic shift for the United States.The act features$370 billion in tax credits for the renewable-energy industry,including a credit of$1.75 a gallon for SAF through 2026 and a production ta
63、x credit of$3.00 per kilogram(kg)of hydrogen that has GHG emissions below 0.45 kg CO2 per kg H2(such as onshore wind or nuclear).By attracting investment,the IRA seeks to scale up SAF production to at least three billion gallons a year by 2030,with the goal of 100 percent blending by 2050.12These ta
64、x credits could significantly boost manufacturing capacity.However,a high share of projects have yet to clear the financial-investment-decision(FID)stage.Twelve major North American passenger and cargo airlines have made SAF commitments through 2030,but their offtakes are still far from meeting futu
65、re demand,and few of those offtakes can be considered fully binding.The North American market also has several policies to support the use of sustainable fuels.For example,the US Renewable Fuel Standard(RFS)and the state-level Low Carbon Fuel Standard(LCFS)programs affect pricing and create markets
66、for credits.Aligning market supply and demandThe different policies and approaches could lead to supply-and-demand imbalances across regions in the medium term.The market could snap back into balance in multiple ways,including the following:12 Sustainable aviation fuel:Agencies should track progress
67、 toward ambitious federal goals,US Government Accountability Office,revised May 17,2023.If capacity ramps up faster than projected demand,additional voluntary use could resultespecially in markets with subsidized supply,such as the United States.Fuel producers might choose to recalibrate their produ
68、ct slatefor instance,by producing more renewable diesel instead of SAF or more bio-naphtha for the chemicals sector.Many projects that have yet to clear the FID stage,particularly those with limited access to feedstock or financing,might not launch or could be delayed for several years.Further,few o
69、fftakes and credit schemes are contractually binding for the next seven to 15 years,which is often the payback time required to achieve positive returns in the highly capital-intensive advanced-biofuels and e-fuels pathways.Insufficient demand could cause a significant decline in average use of prod
70、uction capacity,leading to compressed margins and slower capacity growth until the market rebalances through growth in demand.In the long term,e-fuels or e-crude could become the“new oil,”assuming renewable energy production is not constrained,sustainable-carbon trading develops,or the cost of direc
71、t air capture approaches that of carbon capture.The different policies and approaches could lead to supply-and-demand imbalances across regions in the medium term.9How traders can capture value in sustainable fuels Outlook on global trade flows through 2050The development of sustainable fuels will p
72、roceed at different paces depending on category and region.However,based on trends to date,we can make a few observations about how global trade flows could play out through 2050.Currently,a significant share of production and consumption takes place within regions,shaped by various mandates,incenti
73、ves,and trade rules.Some interregional trade also takes place,notably of feedstocks and fuelsfor example,from AsiaPacific hubs to Europe and North America.Producers outside the United States are increasingly looking to the European Union as a potential export market.Therefore,many of the feedstocks
74、and fuels can be considered as partially global commodities.Although the recent IRA package in the United States is intended to meet local demand,it is starting to attract more investment to the region.This activity may be contributing to the widening gap in pricing among regions.Some demand pattern
75、s are also shifting;for example,airlines refueling with SAF have access to cheaper prices in California than in the European Union.Further,proposed book-and-claim schemes could lead to global or regional optimization of demand volumes based on local incentives.13 13 When SAF isnt available on a give
76、n flight or route,a book-and-claim system enables a company to pay for SAF to be supplied for another aircraft somewhere in the world.This system enables companies to claim the CO2 reduction of SAF on its climate accounting toward Scope 3 emissions while also boosting demand for SAF.For more,see Lau
77、ra Hutchinson et al.,“Clean energy 101:Book and claim,”RMI,May 30,2023.Looking toward the future,long-term scenarios will likely be shaped by high demand growth beyond the European Union and United States,the increased interest in securing supply,regional and local feedstock constraints,greater mark
78、et complexity,and the partial commoditization of markets such as renewable diesel and SAF.On one hand,feedstock shortages could lead to the adoption of more expensive or capital-intensive production pathways,such as the conversion of lignocellulosic feedstocks.Differences in sustainability criteria
79、across regions may result in the growth of regional markets and product differentiation based on sustainability criteria.On the other hand,the rise of e-fuels combined with a scarcity of the biomass needed to support 2050 net-zero scenarios may lead production to concentrate in the global south,depe
80、nding on the cost of direct air capture and requirements for nonfossil carbon sources.As an alternative,production could be more regional,with sustainability criteria differing by region.The resulting long-term outcome will likely be a mix of global commoditization and local fragmentation,creating o
81、pportunities for a range of feedstock,technology,and fuel combinations.Although the recent IRA package in the United States is intended to meet local demand,it is starting to attract more investment to the region.This activity may be contributing to the widening gap in pricing among regions.10How tr
82、aders can capture value in sustainable fuels How traders can win in sustainable fuelsThe sustainable-fuel market is poised to ramp up significantly in both scale and complexity.Five interdependent areas will shape the market in the coming years(Exhibit 5).To better identify value creation opportunit
83、ies and risk,market participants will need to understand how these areas influence one another and how to keep pace with advances.For example,traders that have a good grasp of the shifting market balances but lack an understanding of the pace of investment in new technology platforms could be at a d
84、isadvantage.Given the number of imbalances expected to arise across product categories,traders must develop or enhance several core capabilities to be competitive.Exhibit 5Companies in the dynamic sustainable-fuel market can derive value by understanding the interdependencies in fve key areas.McKins
85、ey&CompanyShifting market balancesExtraordinarily dynamic marketSubsidy impactCost curve maturityEconomic forcingScale and liquidityPrice-clearing pointTechnology learning curves and breakthroughsEvolving regulationScale and pace of investmentChanging infrastructureMarket interdependencies Opportuni
86、ties and risks 11How traders can capture value in sustainable fuels Build a regulatory intelligence teamThe regulatory landscape varies dramatically among countries and regions and is evolving rapidly.Traders that develop a deep understanding of local market regulations,credit qualifications,future
87、trends,and potential changes will be better able to shape their trading strategies and secure offtakes or supply arrangements.The economics of sustainable fuels such as renewable diesel,which has relatively high production costs,are highly dependent on regulatory incentives and vulnerable to regulat
88、ory uncertainty.For example,the cost of SAF from HEFA-UCO14 in Europe without incentives was recently about$2,200 per metric ton,100 to 150 percent more than the cost of producing fossil-based kerosene today.15 That means users either rely on substantial credits(such as LCFS,Renewable Identification
89、 Numbers,16 Blenders Tax Credit,or the new IRA credit stack in the United States)to break even or customers pay the required price for mandated volumes and pass those costs on to customers(the primary mechanism in the European Union).The outlook for many of these programs could be affected by regula
90、tory changes,which will influence the price of subsidized fuels in the years ahead.For example,multiple IRA credits will expire after several years.The RFS program has also historically been volatile,with the price of RINs often driven by legislative outcomes and market perception of new targets set
91、 by the US Environmental Protection Agency.Develop global trade flow modelsGaining an understanding of global trade flows,while feasible in the current context,will be far 14 Hydroprocessed esters and fatty acids produced from used cooking oil.15 Giulia Squadrin,“European SAF market takes flight,”Ar
92、gus Media Group,April 17,2023;“Jet Fuel Price Monitor,”International Air Transport Association,accessed August 18,2023.16 The US Environmental Protection Agencys Renewable Identification Numbers system is used to enforce and track compliance with the Renewable Fuel Standard program.more difficult in
93、 the coming years given the level of uncertainty,lack of transparency(including the dearth of trade categories for some products),and complexity in the sustainable-fuel market.Optionality is especially critical in this environment.Winning traders will model how fast each commodity will grow and in w
94、hich market it will likely clear(including within-year demand dynamics)as well as anticipate shifts and monitor key changes in logistics capability and access within regions.Enhance origination capabilitiesTraders will need robust origination functions to secure offtakes or supply agreements for spe
95、cific feedstocks and products that offer competitive flow advantages.Successful traders will structure these agreements to balance price,volumetric flexibility,and logistics to enhance optionality and derisk volume flows if market dynamics change.Traders also have opportunities to rent or buy blendi
96、ng facilities,acquire sustainable fuels(including certificates)and fossil fuels,perform blending,and detach sales of molecules and creditsessentially creating a secondary market in a given country for the certificates or“tickets.”Commodity trading organizations attracted to sustainable fuels by thei
97、r dynamic nature and growth could try to anticipate how the market will evolve and identify inconsistencies in pricing across products or over time,offering opportunities for market arbitrages.Successful traders look for areas of greatest transactional volume and seek to build scale around these opp
98、ortunities.Often,they will use scale to continue to capture value when margins collapse as the gaps start to close.12How traders can capture value in sustainable fuels Strengthen the trading teamThe interdependencies of feedstock,fuel,and credit prices within sustainable fuels and across other secto
99、rs are complex.Successful traders will need to model correlations among products and explore arbitrage opportunities across specifications,locations,and timing.For example,as demand grows for second-generation feedstocks for drop-in fuels,the prices of advanced waste and oils could become more volat
100、ile.Through 2021 and part of 2022,for example,soybean oil prices exhibited high volatility in response to intensifying competition from both renewable diesel and FAME producers in the United States amid limited supply from export markets.Feedstocks with limited or scattered availability and competin
101、g demand for alternative uses are at greatest risk of such volatility.The trading team will need to have a broad level of expertise across many different commodities and understand the interplay of those commodities in different markets and products.Specialist trading across high-volume commodities
102、will still exist,but because each market will be influenced by a growing array of factors,traders will need far broader commodity knowledge to be effective.In the coming decades,the sustainable-fuel market will be transformed by increased demand,substantial investment,disparate policies across regio
103、ns,and technological advancements.Despite the many factors that will shape the market,rapid growth and volatility could offer enticing opportunities to capture value.Winning traders will develop new capabilities to track regulatory changes,monitor global trade flows,improve origination,and build out
104、 their trading teams to navigate this complex trading landscape.Copyright 2023 McKinsey&Company.All rights reserved.Tapio Melgin is a partner in McKinseys Helsinki office,Agata Mucha-Geppert is a solution manager in the Warsaw office,Xavier Veillard is a partner in the Paris office,and Andrew Warrell is a partner in the Washington,DC,office.The authors wish to thank Cherry Ding,Mikoaj Krutnik,and Nathan Lash for their contributions to this article.Scan Download PersonalizeFind more content like this on the McKinsey Insights App13How traders can capture value in sustainable fuels