Chapter 15: A Monte Carlo-based Methodology for Valuing Refineries Producing Aviation Biofuel

An important component in the commercialization of aviation biofuels is understanding how uncertain market and policy conditions could affect the long-term economics of biorefineries. This chapter describes a methodology for analysing capital budgeting decisions and valuation under uncertainty for such investments. As such, the methodology can be used as a decision making tool to aid prospective investors in determining under what market conditions a profitable biorefinery could be constructed. A hydroprocessing refinery producing aviation-grade biofuel and renewable diesel was selected for assessment, as it represents a commercially available technology with well-understood capital and operating costs. Stochastic processes were constructed to evaluate a prospective project under “real world” conditions, and the distribution of net present values (NPVs) using a discounted cash flow model was used to determine the profitability of such a project over its economic life. Our analysis differs from previous studies in three ways: (1) it includes price uncertainty and correlation between refinery inputs and products; (2) it includes the uncertainty surrounding government mandates and price supports (e.g., tax credits and Renewable Identification Number (RIN) credits); and (3) it utilizes Monte Carlo simulation to determine NPV ranges. Twenty million years of simulations were run and the model confirmed that feedstock costs are the most sensitive parameter in the analysis. In addition, price support policies such as RINs and the Biodiesel Blender Tax Credit are currently necessary to reduce the uncertainty of profitability to commercially acceptable levels.