Reposted with permission from Rocky Mountain Institute.
For the better part of a decade we’ve heard how imminent plants would soon yield significant volumes of advanced, non-food biofuel. So far, almost none of this production has been realized.
Here is a small sample of the industry’s tribulations: A BC International plant in Louisiana was supposed to produce commercial volumes of non-food biofuel by the early 2000s, but after several changes of name, ownership, and/or technology, the plant never did. logen, backed by Shell via joint venture, had intended to produce at commercial scale five years ago, but plans seem to have fully stalled, with layoffs in April 2012 and cancellation of a new plant in Manitoba. And Coskata, a Khosla Ventures company, was conditionally granted a $250 million USDA loan guarantee in early 2011, only to give up in 2012 on cellulosic fuel as a feedstock (abandoning the guarantee) and instead focus on natural gas.
As a result of the lack of advanced, non-food biofuel production, the EPA has dramatically revised downward its cellulosic biofuel blending requirement for oil companies under the current Renewable Fuel Standard (RFS2). Those annual reductions have grown from 95 percent in 2010 to 98.3 percent in 2012, when the EPA cut a 500MMgal requirement down to just 8.65MMgal. What’s more, even these reduced volumes haven’t always materialized. For instance, between July 2010 and October 2011, no volume of cellulosic biofuel was sold into the general market.
But there are signs that 2013 will be the year that the advanced, non-food biofuel spigot finally opens, with several plants nearly built or already producing initial product.
Non-Food Biofuels Quietly Already Here
Despite sparse media coverage, significant volumes of non-food biofuels have been produced in the U.S. for a couple of years now, albeit under the general “advanced biofuel” RFS2 category, not the “cellulosic biofuel” RFS2 subcategory. Some of these RFS2 “advanced biofuel” feedstocks are food-based, such as soy for biodiesel, and in lower volume, sorghum for ethanol. However, many biodiesel producers are increasingly utilizing non-food feedstocks such as low-grade corn oil (a secondary product from ethanol manufacturing), cooking waste oils, and non-food animal fat/rendering.
Renewable Energy Group, the largest U.S. biodiesel manufacturer, produced 83 percent of its biodiesel —about 125 million gallons (nearly a day’s worth of all diesel fuel consumed in the U.S.)—from these non-food sources in 2011. Manufacturers of renewable diesel, which yields different fuel molecules than biodiesel, have also targeted these feedstocks, with commercial volume production ongoing in Europe as well as forthcoming from plants under construction in the U.S.
But these oily feedstock volumes pale in comparison to the potential feedstock volumes most “advanced” non-food biofuel companies are targeting; namely algae, cellulosic wastes and crops, and carbon-based garbage.
Technology Not the Only Challenge
Most advanced biofuel start-ups and corporate research teams have tens to a few hundred million dollars each in funding to develop a technology platform and production facility. It is no small tasks for these firms to produce a product that costs close to, or less, per gallon than the commodity products of gasoline, diesel, or jet fuel. These fossil fuels have benefited from a century and a half of research, development, and demonstration — RD&D undoubtedly totaling well into the trillions of present value dollars.
But the headwinds have been more than technical. The timing of 2008’s economic downturn — the largest since the Great Depression — did not help the burgeoning advanced, non-food biofuels industry. Crude oil commodity prices plummeted for the first year of the recession, weakening financier interest in competing platforms, and in fact crude (WTI price here in the U.S.) has still not exceeded 80 percent of its 2008 pre-crash high. Coupled with the downturn, the always-challenging “valley of death” capital jump required to go from demo to commercial scale was doubly damaging.
Add to these headwinds at least two more: the EPA’s failure to hold oil companies to RFS2 cellulosic ethanol volume totals, and the continually moving target of environmentalists.
The EPA’s aforementioned decision to lower blending limits because the volume wasn’t available undermines the purpose of the limits. Why would oil companies contribute plant construction capital to meet a mandate if the EPA continually minimizes the mandate by lowering the blending requirement?
Meanwhile, the mainstream environmental movement continues to shift its perspective on biofuels. What began as “all that is ‘bio’ is good” (more-or-less pre-2007) became “all that is non-food is good” (~2007 to ~2010) to most recently, “the devil is in the details,” with concerns around extended land use and carbon soil sequestration issues of dedicated energy crops, the degree to which waste cellulosics and their nutrients are removed from crop lands, the effects of garbage converted to fuel instead of recycling, and other matters. While continued scientific inquiry is good, the expectation that today’s learnings should change regulatory programs immediately — providing little to no certainty for investors nor time to fully vet the new scientific conclusions — can be disastrous to financing.
Light at the End of the Tunnel: Survivors May Soon Be Thrivers
Yet, Kior, Abengoa, Poet, and in Europe, Gruppo Mossi & Ghisolfi (M&G), are some of the companies that finally possess sufficient capital and have proven the ability and will to turn this capital into steel in the ground.
Kior, buoyed by a DOE loan guarantee, cash from a 2011 IPO, and the revenue security of sales contracts to high-credit quality buyers Hunt Refining, FedEx, and a Chevron-Weyerhaeuser JV, built an 11 million gal per year facility for renewable crude from woody biomass in Mississippi. Initial production recently commenced with intentions to ship commercial product this year.
Abengoa’s capital sufficiency story is similar to that of Kior — combining cash on balance sheet and a DOE loan guarantee to push through construction of a commercial-scale facility. Construction began on the company’s 23 million gal per year cellulosic ethanol plant in mid-2011. Feedstock will come from a list of potential cellulosic wastes from food crops such as sorghum, wheat, and corn, as well as prairie grasses and wood wastes.
Poet — already a top producer of standard ethanol — had enough capital via a partnership with biotech leader DSM and its own balance sheet to spurn a DOE loan guarantee and build a 25 million gal per year cellulosic ethanol facility in Iowa, which began construction ten months ago. Feedstock will be corn crop residue such as cobs, leaves, husks, and stalks, with production to begin this year.
M&G, like Poet, used its own capital and partner funds (two arms of the U.S. private equity firm TPG) for a 15–20 million gal per year facility in Italy, which was due to begin production at the end of last year. These four companies are not alone in the race to near-term high production. For example, Ineos Bio already began production at an 8 million gal per year cellulosic ethanol facility in Florida. Additionally, several of the aforementioned companies already have financing lined up for their second plant.
After nearly a decade of little more than a trickle of test volume, steel in the ground is finally here at commercial scale to produce meaningful volumes of advanced, non-food biofuel. While steel in the ground doesn’t ensure continuous successful production — witness Range Fuels’ plant closure and bankruptcy—it’s unlikely the half-dozen or so new production plants coming on line this year will face the same level of challenge. Even if they do, several of them appear to have access to deeper balance sheets to be able to weather inevitable plant start-up challenges.