Biofuel Bankrupcies? Shocking!

On Friday, Reuters reported on what everyone paying attention to the alternative fuel market already knew: biofuel markers are succumbing to untenable market conditions:

Soaring corn and soy prices on top of rising construction costs and tight credit markets have pushed about a dozen U.S. biofuel plants to file for bankruptcy protection, experts said.

To this equation you can also add the biblical deluge that the Midwest is currently experiencing and intensifying scrutiny of the biofuel vs. food. End result? A bad situation for biofuels is only going to get worse.

Companies succumbing early include Renova Energy LLC and Ethanex Energy Inc. And while bigger and more diversified players are able to avoid the ax to this point, they're being forced to make adjustments that werre unthinkable a year ago. Case in point: industry bellweather VeraSun will delay the opening of three ethanol plants with a total capacity of 330 million gallons per year.

Hey, Vinod, Make Up Your Mind!

I'm leery of making this blog an ongoing rant against grain-based biofuels such as ethanol. But lately there's been to many things to, well, rant about.

You know Vinod Khosla: started Sun Microsystems, made truckload of money, began VC-ing andm recently, has been making large investments in the biofuel start ups.

A couple of years ago, Mr. Khosla was on the leading endge of a rush of investment into ethanol. Now he might be getting a little defensive about those investments.

VK in October 2006.

"Challenges certainly exist with ethanol, but none are insurmountable, and – with apologies to Al Gore – the convenient truth is that corn ethanol is a crucial first step toward kicking our oil addiction."

VK on May 2008:

"Certain food-based biofuels like biodiesel have always been a bad idea. Others like corn ethanol have served a useful purpose and essentially are obsoleting themselves. We have eight or nine companies producing alternatives to corn ethanol that will be dramatically cheaper. And I just don't see how corn ethanol producers stay in business."

No, it's not a complete sea change. But methinks that one of the fellas behind the Silicon Valley "Green Rush" into new fuels is second guessing a bit...

A.E. (After Ethanol)

So, now what?

As the law of unintended consequences comes into play, the bloom is officially coming off of corn ethanol. A quick recap of some of the big reasons why:

1. Food Riots: Food prices are through the roof all over the world. Food riots in Egypt, Mexico, Haiti, Indonesia, and elsewhere are becoming a regular occurrence. In the US, inflation for food is at its highest rate since the Nixon administration. As a result, diverting a significant portion of the food supply from mouths to fuel tanks is becoming less a philosophical question than an economic one.

2. Net Energy Benefit: Or lack thereof. A growing body of work disputes the net energy benefit of ethanol. Never mind that it can't measure up to gasoline in terms of energy potential. Take into account that it must be trucked (can't distribute it through existing pipelines), and resulting output drops even further.

3. Environmental Disaster: Corn in particular requires intensive amounts of water and pesticides. Record corn prices have driven farmers to plant land that had been set aside for conservation efforts. Any GHG benefit is hotly debated.

4. Political Season Ending: The interminable US primary and presidential election will be drawing to a close in short order, meaning that the naked pandering for corn-belt special interest votes will lessen (though never go away...)

Again: so now what? After all, with the cost of a barrel of oil currently standing at over $118(4/23/08), the need to find alternative sources of energy isn't dissipating. If we assume that corn ethanol is really teetering toward its inevitable collapse, what are the the next options? Who/what are the winners? And losers?

Some initial thoughts:

1. Cellulosic Ethanol Specialists: While still a long way from being practical/affordable, cellulosic ethanol at least removes the corn part of the equation by focusing on sources like waste wood or non-food crops. It's also got some political heft to it, ever since the President's switchgrass reverie. There's also considerable investment capital being spent in this area. Companies to consider: Range Fuels, Verenium, and Iogen.

2. Big Agriculture: Multinationals like ADM and Monsanto are financially positioned to weather the coming corn-ethanol storms, and leverage their growing investments in alternatives like cellulosic ethanol. Buying sprees are probably inevitable.

3. Batteries. Most people agree that the next iteration of the car will not necessarily rely on any one technology (as in gasoline) to power it. There is no silver bullet. One possible exception here is advanced batteries. Each of the fueling sources are enhanced through effective 'range extension devices' (as burdensome a way of saying batteries as can be though of.) Applicability of lithium-ion, advanced lead acid, and other TBD battery technologies will most likely have near universal applicability. Some companies to consider: A123 Systems, EnerDel, Firefly, and Mobius Power (maybe...)

4. Hydrogen: I'm certainly no big fan of hydrogen. But, like it or not, investment $$$ still heads in this direction. It's not likely that this stream of money will expand greatly in the near term (given other priorities), but it will continue.

What to Expect in 2008

This is the crystal ball time of year in 'mainstream' media, so I don't see why this blog should be any different. Here's some things to consider / look out for in 2008, a year that could be a watershed for development of new fuels and efficiency technologies for the automobile.

People Will Continue to Throw Money at Corn Ethanol
And no one will be able to give good reason why. I've made no secret of my almost complete and utter disdain for corn-based ethanol (comparatively low energy output, water absorption, infrastructure challenges, diversion of food supply, etc.) In addition to these much discussed shortcomings, now we learn that farmers seeking to benefit from the Corn Boom of the Mid-Aughts have dumped so much nitrogen-based fertilizer into the Mississippi River, it's killed off virtually all species in a 7,900 square mile area in the Gulf of Mexico, a place fetchingly called the "Dead Zone".

So with all that going against corn ethanol, of course we can expect huge increases in spending in this area. Why? Three things: politics, politics, and politics. It's an election year, so pandering to Midwest farm states is essential. The recently passed Energy Bill (excuse me, the ‘‘Energy
Independence and Security Act of 2007’’) dramatically increases funding on ethanol production and research, leading elation on the part of upstart suppliers like VeraSun.

Order of the Day (er, Year): Mergers and Acquisitions
Maybe you saw the news about VeraSun acquiring USBioenergy for stock. The resulting company will have enough (planned) capacity to put sector titan Archer Daniels-Midland in the number 2 spot.

Oh, we're just getting started. There's a glut of small, cooperatively owned ethanol producers throughout the Midwest (Iowa alone has 29 plants up and running with another 18 under development.) Next, the ethanol craze has produced a high demand for corn , thereby dramatically increasing costs for these small producers. Lastly, the federal government has legislated a huge jump in biofuel capacity, making the big suppliers eager to jockey for position.

The result? A whole bunch of small suppliers are going to turn the keys over to the big boys. The shakeout that follows will benefit the usual suspects like ADM and Monsanto. Smaller winners maybe VerSun, Range Fuels, Pacific Ethanol, and some others.

While ethanol company activity will get the lion's share of attention, M&A activity will extend to other alternative sectors as well. A precursor could be Ballard's sale of their automotive fuel cell business to Daimler and Ford.

OK, this is getting too long. I'll break it into separate posts. More later (I've still got 9 days before the New Year...)

Range Fuels Featured in NYT

Nice article on the front page of the NYT business section about Range Fuels today. While Range isn't the only biomass-focused company to be mentioned (Bluefire, Virent Energy Systems, and Dynamotive Energy Systems all receive nods), Range gets the lion's share of the attention due to the ground breaking on their Georgia facility.

Not much new information explored or revealed that we didn't already know (see earlier Range posts here and here.) That said, the groundbreaking and ensuing media attention point to a company that, while still in its infancy, appears to have its act together.

Indonesia Becoming Hot Ethanol Producer

By now, everyone is more or less familiar with Brazil's position as a leading supplier of sugar-based ethanol. The country has leveraged its immense sugar cane production into a fuel economy that's been in place since 1975.

Not surprisingly, that's recently caused a couple of names to come calling. The President was in Brazil talking up the possibility of an ethanol pact last March, with an eye undoubtedly looking to the possibility of creating the biofuel equivalent of OPEC.

On the heels of this visit, agribusiness giant Arthur Daniels Midland (ADM) announced it was getting into Brazil's sugar can market (previously blogged here) either through development or acquisition. Given the weakness of the current corn ethanol market in the US (high corn prices, abundance of small ethanol producers), accessing Brazil's sugar cane crop makes sense for a long term strategy to guard against price fluctuations.

But even with all that sugarcane and technical expertise, Brazil cannot come close to meeting US energy needs. Which leads us to .... Indonesia.

Shortly after US-Brazil ethanol pact, Brazil entered into a relationship with the Indonesian government to provide technical expertise in developing and expanding Indonesia's sugarcane industry. Indonesia already has about 5.5 million acres slated for sugarcane ethanol production, and several Indonesian companies are looking to double (or triple) their holdings. The Indonesian government is also preparing to spend over $1 billion on subsidies towards local farmers, and has already signed agreements with a number of companies to pump another $12 billion into the ethanol industry.

Given this aggressive growth position, Brazil may soon find that it is surpassed by its student...

Range Fuels Gets First CFO

Fresh on the heels of Telsa's management shakeup comes news that cellulosic ethanol producer Range Fuels has named Dan Hannon to be its first CFO.

Hannon is an experienced energy industry insider, having come to Range from Reliant Energy where he was Sr VP of Finance and Corporate Development. He played a key role in Reliant's IPO, and will undoubtedly be charged with doing the same for Khosla Ventures-backed Range. Prior to Reliant, Hannon spent 10 years with Exxon Mobile in various capacities.

Hannon's ability to transition from major energy companies to a start-up environment will undoubtedly be a key to his success there. Still, coming shortly after the company got the go ahead to build its plant in Georgia, his addition would seem to be a further strengthening of Range's market position.

Peel Power: Citrus Power LLC and FPL Strike Ethanol Pact

You remember Mr. Fusion, right? At the end of the first Back to the Future movie, Doc Brown re-appears and takes Marty McFly to the future. Before they can leave, however, he has to fuel up the modified DeLorean by dropping a banana peel into the Mr Fusion he's installed on the car. Presumably, the organic matter in the peel provides the energy required for time travel (1.21 gigawatts if memory serves).

Well, apparently the folks at Citrus Power, LLC are fans of the trilogy. Or at least a derivative of it.

As the name would imply, Florida-based Citrus Power is focusing on using discarded citrus peel as the feedstock for ethanol conversion. On the surface it makes wonderful sense. In 2006, Florida produced 287 million boxes of citrus. The juicing process produced approximately 5 million tons of wet waste and 1.25 million tons of dry waste. This would put potential production at around 120 million gallons of ethanol per year.

The state of Florida, anxious to create new industrial segment based on the region's biggest crop, recently provided Citrus Power with a $2.5 million grant through the state's Department of Energy. ( The federal DoE has also funded research in the area, providing $134,000 to Renewable Spirits to build out their citrus-to-fuel technology.)

Citrus Power also has a true believer, apparently, in FPL Energy, a subsidiary of FPL Group (NYSE:FPL). FPL recently signed a letter of intent with Citrus to develop a commercial scale citrus peel-to-ethanol plant. They are targeting an output of 4 million gallons of fuel.

I love the idea of closed loop systems: the Tyson-Syntroleum partnership I wrote about here is another example. I love non-food source systems as well, as you avoid the ethical dilemma of re-routing food to fuel.

Citrus Power, however, leaves me wanting. Management team bios are long on generalities and short on detailed experience. The founder is a former computer engineer who previously worked at Renewable Spirits (which led to a recently resolved lawsuit). They are 5 employees.

So in terms of long term strategy, the best bet would seem to be holding on until a larger player comes along to purchase Citrus Power as part of an industry consolidation play. Otherwise, potential investors may want to head back to the future to recoup their investments.

China Says No to Corn Based Ethanol

According to the China Daily, China will eliminate corn as a feedstock for biofuels within the next 5 years. In corn's place, Chinese fuel producers will use sorghum, cassava and sweet potato, all higher yield plants that are not a staple food in the Chinese diet. From the article:

Part of the government’s efforts to develop bio-fuel without harming general food supply and security, the shift will ensure a healthy supply of corn both as food and fodder.

No big surprise, right? The rapidly growing and increasingly financially capable Chinese population needs to be fed, so diverting corn from food and fodder to fuel is by itself a risky gamble.

Add to this that last year China began importing US corn for the first time in 22 years, the result of tightening domestic supplies of grain. With escalating competition between the US and China almost assuredly the script that we'll all be reading from for the foreseeable future, there's no way China is going to put even a microscopic portion of their energy security in US hands and fields.

Right or wrong, the US market for corn-based ethanol certainly has a lot of room to grow domestically. There are too many politicians and investors right now with too much to lose and gain (respectively) but not allowing that to happen.

But for those who get this dreamy look in their eyes envisioning a OPEC-style corn ethanol cartel driven by the US, I have bad news: one of your biggest potential customers is missing.

Diversa + Celunol = Verenium

Peanut Butter and Jelly. Gin and tonic. Laverne and Shirley. All examples of things that are ho-hum on their own but exceptional when put together.

Perhaps it's time to add Diversa and Celunol to the list.

Last month the two companies completed their merger and launched the new company as Verenium (VRNM). On the surface, the move seems to be a smart combination of compatible expertise: Massachusetts-based Celunol has been working on non-feedstock (cellulostic) sources of ethanol. Over on the Left Coast, California-based Diversa's focus is on producing enzymes designed to speed various industrial reactions.

The primary challenge with cellulostic ethanol, of course, is that the cell walls of agricultural waste (the target source for Celunol) are notoriously tough to break down. The hope is that Diversa's patented enzymes will speed this process. By acquiring Celunol's expertise in biofuel systems, Diversa (now Verenium) immediately becomes a potential leader in this burgeoning industry. A pilot facility in Jennings, LA will shortly be joined by a demonstration scale facility.

On the heels of the merger being finalized, Verenium confirmed that it is a member of a team led by Oak Ridge National Laboratory that won a bid from the DoE for a $125 million research center that will seek new ways to produce biofuels. As part of the group, Verenium will receive $4.6 million over 5 years "to discover and develop new enzymes and enzyme cocktails to break down various types of biomass."

The US federal government is a big believer in this market, and continues to advocate for more renewable fuels. The Senate recently passed a bill that would increase the 7.5-billion-gallon renewable fuel standard to 36 billion gallons by 2022 . Verenium is well positioned to grab a portion of this potentially $70 billion market.

It's not all milk and honey (yet another good combination...) Other companies are moving quickly in this space as well (Range Fuels and Iogen, to name two), so Verenium will have to move quickly to smooth out any rough edges of the merger and capitalize on the promise of their combined expertise.

Still, if they execute, Verenium will undoubtedly produce an abundance of dollars and cents (ok, I know, enough already...)

Range Fuels Gets Go Ahead from Georgia

The state of Georgia has permitted start-up Range Fuels to begin construction on a cellulostic ethanol plant capable of up to 100 million gallons per year. The plant should be up and running in 2008 (excluding the almost certain delays).

The plant (really Phase 1 in a larger development process) will initially be capable of 20 million gallons. The primary stock will be wood waste from Georgia's pine forests, but conversion is not limited to wood. Range claims it can gasify biomass waste from other sources as well, including agricultural wastes, grasses, cornstalks, hog manure, municipal garbage, sawdust and paper pulp. Catalysts then convert the resulting syngas to ethanol.

Certainly, creating a viable ethanol product from a diverse source pool of is more compelling than the typical corn-based approach. It provides a certain level of immunity to the vagaries of a corn harvest, specifically the inevitable boom-bust cycles that will wreak havoc on ethanol prices. A diversified source supply allows the Range product to covert the most cost-effective supply of materials.

Range is a bit of darling in the ethanol space (earlier post), and this development certainly won't hurt. Range is backed primarily by Khosla Ventures, which has placed big bets in ethanol. Add in $76 million from the Dept of Energy to build this pilot plant, and things look fairly rosy.

Ethanol from Corn Continues to Underwhelm

I've been accused in the past of being a bit of an ethanol basher. That's not true. Ethanol has some potential, provided it's not made from corn.

It's the corn thing that gives me pause. The ethics involved with moving food to fuel, the global impact on rising corn demand on food prices, and questionable energy capability of the kernel make corn (at least in my humble opinion) a less than thrilling alternative fuel source.

Now add to the equation the fact that the price of corn and crude oil have merged. Good article in the Economist on this topic recently. It references Jeff Currie of Goldman Sachs, opinion that planting more corn will not reduce its price:

Since high oil prices and generous government subsidies ensure that biofuels are profitable, any extra grain will be used to make more of the stuff. That will not dent the oil price, since the volumes remain tiny compared with global oil consumption. Instead, the price of biofuels has risen to that of petrol, and the price of corn and crude oil, the main feedstocks for the two, have converged. For grain prices to fall, Mr Currie argues, either governments must pull the plug on biofuels programmes, or the oil price must fall.

Now, is this going to stop people from investing in a corn-based ethanol future? Not a chance. Too much lobbying in the US from agribusiness and financial groups who have staked large bets on corn for it to go away. But as people realize that the performance of corn is underwhelming and does not compete on price, opportunities will arise for other alternatives.

ADM goes to Brazil

I usually try to focus on new companies in this blog. It's where the greatest amount of innovation is taking place, and (frankly) I find the topic more interesting.

But when global agriculture heavyweight ADM says it's headed to Brazil to enter the sugar cane market, it's worth taking notice. According to the Wall Street Journal, the company is exploring different entry strategies, from greenfield development to acquisitions. This could include the outright purchase of Cosan, Brazil's largest sugar and ethanol producer (market capitalization of about ~ $3.5 billion USD). That's about all ADM executives are saying at this point.

If, as expected, ADM uses Brazil investments to serve as a base for exports to the US, has the potential to radically reshape the nascent ethanol market (which in the US is so heavily linked to corn.) That, and it's going to make everyone who has invested so heavily into corn-based ethanol a little nervous.

Iogen: Cellulosic ethanol from the Great White North

Cellulosic ethanol pioneer Iogen is currently converting 40 tons of wheat straw per day into ethanol at a demonstration facility, prompting this quote from Elizabeth May, Executive Director of the Sierra Club Canada:

"Iogen has figured out how to weave gold out of straw."

Rumpelstiltskin metaphors aside, it's a statement that's only marginally hyperbolic. To whit, consider the company's recent investors (all figures in USD):

• Goldman Sachs: $30 million
  
• Petro Canada: $24.7 million
• Royal Dutch Shell: $46 million

The funding will be used to expand the company's commercialization of their technology. Interesting to note: this does NOT include building more facilities. Rather, the company is going to concentrate on what it knows best: licensing their technology and patented enzymes to ethanol producers. Given the explosion in plant construction in the American Midwest, there's going to be no shortage of potential customers.

Established in 1974, Iogen has an history in developing enzymes for commercial use. In addition to fuels, the company addresses enzymatic needs in sectors including animal feeds , textiles , and pulp and paper business. The company first began working with cellulostic ethanol in the 90's, and now it appears the work is paying off.

Strong financial backing from both institutional and industry investors, broad industry expertise and experience, and a low overhead business model combine to suggest that Iogen will continue to play Rumpelstiltskin in the alternative fuel markets.

Ethanol: Ripples of Corn

The Center for Agricultural and Rural Development @ Iowa State University is forecasting a long term increase in corn prices. Here's their full report.

Well, no surprise there. The explosion in ethanol plant building and record corn prices have been reported on widely. A couple of interesting points, though:

1. Sacrificing Soybeans: To keep up with increased ethanol demand, US farmers are expected to grow their acreage to 94 million acres. Farmers will most likely replace their soybeans crops with corn to do so. The irony, of course, is that the soybean is a more efficient feed stock source of biofuel at a rate of about 3:1. But don't get me started on this, as I've already commented on it here and here.
2. Ripple Effect: No surprise with all that corn headed to fuel, other parts of the economy will be significantly impacted. Inevitable higher feed costs for livestock would increase US food prices by an estimated 1.1% over baseline. Specifically, meat and poultry would jump by 4% and eggs by 8%.
   
3. Cellulostic Fantasy: The much ballyhooed cellulostic ethanol is essential dismissed out of hand for the simple reason that the authors do not envision economic feasibility in the long term for farmers. Too expensive to haul corn stover over long distances to a commercial production facilities, apparently.
   

Admittedly, much of the report reads like a statement of the obvious, but it's worth a read.

Ethanol: Khosla is at it again

Khosla Ventures has staked claim to a leadership position among VCs active in the emerging fuels, particularly ethanol. (Not this is any big secret: see founder Vinod Khosla's article in Wired.)

To reinforce the point, Khosla just put $3.5 million into LanzaTech, a New Zealand-based developer of a process that uses fermenting bacteria to convert carbon monoxide into ethanol. From the press release:

"The technology could produce 50 billion gallons of ethanol from the world’s steel mills alone. The technology will also contribute to the production of biofuels from cellulosic feedstocks, as it can convert syngas—comprising hydrogen, carbon monoxide, and carbon dioxide—into ethanol."

The Khosla money will be used for several purposes, most interesting of which is production of a pilot production facility.

Frankly, it's encouraging to see funding support for ethanol production in areas other than corn, which is of questionable value (see earlier post). The LanzaTech solution has a nice closed loop feel to it, and appears to have an experienced group working on the technology (including the former senior scientist from Genentech.)

Should be an interesting one to watch.

Ethanol: What Falling Corn Sounds Like

Scratch the shiny surface of the ethanol "boom", and you get something just beneath that's far less attractive. Don't believe me? Ask Goldman Sachs analyst Arjun N. Murti: he just released a report lowering his stance on biofuels from "Neutral" to "Cautious".

(You might remember Mr. Murti's assertion in the summer of 2005 that we were headed for a "super-spike" in oil prices, potentially as high as $105. At the time oil was trading at ~$45/barrel, and would soon reach over $70 a barrel. No, it didn't reach the lofty heights he predicted, but that's a pretty significant spike nonetheless.)

Why the caution? Pretty simple: dropping ethanol prices and record prices for corn. Not exactly a recipe for success.

The impact of this new caution was pretty quick, and probably best exemplified by VeraSun Energy (VSE). The company announced it is building a sixth processing plant that will raise the company's total output capability to 670 million gallons. Their shares responded by losing 3.6% of their value.

It's pretty apparent , at least to those outside the Midwest, that the future of ethanol does not lie with corn but instead with other, non-feedstock sources. Hopefully the rush by those seeking to curry political favor from the Farm Belt will not trample innovation in developing ethanol from other, technically superior sources.

Ethanol: Range Fuels

Despite all its promise, one prominent concern with ethanol is that it diverts food stocks into fuels stocks. The results of this can be seen in the recent skyrocket in corn prices (about 70% in the last 6 months) resulting from increased speculation in ethanol opportunities.

(Perhaps foreshadowing political issues to come, major protests in Mexico about increases in corn tortilla prices are attributed to renewed American interest in ethanol.)

One possible solution is deriving ethanol from non-corn sources. Privately held Range Fuels is currently perfecting this process, concentrating not on corn but instead on wood chips, plant cellulose, and other "waste" plant sources. The potential benefits are substantial, due primarily to the ability to derive ethanol from the entire plant, not just corn grain.

The Department of Energy apparently sees the potential of Range as well. The DoE recently awarded a grant worth up to $76 million to Range to capitalize construction of a commercial scale production plant in Georgia.

Range is funded primarily by Kholsa Ventures, which has made several large investments in alternative energy start ups.