Wood Biofuels, Venture Capital and Skin Moisturizers

A fundamental mismatch exists between clean energy projects and venture capital funds.  This conclusion, in a Harvard Business School working paper “Venture Capital Investment in the Clean Energy Sector” by Shikhar Ghosh and Ramana Nanda, emphasized investor expectations of extraordinary financial returns from successful projects in order to balance out numerous failed projects.  The problem with energy projects is that they can take decades to succeed, require enormous capital resources and, in the case of liquid biofuels, compete in an efficient commodity market (i.e. oil).  This working paper was published in 2010 and cited by David Rotman in Technology Review.

In 2011, Forisk and the Schiamberg Group published a study – Transportation Fuels from Wood: Investment and Market Implications – that evaluated 36 cellulosic biofuel projects and estimated commercialization timelines for 12 technology approaches in the United States.  Projects producing drop-in fuels appeared to have superior potential for investors and timber markets.   While we found major technical hurdles that would likely disrupt commercialization, we identified promising projects and strategies including, for example, gasification technology (for diesel and/or jet fuel) and catalytic fast pyrolysis.

Now, in 2012, recent announcements reaffirm the relevance and implications of these previous studies:

• U.S. cellulosic producers will massively miss EPA projections and mandates dictated by the 2007 Renewable Fuel Standard.  As noted by Mike Orcutt in “U.S. Will be Hard-Pressed to Meet its Biofuel Mandate” (May 9, 2012), “Congress [in 2007] vastly overestimated the government’s ability to create a market for cellulosic biofuels.”
• Biofuel projects continue to retool.  Forisk’s 2011 study emphasized the advantages to investors from firms with flexible end product strategies focused on drop-in fuels and other chemical products.  Amyris, a firm that applies synthetic biology technology to produce alternatives to conventional chemical and petroleum products, announced in their Q1 2012 earnings call that they are getting out of the biofuels business.  Rather, the firm will focus on higher-valued products, such as skin moisturizer.

“Transportation Fuels from Wood” is now available at 60% off the original publication price.  For more information, please click here.

Buddha and Wood Bioenergy

The Buddha tells the private equity fund he can fulfill one of its wishes.  A managing director asks, “could you simplify the tax code?”  Seeing the Buddha frown in silence, the person suggests another wish,  “could you make our cellulosic ethanol project work at commercial scale?”  After a long sigh, the Buddha says, “let’s talk about capital gains taxes.”

Last week, the New York Times published a take-down of government biofuel mandates (“A Fine for not Using a Biofuel that Doesn’t Exist,” 1/9/12).  For 2011, gasoline and diesel suppliers will pay ~$6.8 million in penalties because they failed to mix 6.6 million gallons of cellulosic biofuel into their motor fuels as required by law.  One problem: we can’t produce cellulosic ethanol at commercial scale.  So we’re fining firms for noncompliance when compliance remains unfeasible. (Say that five times fast….)

The article reaffirms from multiple sources the conclusion of our 2011 wood biofuels study:  substantial technical hurdles remain.  Even the executive director of the Advanced Biofuels Association acknowledged in the article that wood-based biofuel “was not yet ready for commercial introduction.”

Last month, I summarized the current state of cellulosic ethanol following a similar skinning by the Wall Street Journal (click here for the post and article link).   In the end, the articles and our research spotlight the random, distorting impact of these targets and incentives.  While support and incentives for bench research helps turn the machinery of scientific advancement, mandates based on unproven technologies encourages deceit by market participants and may suppress more promising ideas and technologies.

Wood Bioenergy: Fun House Mirrors and Fact Checking Cellulosic Ethanol

This month I met with the Lt. Governor of a state with a substantive forest industry.  The discussion centered on ways to support forest owners, wood markets and job creating projects.  Then the conversation turned to the potential of wood-based liquid biofuels – such as cellulosic ethanol – and the Lt. Governor turned to me and asked, “Mr. Researcher, what would YOU do?”

After accepting the fact that we weren’t actually on a first name basis, I replied, “I would make it easy for users of wood to operate in your state without betting on any specific technology.”

The Lt. Governor liked the first half of the answer, but not the second half.  The fear of “missing out” on a “wood biofuels boon” has distorted policymaker views of wood market realities.  The sexy, explosive potential of reorienting US transportation fuels to rely on renewable “just-add-sun-and-water” raw materials has made fact-based discussions about the sector akin to strolling through a carnival fun house.

I remember, as a twelve-year old, looking from mirror to mirror at a county fair.  Tall and thin in this mirror; short and stumpy in that mirror.  We use mirrors both to show us what we want to see, and what we don’t.  And when we see what we don’t want, we either change our view, or change mirrors.

When it comes to liquid biofuels and cellulosic ethanol, multiple mirrors continue to reflect a consistent set of facts.  Our team has three years of research, a comprehensive US liquid biofuels study and ongoing market evidence that cellulosic ethanol faces the thorniest of practical challenges in an increasingly difficult context.  So, what are the facts?

• No cellulosic ethanol facilities operate at commercial scale.  Wood Bioenergy US tracks every announced and operating wood-using bioenergy project in the continental United States.  As of December 7, 2011, this represented 456 projects.  Of these, 39 are liquid fuel projects.  How many are operating at commercial scale?  Zero.
• Cellulosic ethanol faces unsolved technology hurdles.  The lack of wood biofuels projects is consistent with the results of our study “Transportation Fuels from Wood: Investment and Market Implications of Current Projects and Technologies.”  For 36 cellulosic biofuel projects, we estimated an 11 year lag between when the projects expect to operate and when our technology analysis indicates the technology could overcome hurdles and be viable at commercial scale.
• Government subsidies and EPA mandates failed.  The Wall Street Journal (“The Cellulosic Ethanol Debacle,” 12/14/11) recently detailed the failure of subsidies and mandates to spur progress and, by implication, facilitate deceit and unrealistic projections.

Finally, the context for these projects has become increasing stark.  In a US market environment where gasoline use has been declining this year and where supplies of natural gas have been increasing, the political urgency and investment potential of these projects dissipate.

National Research Council Affirms Results of Forisk Liquid Biofuels Study

This week, the National Research Council (NRC), which operates as part of the US Academy of Sciences to advise Congress, published a study concluding that the United States will likely fail to satisfy its long-term Renewable Fuel Standards (RFS2) mandate for producing advanced biofuels from trees, grasses and crop waste.  In particular, the study cites the technological challenges of producing “next generation” ethanol.

The NRC research affirms the results of the study Forisk published in May 2011 with the Schiamberg Group which evaluated the wood-based transportation fuel sector in the United States.  While wood pellet and wood-to-electricity projects use established technologies proven at commercial scale, wood biofuel projects continue to face major technological, feedstock and policy challenges.  That said, there is a wide range of technologies and business models in development in the wood transportation fuels sector.

The study – Transportation Fuels from Wood: Investment and Market Implications of Current Projects and Technologies – includes the status of 36 cellulosic biofuel projects and estimated commercialization timelines for 12 technology approaches. While the NRC study addresses policy and sector-wide analysis and implications, the Forisk study emphasizes bioenergy and timberland investor implications by firm and project in the US.  Projects producing drop-in fuels appear to have superior potential for investors.   However, major technical hurdles will likely disrupt commercialization for most technologies under development.

While Forisk’s study finds an 11 year gap on average between estimated technology viability and firm announcements, it highlights promising approaches.   This includes the gasification technology under development by firms like Rentech and ClearFuels for diesel and/or jet fuel. INEOS New Planet, Rappaport Energy and Coskata, and Kior are pursuing innovative approaches using gasification and microbes, and catalytic fast pyrolysis.

For more information, please click here.

Forisk Adds Cogeneration, Thermal Facilities and Urban Wood Use to Tracking of Bioenergy Sector

This year, Amanda Lang, our Director of Wood Bioenergy Research, has led efforts to enhance the investment-relevant insights from Wood Bioenergy US, the Forisk publication that tracks all announced and operating wood-using bioenergy projects in the US.  As of the September 2011 issue, key additions include:

1. Forisk separated cogeneration and thermal project types.  Previously, these projects were included in the electricity category.
2. Urban wood was added as a feedstock type alongside forest materials and mill residues.

Wood Bioenergy US now tracks 467 projects that could consume 134.1 million tons of wood per year by 2021.  However, Forisk screening indicates 48% of this demand fails basic tests of investment and operational viability. Forisk’s improvements help timberland investors, energy developers and forest industry managers to assess project viability based on technology and project development milestones. [Click here for the free September summary.]

Cogeneration is the simultaneous production of electricity and useful heat from the same fuel source. Sixty projects in the database qualify as cogeneration and could consume 15 million green tons of wood by 2021. Twenty small-scale thermal projects, that generate steam or heat, could consume less than one million green tons per year. Urban wood feedstocks represent 8% of the 134.1 million green tons of wood that could be consumed by bioenergy projects by 2021.

“We want to realistically capture wood biomass market development,” said Amanda Lang. “These changes make our bioenergy project tracking more accurate. For example, cogeneration projects generate not only electricity, but also heat energy that can be used to power manufacturing facilities or heat buildings. The economics and efficiencies of cogeneration projects differ from pure electricity plants; by separating cogeneration projects, we can more accurately describe the bioenergy end-markets for wood.”

Forisk now tracks 3,196 wood-using locations in the United States, providing the most current, ongoing analysis of US wood demand and forest industry health available.  Click here for more information.

Wood Bioenergy: Project Count Up, but Viable Volumes Decline in June

The June issue of Wood Bioenergy US indicates that, as of June 28, 2011:

• The continental US has 457 wood-consuming, announced and operating bioenergy projects (up from 453 in May).
• In total, these projects represent potential, incremental wood use of 130.5 million green tons/year by 2021.
• Based on Forisk analysis, projects representing only 68.7 million tons/year pass basic viability screening.

These results represent a net decline from the estimated, viable wood consumption of 71.1 million tons/year reported in the May issue.  Eight fewer projects passed Forisk’s screening methodology in June than in May.  The biggest factor: we modified the status screen to exclude projects that are on hold or shut down, even if the project uses a proven technology and has made significant progress towards operability. “On hold” indicates that a project is at a standstill for an unspecified amount of time.  Click here to download the complete free summary.

#

Again, the project-by-project results confirmed analysis of the US biofuels market published last month by Forisk Consulting and the Schiamberg Group.  KiOR’s lackluster IPO  and falling oil prices harden doubts about the short-term commercial prospects of investments in the wood-based liquid transportation fuel sector in the continental United States. To learn more about the study, click here.

KiOR’s IPO Fizzles; Forisk Analysis “Nailed It!”

Last month, our team published a project-by-project study of the US biofuels sector called “Transportation Fuels from Wood: Investment and Market Implications of Current Projects and Technologies.”  One of the 36 projects evaluated in the study is KiOR, which went public on Friday (June 24, 2011) at $15 per share, nearly 30% below the top of the expected range.  The IPO proved uneventful, with shares closing where they started at $15.

An investor and buyer of our research contacted me over the weekend.  “You guys nailed it!” he said.

So far, that appears to be the case.  Our technology assessment of KiOR indicates a high level of technology risk and that commercialization could be at least eight years into the future. In addition, the firm produces end products that require additional refining; these are not drop-in fuels.

KiOR, which lost $45.9 million in 2010, remains unprofitable and has yet to produce at commercial scale.  While KiOR has the potential to be a successful biofuels company, the IPO simply gets KiOR closer to the capital it must have to give the commercial scale facilities any chance of completion, regardless of whether or not the technology functions and yields materialize as planned.

In addition, the bedrock support for biofuel tax credits has cracked.  On June 16th, the U.S. Senate voted 73 to 27 to repeal the 45 cent per gallon tax credit on biofuel and the 54 cent per gallon tariff on imported ethanol.  While the House is expected to reject the measure, it received broad bipartisan support.  This signals another red flag for investments in wood biofuel projects dependent on government-based subsidies.

For more information about this study, please click here.

Wood Biofuels: KiOR Doubles Size of IPO; Investors Should Not Expect Speedy Payback (if any)

Last week, Pasadena, Texas-based KiOR filed with US regulators to increase the size of its initial public offering to $200 million, doubling its initial filing of $100 million in April (KiOR doubles size of IPO, Reuters, June 1, 2011).  KiOR plans to produce crude oil using non-food biomass types such as wood chips and switch grass.  In addition, KiOR was included in a study published last month – Transportation Fuels from Wood: Investment and Market Implications of Current Projects and Technologies – that includes the status of 36 cellulosic biofuel projects in the US, commercialization timelines for 12 technology approaches, and implications for bioenergy and timberland investors.   The list shows all projects covered in the study.

For each technology, the study ranks the level of technical risk, provides a commercialization timeline, and estimates the expected yields at commercial scale. The results indicate that major technical hurdles need to be solved and will delay or disrupt commercialization for most of the technologies under development.

What were the implications for firms such as KiOR?  KiOR currently operates a pilot plant in Pasadena. The firm is developing commercial scale biorefineries to make gasoline and diesel blendstocks from wood.  Its initial-scale plant in Columbus, Mississippi is under construction. KiOR has secured three off-take agreements for fuel produced at its Columbus location with Hunt Refining Company, Catchlight Energy, and FedEx Ground Services. The company also plans commercial scale facilities in Mississippi (likely in Newton and Bude), Georgia, and Texas. KiOR received a $75 million interest-free loan from the state of Mississippi to build the Columbus plant. KiOR received a term sheet for a DOE loan guarantee for $1 billion announced in February 2011. As of May, the loan guarantee was in the due diligence process and requires that KiOR begin construction by September 30, 2011.

With both strong public and private sector backing, KiOR has the potential to be a successful biofuels company. However, our technology assessment indicates a high level of technology risk and that commercialization could be at least eight years into the future. In addition, the firm produces end products that require additional refining; these are not drop-in fuels.  Finally, the increased IPO simply gets KiOR closer to the capital it must have to give the commercial scale facilities any chance of completion, regardless of whether or not the technology functions and yields materialize as planned.

Relative to other firms in the study, KiOR has a shorter technology gap as the overall results find an 11 year gap on average between estimated technology viability and firm announcements.

For more information about this study, please click here.

Wood Bioenergy: Projected Demand Exceeds 70 Million Tons by 2021; Detailed Study Clarifies Biofuels Projects for Investors

The May issue of Wood Bioenergy US indicates that, as of May 25, 2011:

• The continental US has 453 wood-consuming, announced and operating bioenergy projects.
• In total, these projects represent potential, incremental wood use of 130 million green tons/year by 2021.
• Based on Forisk analysis, projects representing only 71.1 million tons/year pass basic viability screening.

This is the first time projected demand has exceeded 70 million green tons within ten years.  In total, the pass rate of projects is 65%.  Of the 453 total projects evaluated, 54% are associated with cogeneration and/or wood-to-electricity.  The number of liquid fuel projects declined from 36 to 34 since last month.  Click here to download the free summary.

The decline in wood biofuels projects is consistent with the results of the study we published with the Schiamberg Group – Transportation Fuels from Wood: Investment and Market Implications of Current Projects and Technologies.  This research includes the status of 36 cellulosic biofuel projects, estimated commercialization timelines for 12 technology approaches, and implications for bioenergy and timberland investors in the US.   How was the study conducted?

Each technology process was evaluated based on its ability to produce at commercial scale and its estimated yields.  Many of these estimates came from firms, which we compared to proven pilot and demo scale projects.  Our experience in benchmarking information from private firms is that it can prove unreliable and overly optimistic.  Range Fuels is an example of a project we’ve covered since 2009 using similar criteria, and it basically played out as expected based on the criteria used.

For the liquid fuels study, those two elements, ability to produce at commercial scale and estimated yields, can be estimated given existing projects today and provide the basis for a continuum of both technologies and projects.   The key difference we find in comparing notes with private firms is that a successful pilot project is deemed “success” while that would be insufficient from our view.  The critical elements are ability to produce at commercial scale and yields.

For more information about this study, please click here.

Wood Bioenergy: Impacts on Timberland Investors from Biofuels Projects

Questions and comments regarding a study we published with the Schiamberg Group have focused on (1) why a given wood-using transportation fuel project is different or “special” and (2) potential impacts to timberland investors and managers.   The study – Transportation Fuels from Wood: Investment and Market Implications of Current Projects and Technologies – includes the status of 36 cellulosic biofuel projects, estimated commercialization timelines for 12 technology approaches, and implications for bioenergy and timberland investors in the US.   These projects seek to convert wood to fuels including ethanol, butanol, diesel, gasoline, and jet fuel.

With respect to the exact and extraordinary circumstances associated with each wood biofuels project, we defer to the late Senator Daniel Patrick Moynihan, who said “Everyone is entitled to his own opinion, but not his own facts.”  Our research focused on verifiable, third-party sources to confirm the current status and commercial viability of known projects.  While our team, as forestry “enthusiasts”, would love to see growing demand for wood and the associated incentives to increase investments in forestry and forest health, a project cannot be considered viable until the relevant technology has been proven at commercial scale.   We encourage dialogue and will update our analysis as new facts present themselves.

For timberland investors, the overall, potential impacts from this sector appear modest, though specific local markets could benefit within the next ten years.  On a national scale, demonstration and commercial projects could use up to 8.8 million dry tons of wood per year by 2030. According to project announcements, this total wood demand would occur by 2018. A commercialization scenario projects 8.8 million dry tons of wood per year 11 years later in 2029. In other words, we estimate an 11 year lag between when the projects expect to operate and when our technology analysis indicates the technology could overcome hurdles and be viable at commercial scale.  This figure from the study illustrates the story:

The study models and graphs data for all US regions: the US South dominates the potential incremental wood use from the transportation fuel projects evaluated.  At the most basic unit of analysis, the local wood basket circling each liquid fuel project, the population of timberland owners and investors with significant exposure to potential increases in raw material demand from announced projects would include those with timberland investments in markets that include lower risk, higher potential projects.  These markets include Alabama; California; Michigan; Mississippi; and Tennessee.

While some projects show particular promise and advantages, our general results indicate that major technical hurdles will likely disrupt commercialization for most technologies under development.  For more information about this study, please click here.