In Iowa, the Digest today commences a 10-part series on the Bioenergy Project of the Future, based on dozens of interviews on the future of technology, policy, rural communities, finance, and the demand for bio-based products and renewable fuels.
We have spoken to farmers, local business owners, environmentalists, community development officials, engine developers, scientists, policy makers, producers, investors, lenders, blenders, wholesalers, retailers, and end users. We have visited development projects on four continents. We have given it our all.
Our question to you has been: what works? Our quest: to assemble your collective view into a path from start-up to success.
No one needs the Digest to develop a hot technology – there are plenty. Or develop a Renewable Fuel Standard – there are several. Or outline a vision of utopian communities – there are scads. But putting it all together into a subsidy-free business that makes money while doing the good work of community building – in alternative energy, that’s been a challenge.
Here at the Digest, we are not experts in the aspects of development that we are reporting on. But we do know you. And as Churchill once said, there is someone smarter than anyone and that is everyone.” What follows is what you told us. With apologies, we’ve done some stitching together of your individual squares into the collective quilt.
We may startle
Some of our conclusions may be startling, though parental guidance is not required. They vary from the shape of much that has been proposed and built to date – not because the Digest disagrees with the strategy or economics of the projects that have been built, but because we believe that the path of technology development has become clear enough to identify a path towards a superior bio-based eco-system. We have heard it in different ways, over and over again, and we have carefully watched those companies that have gained market advantage – older companies that have become stronger, newer companies that have gained traction.
The Challenges of Advanced Biofuels
We also understand that the path has become clearer on the challenges that must be overcome in financing first-of-kind technologies. You have also told us that the path has come clearer on the means of developing renewable fuel and bio-based product projects that better integrate with and support the Rural Community of the Future.
What we begin with is land. All technologies and strategies to transform the nature of global fuel supply will need land, and lots of it. Even at exotic yields such as 5,000 gallons per acre that have yet to be achieved at commercial scale (but which are now achieved by a number of projects at pilot or bench scale), a transformation of 50 percent of the global fuel supply (leaving room for hybridization of the fleet with electrics, and some residual use of fossil transportation fuels), the world will need 300 million acres of land to execute a renewable fuel strategy, aside from extra acreage needed for the production of other bio-based materials.
Some principles of development
1. First do no harm. The Bioenergy Project of the Future is dependent upon a social compact of respect for the land, respect for other users of common assets such as clean water or air, and respect for the values and the aspirations of the community in which the fuels are produced, and the community of customers. Groups like the Roundtable on Sustainable Biofuels are working – haltingly, painfully – towards a vision of economic, environmental and social sustainability.
2. Less is more. Use what is there to the extent possible. This means using waste streams from other industrial processes (e,g. steam, heat, CO2, wastewater), or animal or municipal waste streams. Also, existing fleet, infrastructure, feedstock systems, and processing technologies. It also means efficiently using the existing skills and habits of the community. It also means working with financial and policy partners who have skin in the game.
3. Add ingredients slowly and stir. Projects are often thrown up quickly, and on a stand-alone basis because time is money and – as Jack Sparrow said in Pirates of the Caribbean, “those who fall behind, are left behind”. A mistake. Better projects are those which find stability through risk reduction and incremental development, and where each module in the Project builds and extends value to the parts that have been constructed in earlier stages. As the project gains financial, community and market strength, higher-risk modules can be added on an integrated basis.
Step one – the first generation biofuel plant
I am sure that we lost some readers right here, in the first sentence. Ecccch, we hear them say – why build more corn or sugarcane ethanol, or jatropha, soy or palm-based biodiesel? Don’t we have a hundred better options in terms of the technology?
We surely do. But its worth remembering that even the Apollo moonshot program began in 1961 with a Project Mercury suborbital flight, using ethanol as a fuel and the established Redstone rocket technology for the booster. It may not have been well-understood at the time that Alan Shepard was riding on an adapted missile delivery system fueled by moonshine whiskey.
The reason for the choices? The application of our three principles – first do no harm (don’t blow Shepard up), less is more (use the Redstone now, use the Saturn V later), and add ingredients slowly and stir (add orbits, long-term flight, spacewalks, rendezvous, and landers later). In the moonshot, the eye was always on the prize, but the projects were designed as a series of incremental wins.
So, in the Bioenergy Project of the Future, we not only have to demonstrate technological prowess in bioprocessing, we have to demonstrate financial and management acumen to all our stakeholders – the community, policymakers, lenders, and customers.
Too often, a “demonstration” project is a demonstration or a pilot of a proposed processing technology. That’s important, but there’s something more important – building a demonstration of a sustainable feedstock system. And demonstrating the financial strength and risk management that justifies riskier add-ons down the line,.
That’s where the first-generation biofuel plant comes in. In this phase of the Project – which can be purchased or built – the product goal is to make and distribute ethanol (butanol is fine too) or biodiesel. Ethanol is preferred.
It may strike some as a backward step, but think of all the advanced bioenergy companies that are doing something just like this. If you look at the top 10 of the Digest’s Hottest Companies in Bioenergy you will see eight of them focused in some way along these lines. Plus, super-hot companies like Gevo, AE Biofuels, Joule Unlimited, Algenol, ZeaChem, Enerkem, and Range Fuels that just missed out on the top 10 this year.
So what’s unique about this first step? Unlike some companies – in this step you actually build or acquire a plant that uses first-generation technologies. That’s a strategy being used by Gevo, Butamax, AE Biofuels, and POET, among others.
As POET CEO Jeff Broin said, “with the integrated biorefinery of the future, ethanol is the base.”
Yep, that’s corn ethanol.
Before you resign your Biofuels Digest subscription, consider this: existing first-generation fermentation biofuels require no re-invention of feedstock systems, no exotic first-of-kind processing technology, no fuel certification or from-scratch market development. They are financeable.
What you get with first generation technology is something more precious than any demonstration of an advanced technology. You get an opportunity to establish relationships with the community you intend to serve. You will sell fuel and develop a market, you will employ and train workers and build the platform of the advanced Bioenergy project team you will need. You will stabilize and excite the community you are working in – and other entrepreneurs will start businesses to serve yours in ways you will need. For example, they will provide the maintenance and repair services, baling and tractor dealerships for local farmers, the local truck stops that will offer services to the fleet that will be bringing feedstock to your project.
You will begin to build your community, and with effective risk management and project development you can be up and running profitably within two years. There are advanced bioenergy projects that have been waiting for financing for longer than that.
Those community relationships are more important than you think. In a five state tour of South Dakota, Minnesota, Iowa and Nebraska just completed by the Digest – one mantra was repeated over and over by every successful project we found: building farmer relations is key to success.
You see, in these times, capital light development means depending on contract farming, or independent growers. They have other markets for their feedstock. You will need to establish tactical reasons who they will sign with your project at $4.00 per bushel for corn, instead of aiming at $4.15 per bushel in a spot deal with the outfit down the road. And there’s always an outfit down the road.
You will need those relationships, especially when it is time to upgrade to collecting biomass. They will need to trust your guidance, and you will need to understand their challenges.
You see, collecting biomass is not as easy as it looks, unless you are only looking at the low-hanging fruit. Sure, its relatively easy to acquire woodchips – there are proven models, and logistics, and systems and contracts. And wood is a great feedstock for advanced biofuels. But the coal-fired utility in the next county is looking at it too, has a monopoly market in many cases and passes along the cost of biomass via a rate case. They can afford, if forced to by a national Renewable Power Mandate, to pay $120 per tonne for wood biomass. Can you?
Consider cobs and stover, being used by POET in its Project Liberty in Emmetsburg, Iowa. Farmers haven’t collected those in the past – so they need to invest in equipment to collect and bale. Plus they have to find a time window, and you will need to work with them on that. Grain harvest and fall tillage will take precedence – collectively, you will need to figure out the who and how of getting that done.
“One of our farmers we are working with is in his 50s, with 1000 acres, and his kids have gone off to college out of town,” said POET Biomass chief Mike Roth. “He’d like them to come back to the area after school, but it usually doesn’t happen. Kids grow up and move out around here, and this farmer knows that there isn’t an opportunity to bring his son back to the farm, as the 1,000 acres won’t provide enough income.
“That’s where biomass comes in. The son is looking at collecting biomass from his Dad’s farm, and several thousand acres in the area. He’ll have a hack of a tough fall season, but he can make money at this business doing something that creates value and wasn’t there before.”
That’s sustainable community development in a nutshell. That’s one more college educated person, coming back to a previously challenged rural Iowa county, for a high-paying job. Add a well-educated spouse, and another and another, and you start to have reasons to attract high-technology or other attractive businesses to the rural economic development mix. Two jobs with two good incomes, and you have the foundations of employment stability and community involvement. In the Bioenergy Project of the Future, we build communities at the same time as we build businesses.
Now, keep in mind that corn is far from the only first-generation feedstock available. It depends on your geography. And for darn sure you are going to consider building a plant that uses soybeans if you have feedstock growers in corn-soy rotation, and open to developing a market with you. You might not buy the whole crop, just perhaps enough to supply blended biodiesel to farmers in the local community, and fleet sales to the county.
The county will hear your message – because you are building a community, their community, with the Bioenergy Project of the Future. You are the engine for future jobs. Farmers will hear your message too, if you have built your relationships with care. They will understand your mission in bringing down the fosill-fuel intensity of local agriculture, as well as buying fuel from the local supplier. They are invested in you, and you are invested in them.
But this isn’t utopia, though it may sound utopian. It’s an ethanol business, that buys corn at $4 or so per bushel (little higher right now), and makes 2.9 gallons per bushel worth around $5.80 – and has $1.30 or so in dried distillers grains left over to distribute on the market. It can be a good business. It’s not impossible to finance, and it doesn’t have to be a monster plant because you are working on something more grand than a first-gen revisit of the failed VeraSun strategy.
You are not going to stay, only, in the first generation for long. It’s your base. Because with your ethanol you acquire some good things you can use right away – good people, good growers, and good lender relations, and the beginnings of a strong balance sheet. You also acquire some CO2, your distiller’s grains, some wastewater, and some process heat. You’ll need those later on. You also acquire some opportunities associated with your growers – their nutrient-filled waste streams and the indirect emissions associated with their fertilizers. Problems? Gulf Dead Zone run-off? No, it’s an opportunity.
Remember our first principle: Less is More. We’ll do some very interesting things with those, that might surprise you. In the Bioenergy Project of the Future, there are no waste streams. There are only material streams, applied imagination, sound business and finance principles, and people dedicated to solving problems that create jobs and building sustainable communities.
In part II of our series tomorrow, we’ll look at your first bolt-on project. We’ll be adding that biomass collection we have been discussing. No, we won’t be using that just right away for advanced bioprocessing. You will eventually. But in the Bioenergy Project of the Future, we walk before we run. Initially, we’ll use that biomass to replace some of our natural gas, and reduce the price volatility, emissions and risk associated with our base ethanol (or butanol) module. We may even reduce the operating cost in certain market conditions. And we are beginning to build out the base for the collection, storage, contracting, and use of advanced biofuels materials – not on a venture capitalist’s dollars that cost 30 percent per annum, but on lender dollars that go to projects that have strong vision, community roots, and proven technologies.