The Range Fuels failure

| December 5, 2011

“Taxpayers will foot the bill, they will become cynical about biofuels as a result of the many broken promises, and ultimately funding will dry up for everyone in the sector.”

Will that prediction from 2010 come true?

Let’s talk about Range Fuels, the good and the bad.

In Georgia, the AgSouth Farm Credit bank, which is the lender of record for an $80 million construction loan that Range defaulted on, is advertising a foreclosure sale of Range’s OneGeorgia plant in the local Soperton (Georgia) News, which will take place on January 3rd.

Justin DeJong, a spokesman for the Department of Agriculture, said, “We are disappointed that this company did not succeed, and we will be working on behalf of the American people to protect the federal government’s interest in the loan.”

The complicating feature is that Range Fuels received the USDA’s first biofuels loan guarantee, $64 million in total. The failure of the project has a number of people in the industry nervously whispering “Solyndra”, as Congress considers the new Farm Bill and the USDA’s overall loan-guarantee authority.

The fear is that the failure of Range will cause the government to exit the business of issuing loan guarantees altogether, cutting off one of the few financing lifelines that has remained viable in the global project finance slowdown.

How much assistance did Range Fuels receive?

In total, the project received more than $160 million in investor financing, plus $162.25 million in government commitments. On the government tab, a $76 million DOE grant in 2007, the aforementioned loan guarantee, and a $6.25 state grant. Overall, the DOE released $43.6 million of the project funds, before suspending payments earlier this year and terminating its agreement with Range in August.

In February of last year, Range Fuels CEO David Aldous told the Digest, “On the financial side the money provided by the government under the DOE 932 grant and the USDA loan guarantee (not a loan) are for Phase 1 AND future phases of the plant,”  leaving open the possibility that some of the $80 million in project loans were not released.

The LanzaTech gambit

One behind-the-scenes drama this fall surrounded efforts by Range Fuels and its investor group to transfer the obligations to LanzaTech. Under the proposed arrangement, the Soperton facility would have been developed combining the Range Fuels gasification technology, and LanzaTech’s gas fermentation, to produce ethanol and butanediol (BDO), which is used as a solvent as well as a component in plastics and polyurethane.

The Range Fuels project has focused on a thermochemical conversion of the syngas, as opposed to the biology-based fermentation technology that powers LanzaTech. Both projects features Khosla Ventures as the lead investor.

The plan, which advanced as far as the formation of LanzaTech Freedom Pines LLC in September, and a proposal to initially produce 2 million gallons per year at the facility. The deal was ultimately scuttled in late October when the USDA notified AgSouth that “it was moving forward with liquidation, because liquidation is seen as the best way to preserve U.S. assets and reclaim funding.” Though discussions continued into early November in hopes that a workaround to the USDA’s move could be found.

Who’s to blame?

Well, the knives are sure to come out, and there seems to be an effort on to pin responsibility on the Bush Administration, and indeed the DOE grants date back to 2007-08 and the previous administration. Of course. the loan guarantee dates back to 2010, which will make it difficult for the Obama Administration to fully escape scrutiny.

Voices from the wilderness

In early 2010, energy writer Robert Rapier  filed a stinging critique of the Range Fuels cellulosic ethanol project. Looking back, it is notable that the critique was published by Forbes.com, on Rapier’s blog, and extensively discussed in the Digest, in the month prior to the loan guarantee being announced.

“So taxpayers funded a 40 MGY wood-based ethanol plant and they are instead getting a 4 MGY wood-based methanol plant,” Rapier wrote. “The technology to produce methanol from synthesis gas (the output of Range’s gasifier) was invented in 1923, and is widely used in the petrochemical industry today. It appears that the wheel has been reinvented at taxpayer expense.”

“After investments that have been publicly announced at $320 million,” Rapier continues, “the EPA announced that Range would initially produce 4 million gallons, and it would be methanol. Further, no ethanol is expected before mid-2012. In summary, when Range was looking for funding they said that it would take $150 million to build 100 million gallons of cellulosic ethanol capacity. Now that they have their money, they need more, and for $320 million they will have 4 million gallons of methanol capacity to show for it.

“This situation was largely avoidable. The decision to continue funding Range potentially drained funding away from others who were perhaps more deserving on the technical merits, but less vocal. We can’t afford to have our energy policy hijacked by those who make the boldest claims.”

The Digest commented

At the time, we wrote: Rapier’s intent is not simple sensationalism; his intent is a cautionary tale.

“I want to make it clear that I am not criticizing failure,” he wrote. “That is normal and expected. Failure is a part of what it takes to learn and move forward. But when you take taxpayer money to build your business, there needs to be a different level of accountability.

Rapier’s prediction, prior to the loan guarantee

“Taxpayers will foot the bill,” he predicted. “They will become cynical about biofuels as a result of the many broken promises, and ultimately funding will dry up for everyone in the sector.”

Revisiting the LanzaTech proposal

One difference between Solyndra and Range Fuels. There is no evidence of hanky-panky. It is simply, so far as we can tell, a case of a technology that did not pan out. It failed the Steve Burrill test (“Technologies are going to die, we just hope they die early.”), but that’s really all there is to it.

Now, Solyndra is a different case. A lot of hoo-hah has been raised over the politicization of the loan guarantee process itself. But what makes Solyndra, Solyndra is the renegotiation of the deal, when the project was in deep trouble, which involved subordinating the US taxpayer interest, in favor of new money from outside investors. That is going to cause extreme discomfort for all involved.

In our view, transferring the Range Fuels obligation to LanzaTech would have been “more of the same,” saddling a hot technology with significant obligations – including repaying the loan guarantee and following through on an overall commitment to invest $225 million in the Soperton project. For what? Access to a gasification technology, a project site, and the logistics that have been developed to date.

Our belief? Effective off-gases for the LanzaTech process can be had, elsewhere, in exchange for a low-cost equity interest. The value of the Soperton facility? Well, we suspect it will auction for less than the total deal value that LanzaTech would have assumed. Syngas can be obtained elsewhere, for less, we believe.

Moreover, the taxpayers, as Rapier noted, thought they were funding a 40 million gallon cellulosic ethanol plant, not a 2 million gallon cellulosic ethanol and BDO project.

The USDA’s decision?

Grades for the USDA? In issuing the loan guarantee, F. As far as not approving a transfer of the obligation to little LanzaTech, that would be an A.

The loan guarantee program itself? In the end, it ought be evaluated on its overall effectiveness, not cherry-picking deal-by-deal to highlight headline-grabbing success or failure.

That is, the dollars and gallons generated by successful projects, the default rate on unsuccessful ones. Whether the goal of moving the US off a dependence on fossil fuels was substantially achieved, and at what overall cost.

It is consistently stated that the US needs to get back to the sort of can-do spirit and application of know-how as was seen in the moon program. Well, the moon program wasn’t shut down when single technologies failed, or even in the case of the catastrophic failure of Apollo 1, in which three astronauts lost their lives in a launching pad fire.

Nor did the United States surrender in the Second World War when it turned out that the M6 Heavy Tank turned out to be a failure, in 1942.

Some projects will fail. Just as there is no “I” in “team”, there is no “risk-free” in “transformation”.

Playing hanky-panky or hokey-pokey with projects, trying to disguise the nature of risk to the American taxpayer, is bad politics, bad for renewable energy, and bad for all new technologies. Other projects are going to fail – it is the nature of innovation – but the goal has to remain the same. Getting people used to the idea is a good thing. And then, going back to the drawing board to minimize those occurrences.

That is, let’s develop some more of that bio-based material known as backbone. Else we run in the same crowd that called on Britain to surrender in World War Two, after the reverses of 1940.



Tags:

Category: News Analysis, Top Stories

Comments (0)

Trackback URL | Comments RSS Feed

There are no comments yet. Why not be the first to speak your mind.

Comments are closed.