FCP – the secret magic ingredient for success in bioenergy

| March 9, 2012

The element that separates real companies from science projects is called FCP – first commercial project. Here are the 5 Must-Haves in Moving from “Heck, No” to “Here You Go”

Psst! Over here. That’s right, you. I have a secret to tell you. Don’t tell anyone. Take a science project, add this magic ingredient, and presto! You have an industrial biotech company.

It’s called FCP. You can’t buy it in a dime bag, and you can’t synthesize it from municipal solid waste. It’s not angel-investor dust. It costs a world.

I know, maybe you heard that you make it from a chicken and an egg. Or is that an egg, and then a chicken? Which comes first? I forget. Doesn’t matter, you make it from one part smarts, one part savvy, one part hunger.

Now, sssshh. I’ll tell you what it means. First Commercial Project. Got one of those, you’re on your way. Because, before you can work with all those guys who tell you “I want to be the first to finance your second project,” the first one is on you.

Here’s what we know

This year at the Advanced Biofuels Leadership Conference, the Bio-Based Investor Summit is focused on the theme of “what will it take for bio-based technologies to get first commercial projects financed?” Financial firms such as USRG Renewable Finance, CIBC World Markets, Black River, Monsanto, Burrill & Company, Hudson Clean Energy Partners, CitiGroup, Chapparal Energy, Taylor De-Jongh, Confluence Investments and Willis America will explore the topic in-depth.

Investors, and project owners that are getting financing completed for scale-up tell us about the 5 boxes that must be checked off before a project will be financed.

1. Advantaged Feedstock.

Investors and developers tell us that the threshold is $55 per ton for cellulosic feedstock. 15 cents per pound is reputed to be the magic number for renewable sugars.

Biodiesel plays based on oils can price higher, since 90 percent of the cost is in the feedstock, but projects of this nature have their own special challenges in obtaining enough working capital, since so much of the cost of the project is tied up in buying the feedstock that is refined into fuel. And, of course, first generation ethanol projects are based off higher per-tonne figures as well, although some of that relates back to the value of co-products such as CO2 and distillers grains.

Above $55 per ton for cellulosic feedstock , impossible to get projects done, and way better is preferred – $40, $30, even $20 per tonne, unless there is a transformative magic bug driving super yields. The contract for feedstock needs to be long-term – 15 years or more is ideal, and fixed price or tied to the price of the produced fuel to maintain the crush spread. Not tied to feedstock prices, or to the price of oil, but to the price of renewable gasoline, diesel or jet, or ethanol, or biodiesel, or whatever the fuel of choice is.

One structure that is increasingly popular is paying a floor price for feedstock, then sharing any upside back to the feedstock provider – making them a part of your success helps you persuade them to help protect you against hard times.

Even better, there’s zero cost feedstock. Enerkem went this route. Winning heavy support from the province of Alberta, the company also secured a long-term, fixed price feedstock contract via Edmonton’s municipal solid waste authority. Throw in support from Valero in the form of finance and an off take contract, and financing from Waste Management, and you have the means to complete. Fulcrum Bioenergy has followed a similar path in its Sierra project in Nevada.

2. Advantaged Offtake.

15 year off take agreement with a credit worthy buyer based on a price tied to your cost of feedstock – that’s ideal. Airlines can’t and won’t do these though, for example. Solution? Financiers and project developers tell us that long-term off take contracts are possible; where off takers lack economic strength, sell instead to a consortium that agrees to buy a guaranteed amount, and re-sell to its members.

Can’t get prices tied to your feedstock of choice, for fear by off takers of $8 corn or $100 per tonne MSW? That’s where projects that can do multiple feedstocks fit in – you can structure pricing around a feedstock blend, or allow for substitution, or a hybrid of oil prices and feedstock prices.

What fears do developers share with offtakers? That the price of feedstock will rise faster than oil and the incumbent fuels.

3. Parity with $80 oil

You’ll need to have parity with $80 oil or better, financiers and projects tell us, based on production at scale. $90 is possible but tough. If the numbers don;t look good, generally the best fix is to go back and work on the feedstock costs and re-structure.

4. Proven at projectable scale based on 3rd party evaluation.

Financiers and projects both report that too many projects have faltered in aggressive leaps to scale – Range Fuels, Amyris and so on. A 3rd-party verified demonstration, at sufficient scale to de-risk the first commercial project, is increasingly a must-have.

5. Name brand strategic investor willing to backstop the project.

Whether it is Waste Management stepping up for Fulcrum, Valero for Mascoma, BP Biofuels for the Vercipia project, DSM for the POET-DSM project, Dupont for Dupont Cellulosic Ethanol, INEOS for INEOS Bio, Total for Amyris, and Abengoa for Abengoa Bioenergy – the trend is clear, Dad pays for the first project.

It can be a small first commercial, but those are the projects that are, on the whole, getting done – exceptions being the companies that executed successful IPOs such as Solazyme, Gevo or KiOR.



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