Voices from VODville: Lessons learned in the journey towards advanced biofuels

What makes a winner in advanced biofuels? Five companies – Abengoa, INEOS Bio, Mascoma, Gevo, and American Process reflect on the essential ingredients for success.

“We are industrial technology businesses, making a commodity, we have to control costs everywhere and learn, learn, learn.” – American Process CEO Theodora Retsina

You could call it VODville, VOD for valley of death that is – a stretch of hard desert that every project and developer must cross, and, according to conventional wisdom, in the biggest hurry possible.

There are ox skulls along the side of the road to remind you of what happens to those who linger too long, and the bright lights of some Las Vegas ahead to tempt you ever forward, like the kleig lights attending a Hollywood opening.

But is racing across the desert in the fastest possible manner always the best policy? Are there reasons to stage it as a slow, methodical journey, despite the hardships and the boardroom heartache? And, if so, how do you best plan the journey?

In Washington this week, the US Department of Energy’s Biomass Program gathered together their portfolio companies developing advanced biofuels at BIOMASS 2012. Yesterday, five companies took the stage to reflect on lessons learned from the pioneering journeys in building demonstration and first commercial advanced biofuels projects.

Christopher Standlee, Executive Vice President, Abengoa Bioenergy

“Cellulosic ethanol for us at Abengoa – it’s been a long journey with the DOE, starting back with a pilot that we built in Nebraska, using wheat straw as a feedstock, back in 2007. Then, we built our demonstration plant in Salamanca, Spain in 2009 and started construction on our first commercial scale plant in Hugoton, Kansas, in September 2011. We’ll be operational at the end of 2013.

“In first generation, there were challenges – in technology, financing and it took a long time to persuade lenders to take risks. In 2nd generation ethanol, project financing is an even greater challenge. Aside from the technology risk, there’s the feedstock risk, and the offtake risk – especially because in this commodity market, there aren’t 20-year power purchase agreements and pricing visibility can be, by lending standards, very short term.

“And then there are the RIN values, which are somewhat unproven as yet in the cellulosic area.

“So, it took time to assemble the $133 million loan that we needed for the project. And it’s a loan, its going to be paid back, its backed by the full faith and credit of Abengoa and our company has never failed to repay a loan since it was founded many years ago.

“For us, the primary driver has been the Renewable Fuel Standard,” adding that none of Abengoa’s efforts would have been made without the long-term stability that RFS2 brought, to ensure that there would be a market for the fuel.

“The economic impacts are not insubstantial, even for a first commercial facility. In addition to hundreds of construction jobs, and 65 full time jobs after construction is completed, there is the $17M in biomass that we will acquire from growers in a 50 mile radius around the plant – and that feedstock never really had much of a market before.”

Peter Williams, CEO, Ineos BIO

“The most important lesson learned? Team is the most important factor. Team is every aspect of the operation, from design and construction through to operation.”

Williams added that the second most important factor was, in their view, to have a technology that could take advantage of a diversity of feedstock, and a diversity of geography, to ensure the widest possible customer base for the commercialization and licensing phase, after the first commercial plant was completed.

Bill Brady, CEO, Mascoma

Brady emphasized the importance of products that could drive revenue for a company in the early stage, noting how Mascoma’s MGT yeast technology had landed seven customers for the company among traditional ethanol producers, in the years while it was developing its technology and moving from its Rome, NY demonstration to its first commercial plant in Kinross, Michigan, which is expected to be operational in 2014.

“A major lesson learned? First of kind projects usually have a second phase when design flaws a fixed. So, its been important for us to recognize and learn that our journey ought to be completed in two phases. A first phase, where we take out as much risk as we can and save as much capital as we can, and run that project for 24 months, and then make improvements. Making design changes without operating experience can result in real disappointment.

“For us, on the finance side, the power of clear market signals is absolutely critical – signals like tax policies and RFS2.

“You see, in companies there are generally four types of projects that could get funded, once you have shown that you can exceed the company’s basic internal hurdle rate of return.

“There are the low risk, high return projects, which are really rare. There are the projects which have low risk and low return, generally business as usual expansions. Then there are the high risk, high return investments, that generally represent new technologies deployed in existing businesses. Then there are projects like first of kind, advanced biofuels, which are high risk and low return.

“To get projects funded in that kind of environment, you need all the help that policies like RFS2 and tax policies can provide.”

Chris Ryan, President and COO, Gevo

“The most important thing, in our view, is when you find the product that you can make and for which there is a market, you have to find the most economic route of production. You have to understand what the best of biology can give you, and what good chemical engineering can do with that to realize it in the lowest cost way.

“Some projects get too focused on the biology or the chemistry, and the opportunity of the market, and they overlook the importance of engineering in terms of delivering that lowest-cost product.”

Theodora Retsina, CEO, American Process

“For us, there are five important lessons learned. First, leverage co production wherever you can, and don’t build anything you don’t have to. Second, understand that there is real risk, and perceived risk, and only operating a large demonstration that you keep as simple as possible, will allow you to understand the risks.

“Third, there’s the execution risk, and we have found that it is paramount to keep in-house control of basic engineering and construction management.

“Fourth, a lack of stable policy has great impact. Fifth, in financing, you have to look everywhere, conventional and unconventional.

The Bottom Line

Theodora Retsina put it well, “We are industrial technology businesses, making a commodity, we have to control costs everywhere and learn, learn, learn.”

Shaking out the cost, and de-risking projects, is the abundantly clear message. Whether it is in using bolt-on technologies that leverage existing production, or developing in multiple phases to learn as much as possible at the minimal engineering scale.

Team and experience – whether it is experience gained from multiple stages of development, or the experience that the team brings from projects in the past – was commonly cited.

And the group was clear on the transformational impact of clear, long-term market signals such as the Renewable Fuel Standard – paramount, in their view, to risk mitigation for lenders and project developers.

Is there a market? What’s the best team? How to shake out the costs? Those are the lessons from the grizzled pioneers, the veterans of VODville.

Would-be crossers of the Valley could highly profit from their experience.