$500 million and no one to dance with? Canada and advanced biofuels

November 14, 2012 |

Canada’s $500 million NextGen Biofuels Fund, five years after formation, gets close to making its first investments just as Canada’s leaders consider pulling the plug

It was the most amazing sovereign commitment to biofuels of its time, the $500 million NextGen Biofuels Fund that Canada established in 2007. As a percentage of GDP, it was the equivalent of a $4.3 billion commitment by the United States.

To make matters sweeter, it was a companion fund to the $550 million SD Tech Fund. SDTF, in turn, had the broad responsibility to invest in early R&D, pilots and commercial demonstrations in technologies that could improve air, water, or soil quality, or bring forward new energy or energy-saving systems.

The NextGen Biofuels Fund was focused solely on providing up to 40 percent of the equity for first commercial projects – novel, technologies that found trouble in getting conventional project financing. The Fund could allocate up to $200 million for a single investment. Another 20 percent of project equity could be cobbled together, in certain Canadian provinces, with a collection of provincial-level credits, grants and incentives. Leaving the project sponsor to come up with only the remaining 40 percent, presumably through equity provided by a parent, strategics, or its venture or private equity investors.

From Nirvana to Nada

All you had to do was build a commercially-feasible, commercial-scale project in Canada.

Between the supports for R&D, commercial-scale financing, a willing group of offtakers such as airlines and PetroCanada, and as much feedstock as you could possibly imagine between Canada’s agricultural base and its wood basket — well, it looked like Canada was on the fast track towards biofuels superstardom.

And then, nothing.

Which is not to say that the fund’s managers didn’t hear from interested parties. “I think we have heard at one time or another from just about every major technology developer around,” notes fund advisor Guy Ouimet, with a sigh.

The Iogen problem

You see, in one way or another, the Fund was essentially established as a vehicle for Iogen – which was expected to need $200 million in federal help for its first commercial cellulosic ethanol project. Hence the fund’s focus on “next-gen biofuels” and its $200 million per project investment cap. Political leaders expanded the program’s scope and funding level, so that it would not be a politicized case of “pick a winner in advanced biofuels”.

Accordingly, it was established at a time when there was exactly one technology that was expected to be ready to go to commercial scale in the 2007-2009 period. Then Iogen’s path to commercialization slowed, and the global financial crisis arrived. Oops. $500 million with nowhere to go. And so the whispering began.

Ultimately, the fund’s managers went on a year-long search for companies to fund, looking at more than 180 in all. Winnowed ultimately down to 24 that were project-ready, and suitable for Canada.

Now, after a round of applications and due diligence, they are reduced to a group of eight. Five in the process of finalizing their funding arrangements now, three that are expected to be finalized in a second wave.

We’ll not officially learn the identities of the eight for some time. Greenfield Ethanol’s celluloisc ethanol project, and Enerkem’s Quebec project, have been elsewhere “outed” – and unconfirmed rumors swirl around that an Ensyn project is on the list and will be announced as soon as the end of the month. We do know that the projects, in total, represent $2.6 billion in total project cost, and $210 million gallons in capacity.

The next-gen biofuels pathways for Canada

The technology pathways? We know that the projects cover:

• biochemical ethanol (think Greenfield)
• thermochemical ethanol (think Enerkem)
• pyrolysis bio-oil (think Ensyn)
• thermochemical Fischer-Tropsch (probably Rentech’s Olympiad project)
• hybrid thermochemical/biochemical (sounds an awful lot like ZeaChem)
• catalytic pyrolysis upgrading for drop-in fuels (sounds like KiOR, or the Honeywell’s UOP project within the NABC consortium to add a catalytic function to enable Ensyn’s “RTP system to operate in a mode virtually identical to the fluidized catalytic cracking (FCC) process”).

Pretty impressive set of projects, in all, and an impressive leveraging of the original Canadian investment of $500 million. That’s more than 5:1 leverage of federal dollars, if the entire fund were depleted for these eight projects – and, at the same time, a much-needed source of equity investment for the projects themselves.

The problem of politics

Now, here’s the irony. Canada’s political leadership is being urged to pull the plug on the entire project, or substantially move the funds. Just when they have reached deployment stage.

Why? Well, it shows the danger of establishing these vehicles ahead of the technologies – or, more importantly, of the end-to-end supply chain from feedstock through to offtake.

Political forces can only so long resist the temptation to shift funding from places where it isn’t being deployed quickly (such as the NextGen Biofuels Fund), to programs like the $100 million, four-year Investments in Forest Industry Transformation (IFIT) program.

By contrast, the deal flow at IFIT is brisk. IFIT’s second round of applications closed in September 2011 and received a total of 57 applications representing $1.2 billion in project proposals where the requested IFIT contributions amount to almost $300M.

There’s a certain amount of understandable “hey, send the money over here, we can use it and they can’t” that goes on in Federal circles, in Canada as elsewhere.

Of course, you might wonder, ultimately, about the wisdom of funding, under the guise of “transforming Canada’s forest products industry,” the kind of ho-hum projects that you get when you combine timelines suitable for political rather than industrial cycles with the inherent conservatism of the forest products industry.

Transformation: what’s in a word?

One IFIT project? An award of $2.6 million for Lauzon Distinctive Hardwood Flooring to modernize its production process “to better serve its clients”; another, a $4.5 million award to Alberta-Pacific Forest Industries (Alpac) for a methanol purification project.

Important for the companies and their clientele? Surely. Good investments for companies and Canada to make? It seems so. “Promising breakthrough technologies in the forest sector”? Not really.

The NextGen Biofuels Fund is, and always was, of a different character. Intent on taking a technology through to the point where it could stand on its own, and potentially transform both Canadian greenhouse gas emissions as well as economic opportunity in the Canadian heartland.

As Ouimet points out, “Canada has the potential, in its available biomass, to support 120 commercial-scale advanced biofuels refineries.”

Not that Canada really needs the energy security, given its oil sands assets – but for hundreds of rural communities, there’s the potential of adding a whole new industrial sector to stabilize local economies badly hit by the death of newsprint. Forest products remain Canada’s second largest industry, after energy production.

To bail or not to bail?

So, why would politicians bail out on the NextGen Biofuels Fund? “The cellulosic ethanol companies oversold themselves and underdelivered,” notes Paula Viera, Director of the Fuels Policy and Programs Division of Natural Resources Canada, which has an oversight role on the Fund and develops policy options for Canada’s leadership, and are developing recommendations on a broader bioeconomy strategy at this time.

“We get questions about the biofuels sector, and they are tough to answer,” she noted. “With other sectors we support, we can account for every decision, look at where money was spent, what succeeded, what failed, where we can learn. With this fund, the companies weren’t ready, the investments couldn’t be made, and for a lot of people the attention has shifted beyond renewable fuels.”

Were Canada’s next-gen companies ready? It turns out, no, they were not.

We never did see a credible feedstock aggregation strategy from Iogen, while they were focused on Canada. Maybe they had one. Hmmm. As late as last December, Shell was reported to be still scouting around Manitoba for sites that could provide up to 120,000 tons per year of wheat straw.

Scouting? In 2011? POET focused its attention on Emmetsburg some four years ago, already had an ethanol plant in place there, and still needed herculean effort to work out its POET Biomass supply chain over several years.

Overall, its not entirely surprising that Iogen’s Manitoba project was abandoned in May, and that subsequently the company shifted its focus to Brazil, where sugar-ethanol producers have long-established systems for aggregating sugarcane and producing the cellulosic feedstock in the form of bagasse.

The good news

But there is good news. The fund itself has a 10-year lifespan, with all dollars intended to be disbursed by March 31, 2017. And a second generation of technologies have come along – many of which utilize easier-to-aggregate feedstocks such as sustainable timber, wood residues aggregated by milling operations, and municipal solid waste. One thing Canadians know better than perhaps any people on earth, is how to aggregate forest resources.

Plus, the technologies that the fund looks at have broadened beyond blend-wall challenged ethanol – and include an array of drop-in fuels (gasoline, diesel and jet) as well as capabilities for producing key chemicals that also replace fossil fuels.

Is this the hour to back away from the NextGen Biofuels Fund – just as the NextGen arrives? Surely not. Will the fund survive? Only time will tell.

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