Square Pump, Round Fuel

The barrier between the advanced biofuels industry and the sunny lands of success at scale? You can sum it up in four syllables: infrastructure.

What’s the path forward?

On D-Day 1944, as the 4th division landed at Utah Beach, assistant division commander Theodore Roosevelt Jr., the only US general to go in with the D-Day first wave, noted that the landing craft had drifted in the strong currents, a full mile south of the original objective.

Pull-out and redeploy — reconnecting with all the infrastructure intended to support the invaders?  Nothing doing, concluded Roosevelt. “The war starts right here.”

The troops hit Utah Beach on D-Day 1944

Flash-forward to today: the American Petroleum Institute rallies the Panzers to repel the landing of renewable fuels — bringing alternative choices for consumers at affordable prices, via a counter-assault on the Renewable Fuel Standard.

And some interests in the renewable fuels movement might conclude “pull out and redeploy”, “this is not our fight”, “ethanol has thrown enough people under the bus, why should we rally for them?”, “I could care less about E85, we make drop-in fuels and chemicals”. And so on.

To that end, we’ll summarize the five immutable laws of renewable fuel investing in the United States — and, for those technologies that will be built here and deployed elsewhere, a global set of laws. We’ve summarized from the longer and less-politely-put conversations we have with investors.

The Immutable Laws

1. No RFS? No money for you. No oxygen. You die. “We’re not putting up $300 million dollars or more to take you to scale if you can’t demonstrate market access in fuels.”

2. No way around the E10 blend wall? No RFS beyond the current 13 billion gallons or so. No market for advanced biofuels. No money for you. No oxygen. You die.

3. No demand for higher ethanol blends? No way around the E10 blend wall. No money for you. No oxygen. You die.

4. No emphatic proof that fuels like E85 are popular? No demand for higher ethanol blends. No money for you. No oxygen. You die.

5. No control of the pricing and field-to-wheels promotion of that fuel— at least at one pump? No emphatic proof that fuels like E85 are popular. No money for you. No oxygen. You die.

If there was any doubt that the fate advanced biofuels and first-gen fuels were inextricably linked, consider that the EPA has slashed the target for advanced biofuels in 2014 by even more than it slashed the target for first-gen fuels. Our candidate for the “biggest surprise in biofuels in the last decade.”

The Four Options

So, the war’s starting from the wrong beach, but let’s consider the options. We can think of four. The industry can:

1. Hope that the American Petroleum Institute is just kidding.

2. Hope that, despite the supposed threat to the national economy, drivers, cars, refiners, ranchers, poultry farmers, the environment, and common sense that the API says the RFS represents, the current distribution infrastructure will be happily deployed in support of low-carbon fuels.

3. Build out an alternative distribution system of, say, 1 billion gallons or more, over the next few months.

4. Build at least one outlet, control the pricing and promotion, and demonstrate in the real world what economists are telling us, that higher ethanol blends are not failed fuels, they have failed pricing and promotion strategies.

The Digesterati prefer the fourth. But let’s be clear about “control pricing and promotion”. It’s not about installing a pump at the plant. It’s about building a complete customer experience that embraces price, experience, convenience, and cachet.

All you have to build is store #1. The rest will follow in the way that capital always follows to proven ideas. Just think upon how the Apple Store changed APPL’s cost of capital.