The Map: Navigating Biofuels’ uncharted waters

Chasing treasure? Start with a map.

Here’s ours. A biofuels map, that is, the chart we use to diagram how to look at technologies, drivers, stakeholders and their concerns.

In today’s Digest, let’s look at The Map. Which is to say, the guide map we use here in Digestville to understand how and why companies choose directions for focus, and how and why they deploy resources in this turbulent and growing market.

For one of two reasons: 1) Our role is to simplify complex ideas or 2) we are simpletons, we have a simple four-cell box into which we organize the more than 2,000 organizations active in this space as technologists, investors, marketers or other stakeholders from trade groups to enthusiasts.

Resources?

They can be any of the four Ts: tools, team, training or time — or the money to buy them (tools covers anything from raw materials to technologies). Some companies deploy money to assist others in obtaining these, while others make in-kind contributions.

Criteria?

The criteria are markets and technology, and we divide the “proven” from the “novel”. So, ethanol is an example of a “novel” fuel, an “exact-same” aviation biofuel is an example of one that is “proven”. Over on the market side, the market for “natural gas” as a commodity would be on the proven side, the market for “compressed natural gas” as a transportation fuel would be an example on the novel side.

What drives action and opportunity?

In this market, a change in feedstock prices. It could be that demand has been reshaped by changes in economies. It could be that a new technology has changed the cost of accessing a feedstock (e.g. fracking, cellulosic sugar extraction, algae cultivation) to make a known or novel material for the marketplace.

What’s novel?

Novel means change — often infrastructure change, and certainly customer behavior change. The drivers to take steps towards market change can be shortages (think of innovative fuels introduced in wartime), or new concerns about external consequences (e.g. carbon emissions, MTBE contamination, lung damage, to use examples).

What drives novel markets?

For market change, the leverage is in the market guarantee — as expressed in anything from an offtake agreement to a mandate. The more that markets are guaranteed, the more that actors will embrace the novel.

Take for example, market guarantees in the area of biopower — that is to say, renewable power mandates, have offered the kind of market guarantee that has made wood pellets attractive. It’s an old technology made useful again by a mandate — and companies are jumping in like crazy. But if biomass power mandates were to become unstable — well, zap! You’d see the technologists disappear from the market faster than you can say “corn ethanol”.

What drives novel technologies?

For technology change, the leverage is in the price and technology guarantees. The more that these are guaranteed, the more that actors will embrace the novel.

Take for example the aviation biofuels market. There’s a proven market for jet fuels, and new technologies have emerged, but they can’t afford the financing packages available (i.e. 16% interest, as opposed to 5% or less for proven technologies) for technologies that aren’t packaged with fixed offtake, fixed feedstock prices and a technology guarantee.

What drives financial investors?

Leaving aside VCs — who raise money from financial investors but act more like technologists or strategics — financial investors tend to avoid technology risk like the plague. They generally don’t like market-risk very much either — but if the risk is perceived to be long-term and the market is currently pretty good, and there are off-the-shelf technologies that can be deployed right away, financial investors don;t mind making hay while the sun shines.

For that reason, it’s easier to finance natgas and pellet projects — even first-gen ethanol did well with financial investors for a while, until concerns over market risk mounted.

Their concern? They’ll watch demand very carefully. If it expands, so will they. First sign of a drop — well, a good financial investor always carries a well-packed parachute.

What drives incumbents?

Generally, incumbents like “more of the same” — after all, that means expanding based on core technology and known project characteristics.

So, they generally avoid too many novel technologies — though they love process improvement, and do those quite often.

Their concern? Generally, they worry about supply. If competitors start making too much, they bail. Also, if the cost of raw materials starts to climb, don’t expect too many new projects.

What drives strategics?

Generally, strategics dislike novel markets, though occasionally they invent a technology and may think and act like a technologist in that one area of operation.

Strategics like existing markets — namely, their own. Make their molecule — at a lower cost, better performance, or with better carbon attributes — and you’ll get a good conversation going with a strategic. Particularly if they want to improve market share in a given market they are acting in, or one adjacent to a market they are successful in.

Their concern? Generally, they worry about cost, and primarily about the return on investment. They like payback in 3 years, for example. They won’t pay a green premium — there’s a green preference, but no more. And they like better performance, but its a harder sell-through to their customer base. But cost is easy to sell, easy to understand.

What drives technologists?

Generally, technologists are the most likely to develop new markets for new technologies. VCs exist — for example — to help financial investors obtain elevated returns by identifying technology waves and creating ventures to get into powerful new niches.

They’ll take on new markets, though they don’t like market risk all that much, and expect another class of investor to come along after they have mitigated the technology risk. But high costs and long timelines rupture the classic VC-IPO formula.

They may skip a step or two to bring a technology along faster — and can suffer an expensive, epic fail if the scale-up runs into trouble. Or, rush to the IPO exit prematurely, and expose the technology to “where’s my money now?” pressure from investors.

And even big technology players — such as DuPont don’t want to be an owner-operators — they want to build one or two with their money, then build the next fifty with your money. Capex is always their key.

The Bottom Line

The important thing is to know the roadmap so that you partner up effectively — and understand the marketplace clearly, so that it doesn’t befuddle you.

If you think in terms of players, products, concerns — and use the four-cell box approach defined by Technologies and Markets — you’ll be able to navigate the waters effectively.