Pavel Molchanov notes Q3 depression in cleantech investment

In New York, Raymond James energy analyst Pavel Molchanov writes of 2014’s third quarter for clean tech investment:

Amid a rather sharp “risk-off” trade towards the end of the quarter, 3Q was not a pleasant time for most clean tech investors (well, unless you were on the short side). Of course, the same was true of energy stocks across the board…nearly all of the energy subsectors, clean tech included, are underperforming the S&P 500 on a year-to-date basis…

Outlook on Biofuels and Bioindustrials

Conventional ethanol – produced from corn in the U.S. and sugarcane in Brazil – has long been used as a mainstream fuel component for blending into gasoline. While it is not without some merits, its central economic flaw is the systemic challenge of managing the “crush spread” between the price of ethanol (an energy commodity loosely linked to gasoline) and the cost of corn/sugarcane (an agricultural commodity). Cellulosic biofuels address this problem. Since they are produced from non-food feedstocks such as wood chips, switchgrass or municipal waste (materials that have almost no intrinsic value), the cost side of the economic equation is immune from volatility in the agricultural market.
Scale-up of cellulosic and other advanced biofuels is progressing slowly, for two reasons. First, commercialization involves significant execution risks. This is true both for companies using a biochemical process (fermentation), which involves a large element of biotech R&D, as well as for those using a thermochemical/catalytic process. Second, capacity expansion is highly capital-intensive. Venture funding can get companies to the proof-of-concept stage, but for commercial scale-up there are three main financing options: government loan guarantees, strategic partnerships (often with integrated oil companies, refiners and chemical producers), and capital markets. Given the generally higher pricing for chemicals as compared to fuels, many advanced biofuel developers are focusing on opportunities in renewable chemicals and other bioindustrial products.
Given the higher adoption rates of diesel engines in Europe vs. the U.S., biodiesel has historically been more common in Europe. Biodiesel margins are a function of the crush spread between the price of biodiesel and the cost of feedstock. The bulk of U.S. biodiesel plants use soybean oil as their principal (or sole) feedstock, though some are able to utilize and source lower-cost feedstocks. Longer term, renewable diesel can provide a “drop-in” alternative to biodiesel, with particular benefits for cold climates.
The most important U.S. policy supporting biofuels is the Renewable Fuels Standard (RFS), which provides a statutory demand floor for both conventional and advanced biofuels through 2022, although each year’s target is subject to modification by the EPA. Given the slower-than-expected pace of scale-up, the cellulosic mandate of the RFS has been sharply reduced in recent years, and this is likely to continue. As part of the RFS, biofuel producers can monetize credits, called RINs, when selling to fuel distributors. As corn ethanol approaches the “blend wall”, ethanol RIN values have increased, spurring a regulatory response by the EPA, but we do not envision any near-term legislative changes to the RFS given the broad-based, bipartisan support for the overall policy.

To see the full analysis.