8 Top Ways around the Big, Bad Oxygen Problem in Biofuels

October 13, 2015 |

arc-reactorOxygen is colorless, odorless, and try to get through an hour without some.

But in the Advanced Bioeconomy, oxygen is not your friend — it could be an existential threat.  In today’s Part II, another 4 workarounds.

Part I of this story can be found here.

In the advanced bioeconomy, the Big, Bad Barrier is the Oxygen Problem. That is, 56% of a sugar molecule, by weight, consists of oxygen — and in the world of making hydrocarbons from sugar, the oxygen in the molecule poses as daunting a challenge as the absence of oxygen posed for the moon-shot science team. It turns out there really can be “too much of a good thing”.

Either you can’t afford to move it (raw biomass, which also contains oxygen in the form of water, to compound the felony), or you can’t afford the molecule after you’ve stripped away the Os.

V. The niche fuel

One solution — especially for companies working their way down the cost curve (i.e. over time generating process imporvements, and economies of scale), is to target niche fuels. That’s been Gevo’s pathway, to some extent — in targeting isobutanolk towards situaiyons where renewable fuel is desired but less practical, for example as a marine or small-engine fuel where the engines have not been as broadly adapted to E10 ethanol.

As we observed in July, you can get $5 for a gallon of isobutanol and still offer a benefit to consumers. Here’s how:

“Perhaps the most fascinating stat in this growing market is the pricing. E85prices.com reports the national E85 price average at $1.93,  E10 at $2.30, and E0 averaging $2.88.

“A $5.00 per gallon (wholesale) isobutanol fuel blended at 12.5 percent adds 47.8 cents to the hard cost of a gallon of fuel, compared to using $1.468 ethanol (today’s CBOT September ethanol futures contract price). At the same time, there’s a 5.6 cent gain in the RIN value in the fuel (slightly higher blend, higher RIN value for advanced biofuels and more energy density). So, you net out with a $0.42 premium in this scenario — or $2.72 for B12.5. That’s less than the $2.88 average for E0.”

VI. The low carbon mandate

Where there are low-carbon mandates, there can be premium values for the fuels expressed through rebnewable fuel credits, such as RINs. The RIN value has stayed about 50 cents all year for a gallon of corn ethanol, and is around 76 cents per gallon for biodiesel and advanced biofuels. Now, that’s not available to the producer — the RIN comes for free to the obligated party (who blends renewable fuel), but the higher the RIN value, the more incentivized the obligated party is to buy renewable fuel at a premium, instead of buying RINs on the open market instead of renewable fuel.

A lot of people carp about the subsidy that RINs represent, but they really aren’t. What they are is, essentially, a fine as an optional behavior. Like paying rent, you can pay on time, or pay late and add a late fee. Consider it a soft mandate — you really don’t have to blend renewable fuels, you have to acquire RINs, and if RINs happened to be available at a nominal marlet price, as happens from time to time, you can skip blending renewable fuels altogether.

At the same time, low carbon mechanisms help solve a pressing problem in the low carbon economy: low carbon technologies provide a public benefit (i.e. lower greenhouse gas emissions, contributing to the fight against global warning), but don’t bring a direct benefit to investors. It’s impossible to inspire investors without a return for the cost of developing a technology — especially when small start-ups have to compete with established behemoths. So, the low carbon mechanism injects an extra form of return into a venture, so that the public itself doesn’t have to directly make all the investment in technology.

VII. The high-value product

We’ve seen it time and again, the company that began with a focus on fuels switches over to a higher-margin, smaller-volume product when the development timeline gets too expensive.

As we observed in “The Dream of Algae and the Business of Algae”:

Sapphire is typical. They are Sapphire Energy for now, but the name is clearly going to have to change. They’re now aimed squarely at “commencing omega 3/7 oil sales in 2017 from our Columbus, New Mexico plant, and then omega-3 EPAs, which are sustainable and non-fish in origin.”

“For now, we are focused on health & nutrition,” said [CEO Jamie] Levine, “and later as we move down the cost curve there are opportunities with high-value protein, aquaculture feeds, and animal feed. And we’ll keep an eye on fuels.”

“In the path down the cost curve from perfume economics, to health-and-beauty economics, and on to everyday triglyceride oil economics for non-exotic products, and on to products such as foods, fish meal, animal feed and ultimately fuels, a large number of companies have paused somewhere around health-and-beauty – in Solazyme’s case, a little further and into the world of commercial triglyceride oils for everyday applications like drilling fluids and foods. Many are still working at sky-high costs where only a handful of markets are open to them. But they’ve found that algae competes well, there.

For a lack of capital, a need to do business soon with a winning first product, or simply a yield wall they have not been able to overcome, there’s quite a pile-up of algae companies somewhere past perfumery and short of animal feed. Creating a log-jam in markets such as astaxanthin.

VIII. Wishing for higher fuel prices

In some cases, we have companies that are willing to wait out the fuel price environment, or take a longer view of whether we are experiencing low oil prices or simply the typical low end of a volatile, whip-sawing market in petroleum.

Fans of the latter case: that we are looking at a typical cycle and companies have to anticipate and compete against the whole cycle, not just part of it — point to oil prices 10 years ago and oil prices today. After all, they argue, the original US Energy Policy ACt was signed in 2005 and spawned a flood of energy start-ups, why not consider how prices were then, and now.

Brent Crude in May 2005, expressed in Euros: €41.22
Brent Crude in Oct 2015, expressed in Euros: €44.34

Either way, fuel prices are expected to rise in 2016-17. OPEC chief Abdalla Salem el-Badri told conference-goers in Kuwait City this week that “we are hopeful that the industry will see a more balanced oil market in 2016. We have recently seen a contraction in production from some non-OPEC producers and an uptick in demand growth.”

How much will oil prices rise? The December 2016 NYMEX Brent Crude contract is trading today at 56.45, and trades are reaching $60 for the February 2018 contract.

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