The Advanced Bioeconomy 2016: State of the Industry

For the advanced bioeconomy, the question remains and will remain for some time, where are the gallons? Specifically, projects that use biobased feedstocks that can be converted into renewable fuels, chemicals, advanced foods, and biobased materials.

Projects have not materialized in the numbers that would support rapid growth because of immature technology (expressed in unreliable operation, or high costs), and poor returns for the risk profile associated with technologies as they mature.

The risks, in turn, are driven by three major factors:

1. Technology risk.
2. Commodity price risk.
3. Market access risk, closely associated with policy risk relating to mandates.

With these concerns addressed, the growth scenario would be very different. Military, governments, airlines, chemical manufacturers, and consumer-facing brand marketers with sustainability goals have broadly indicated a robust interest in these technologies and products. Airlines alone have indicated that up to 50 percent of their demand would be available to low-carbon fuels — and that represents 10 billion gallons of added fuel demand in the US alone.

Sources disagree, in speaking with The Digest, on the pace of growth less because of confusing demand or price signals, but because of the uncertainties relating to the pace of addressing the risks.

One thing they do agree on: policy and market access risks are closely related to, and derivative from, technology and commodity price risk. In short, demand would be a whole lot higher if low-carbon alternatives were more mature and commodity price risks were more manageable.

No debt financier wants to back a $200 million project that would realize $10 million in a scrap auction unless there is almost no risk of project failure. And even government loan guarantees are available only in narrow circumstances — the project fundamentals cannot be materially and obviously at high risk.

Which brings us to feedstocks — since technology maturity is likely to reduce naturally over time where robust R&D efforts are in place and as project operators learn to reduce unreliability through comprehensive project demonstrations and technology iterations.

Most technologies that reach a “state of reliability” will be capable of producing between 25-50% yields per ton of biobased feedstock, and will cost between $1.50 and $10 per gallon of installed capacity — amortized over 15-20 years, there aren’t any product pricing scenarios that make these cost ranges unfeasible, so long as operating costs are in line. And overwhelmingly these relate back to feedstock.

How much can feedstock cost?

Leaving aside boutique markets for exotic materials — for example, astaxanthin — generally speaking, project developers speak to The Digest about products with price ranges of $500 to $2000 per ton — or $0.25 to $1.00 per pound. Putting the yields and the product prices together, you can see right away that, with a 25% yield and a $500 price target, even nickel a pound feedstocks will not allow for recovery of capital costs and a return for investors commensurate with all that risk.

Accordingly, projects that depend on more costly feedstocks will exist on government fiat, essentially — mandates that create a separate market for low-carbon products owing to economic development, supply security or emissions goals. These have proven, more or less, easier to maintain in countries with abundant biobased feedstocks in place that need markets. Hence Brazilian cane, US corn and soy, Argentine soy, EU rapeseed, and so on. But as soon as the stocks tighten, governments tend to lose interest in mandates.

What’s likely to cost less than 5 cents a pound in the near and mid-term?

Generally speaking, woods and residues. Energy crops will come later — if for no other reason, because of the timelines for widespread grower adoption and crop establishment.  With “first generation” feedstocks there is, around the world, quite a bit of pushback against more diversion of feedstock to low carbon products and away from feed markets.

Everywhere, there’s enthusiasm for residues because they can have zero or negative cost. Here in Digestville, we tend to be more narrowly enthusiastic about residues that cause financial pain for their producers — new landfill creation, converting CO to CO2, and so on. We have seen that perfectly good residues like bagasse haven’t taken off despite, essentially, a zero price — likely, because “business as usual” wasn’t causing cane producers enough pain.

We are quite enthusiastic about wood — low prices, production at scale, excellent aggregation, no squawking from feed markets, and experience with bioconversion.

Oil prices

Low oil prices have reduced interest in energy investing and lowered the price at which low carbon products may enter the market. Consequently, everyone asks about the oil price outlook, and the good news for project developers is that most authorities are projecting prices in the $60 range by the end of 2016, and into the low $70s by the end of 2017.

Change of government?

The presence of mandates, loan guarantees, R&D support and so on makes the sector highly tuned in to the political scene, and in the latest global market for low carbon products, the US, there’s an election year on. At the moment, Reuters polling puts Hillary Clinton 10 points ahead of Donald Trump; both candidates expressed robust support for the Renewable Fuel Standard, although Trump has spoken of unwinding portions of the current US low carbon agenda.

On Capitol Hill, experts are projecting a possible return of the US Senate to Democratic hands, but no change is yet foreseen of control of the US House of Representatives, though a swing of a handful of seats to Democrats has been tipped by the UVA Center for Politics.

Financing

Financing have not materially evolved since bond funding emerged as a debt instrument, and sentiment remains broadly and sharply against the sector in the pure financial investors — strategic investors have been the source of most project capital. Financing sentiment will improve in 2017 if the impending change in government does not come with a change in policy, and as technologies mature.

Given the generally weak state of pulp & paper company balance sheets, wood based projects will continue to struggle to find strategic investor capital, and states and municipalities are wary of bond issues or loans owing to the KiOR failure. So, a new financing instrument is going to have to emerge. Ultimately, the risk and the capital have to be separated, and loan guarantees achieve this but they are costly, cumbersome and slow — and government loan guarantee funds are unlikely to expand.

We see the possibility that a new financing instrument might emerge where the risks are transferred to those with carbon exposure. This is the practice in carbon markets _ buying and selling of carbon credits — but signals from carbon markets (such as RIN prices) have translated more into more political noise than financing availability, so a new instrument is going to have to emerge that accumulates capital that can be put into projects. The Europeans use a model like this, though as elsewhere the project selection process is cumbersome and slow.

Bright spot: food

Looking for growth? Think proteins and advanced foods. That’s where you’ll find hot entries like Impossible Foods, Beyond Meats, Modern Meadow, Muufri, TerraVia, Calysta — and Cellana with it’s multi-product strategy encompassing fuels, nutraceuticals and feed. The markets are large and, as anyone who had ever paid $5.00 for a 4 oz bag of potato chips at a movie theater can attest, the prices at retail can exceed $30,000 per ton for a finished product. Fishmeal is selling well north of $1000 per tonne, and there is excitement over new offerings through biotechnology for sweeteners like EverSweet to vegan-friendly foods that offer real protein, only cutting out the middlecow.

More exciting — brand marketers are looking for big ideas and new products, not fighting them with high-paid lobbyists.

The 5 technology drivers

We wrote about them in “Big Data, robotics and synth bio: Driving The New Agriculture” last week — and all of these areas are hot, hot, hot.

1. Plant improvement, from genotype enhancement to phenotype selection and deployment.

2. Automation, from self-driving tractors to unmanned aerial robots that replace scarce labor and bring new complex real-time data.

3. Transformed pest management, moving from traditional chemicals and biologicals, to more integrated pest management, including microbials as well as new chemicals and breeding — and opportunities in the plant’s micro-biome.

4. Data science — big data management allowing for faster, better cheaper decision-support tools.

5. PrecisionAg — more targeted delivery of water, crop protection, and seeds to optimize yield and minimize inputs.

The Bottom Line

Barring transformation in financing, the big markets in fuels and chemicals are likely to remain in the “pockets of growth” department for some time, though those pockets could be very attractive especially with woods and residues feedstocks. But protein is looking a lot more promising at the moment, one of the reasons that so many marketers are heading there seeking higher prices, less policy turbulence, and bigger volumes than in, say, the  nutraceutical markets.