The Red-Light District in biofuels feedstocks

You’ve heard about it, no doubt, the red light district. Filled with today’s temptations and allure, tomorrow’s regrets and OMGs.

Biofuels has its own district, too – but Roxanne, you don’t have to put out the red light.

In biofuels, feedstocks come in many shapes, phases, and sizes — but only three colors – red, yellow and green. That’s what our friends in the financial world tell us.

Now, sometimes even a red-light feedstock has been made to work in the past. That was then, this is now. But for financing new projects, red-light feedstocks are generally to be avoided at all costs. Yellow-light feedstocks can be used successfully in a range of circumstances – but watch the range. Green-light feedstocks are — for the foreseeable future — sustainable, affordable, reliable, and available.

Let’s look at a few.

Red-light.

The criteria. Your processing technology may give you a cost advantage, but not material enough to secure long-term contracts or supplier equity, leaving you with a tough financing environment.

Or, your proposed technology path lacks the technology state of readiness where commercial applied development can be financially justified – ROI is too low, or too slow.

Or, you are using a controversial feedstock that will create growth-stopping headwinds before you reach competitive economies of scale.

The allure. Low-cost, easy-to-operate technology that works with certain feedstocks, can tempt many a Mom-and-Pop to build small-scale capacity (without locking-in advantaged feedstock or offtake prices that offset the loss of economies of scale.)

Sometimes, opportunities exist to capitalize on an expertise in first-gen feedstocks like sugarcane, but these should also be evaluated in terms of the global sugar and molasses markets.

There are “come, hither” suppliers who have aggregated, currently affordable, get-into-business-now feedstocks – but may be engaging in a form of bait-and-switch. Their long-term interest may in raising feedstock prices through competition, and your economics may go under the bus while enabling theirs.

The warning signs. Upside down economics come fast and furious in this sector – skyrocketing feedstock costs and steady or falling offtake prices. One warming sign – tough times in negotiating long-term feedstock or offtake contracts. Another warning sign – budding controversy over the consequences of capacity building (e.g. “food vs fuel”) where the necessary positive communications campaigns are beyond your budget.

Examples. Food crops, residues where there are no IP or supply-chain barriers to overcapacity. Feedstocks grown on land converted from other popular purposes. Feedstocks grown at lab scale.

Yellow-light.

The criteria. Your process and site location gives you a total cost advantage not only over fossil fuels, but over competing uses for that feedstock – including competition from other biofuels technologies. It may not quite justify partners jumping in with equity, but long term contracts at affordable rates are available – and, when you have further proven your case, equity is not out of the question.

Your feedstock may not be a waste or a material that is abundant and aggregated in its natural state (like sunshine, or water), but it can be aggregated at affordable costs using available (or easily adapted) technology. It certainly must have positive social attributes by not competing with commodity foods.

Also, your feedstock may be something that will be a green-light feedstock tomorrow, but there are limitations on its availability or viability today – perhaps, for example, you have a CO2 source but it must be expensively transported in as you await a rail spike or pipeline.

The allure. These are (usually) financeable feedstocks that will have strategic customers generally eager to provide long-term off-take contracts and in many cases invest in capacity building. By locking in long-term feedstock prices, you have a strong business case for the viability of the finances.

The warning signs. If and when your IP protections degrade, a competing technology may come along. Also, if you are working with residues from a grower, take care for signs that the underlying primary material remains financially viable – not much corn stover available from people who have turned to pasturage.

If you are dependent on future infrastructure promises, beware of the possibility that the counterparty may default on an obligation or change strategic directions.

From a social point of view – beware of environmentalist campaigns that begin to target land-use and not just crop-use. You may not be using a feedstock that also is used by food makers, but if you are using land that could be used to make food ingredients , or land that was a carbon sink – you may be targeted for protest.

Examples. Energy crops, agricultural and waste oil residues (where there are barriers to processing overcapacity), marine crops, wood and forest residues. The new feedstocks of the not-too-distant-future.

Green-light.

The criteria. Your tightly-protected processing technology IP represents a proven, materially better profit opportunity for your feedstock partners, to the point where they will seek low-cost equity in your project instead of demanding payment at the gate or simply engaging in long-term supply contracts.

In even better circumstances, your feedstock is an emission or waste rather than a crop, so your technology will have strong remediation attributes – in addition to monetary and carbon attributes – and someone else has a motivation to aggregate the feedstock, whether you are around or not.

In the best of circumstances, your feedstocks will be evidently abundant, low-cost or free, and secured for the long-term, even at volumes that maximize the economies of scale in your process design.

The allure. These are financeable feedstocks. By maximizing your cost advantages over incumbent fossil fuels, you have created a stronger array of interested balance sheets that may invest with you to deploy your technology at scale. By having feedstock equity partners, you reduce your capital needs and materially increase your chances of securing affordable debt. In social terms, there is not pressure against the scaling of your technology – there is pressure for it.

The warning signs. If and when your IP protections degrade, a competing technology may come along. Also, if you are working with an emitter, watch for signs that your feedstock partner is financially viable in the other (usually larger) parts of the business. If your feedstocks are free and abundant (such as a saline aquifer) watch out to see that, for example, an aquifer or pipeline does not degrade or close.

Examples. Municipal solid waste, CO2, carbon monoxide, sunlight, saline or brackish water, grey water, animal residues, process heat and steam from co-located projects, sugarcane bagasse and vinasse, noxious industrial effluents with a carbon fraction.

The bottom line.

Yes, Roxanne, you don’t have to put out the red light .

The viability of your project will depend to a great extent not only on developing a processing technology that unlocks value in a feedstock – but in doing so in ways that meet financial and social criteria, and is cost-competitive within the biofuels sphere.

It profits you nothing to develop a process that competes with $50 oil, if there is someone else working on the same feedstock that can compete with $45 oil – or, if you end up being competitive only at $180 oil because the price of the feedstock tripled.