The Solyndra Effect, or why alcohol-to-jet fuel is a tough sell

November 16, 2012 |

Why is ATJ experiencing NSF, possibly DOA, and certainly not yet RFTO (AFAIK), as skeptics are (FYI) ROFL?


By now it must be universally understood that it’s tough to run a business that processes $10 bills into $5 bills, no matter what economies of scale you reach – and no matter what the rate, titer or yield of your process.

What we keep running into is what Aemetis CEO Eric McAfee once described to me as the immutable “Natural Law of Alternative Commodity Markets”.

The acronym for this is NLACM, which is hard to pronounce, and in fact sounds like a dog trying to get peanut butter off the roof of its mouth.

But it is important to understand.

NLACM states that “the value of any intermediate products produced in any process must be significantly exceeded by the value of the end product, or the end product will not be produced.”

The Solyndra Effect

McAfee uses Solyndra as an example.

1. Produce valuable, capital intensive thin film solar panel material that captures 100% of the available light on a flat surface and converts the light energy to electricity.

2. Roll the thin film material into a circle using an expensive process, thereby reducing the capture of direct light by 50% and capturing indirect light only from white rooftops.  White industrial rooftops comprise 3% of the market, thereby eliminating 97% of the available target market.

3.  Repeat at high production volume to achieve “economies of scale” to compete with thin film and silicon crystal flat panels.

4.  Shut down the company and wonder why it didn’t work as well in real life as it did on spreadsheets.

The fallacy? “The production of thin film solar panels,” McAfee says, “is actually the highest value activity in the process, after which every process step reduced economic value and eliminated available markets.”

NLACM and alcohol-to-jet biofuels

But NLACM is something that can be used to analyze something closer to home for the biofuels community – and that is the problem of alcohol-to-jet fuels. It’s a path that the Department of Defense wants very badly for its military aviation biofuels program – and yet insiders say that they, and engine manufacturers, are privately wondering why it is so difficult to get samples of aviation jet fuel made from alcohol, so that they advance the certification process.

Where are the gallons, given that the science has made so much progress? Well, think of it through the NLACM lens.

1. Produce non-food, advanced biofuels such as cellulosic ethanol worth $4 per gallon ($2.50 ethanol + $0.45 advanced fuels RIN + $1.01 tax credit).

2. Recombine ethanol molecules in a reaction that makes about 1 molecule of jet fuel from 2.5 molecules of ethanol.

3. The value of the total molecule is now about $7 as corn ethanol and $10 as cellulosic ethanol, but only $3.50 as unsubsidized jet fuel.

4. Repeat at high production volumes to achieve “economies of scale”.

5.  Invoke the Defense Production Act to allow direct investment by the military in building a full-scale plant.

6. Shut down the production of jet fuel when less expensive direct conversion technologies enter the market.

7. Sell the plant to someone else, who happily and profitably produces cellulosic ethanol, due to the high cost of cellulosic ethanol feedstock for jet fuel relative to the alternative use of the feedstock as motor fuel.

8. Wonder why the spreadsheet looked so good.

OK, here comes the response from industry.

“Jet fuel production costs will fall dramatically, as woody biomass and other cellulosic feedstock come into use – to as low as $1 per gallon for the underlying alcohol molecule, making it financially feasible to make jet fuel from biomass, via alcohol.”

The NLACM paradox.

The intermediate product is still cellulosic ethanol, which has a value of $6.25 per gallon (at a rate 2.5 molecules of ethanol to a molecule of jet fuel), even without RIN credits and subsidies. The value of the intermediate cellulosic ethanol product must be ignored in order to produce any ATJ at all.

Make a molecule of jet fuel from a molecule of isobutanol? Worse. Now you start with a molecule worth $4 or more instead of one worth $2.50.

Now, its true – there is the problem of saturated markets. You can only sell so much high-value astaxanthin made from algae before you have to start selling some cuts of your barrel for something a little less. After all, not every cut in the barrel of oil sells for $3.50 per gallon.

But that’s after saturation. The 1.2 trillion gallon fossil fuels market and the sub 20-billion gallon advanced biofuels market are at different stages along that path.

ATJ, seen by the banking community

Today, with RIN and tax credits – here’s what the banker sees.

“OK, you start with $2.50 value corn alcohol as a feedstock, then propose a non-food, lower cost replacement feedstock to create the $4.00 per gallon higher value cellulosic ethanol. Ignore both of these ethanol product values, then obtain grants to produce a jet fuel that has a $10 base value of its intermediate products – cellulosic ethanol.  Then sell the jet fuel for $3.50 per gallon, rather than cellulosic ethanol for an equivalent value of $10 per gallon.

“Whaddya ya think I am, crazy? Geddouta here.”

That’s why it is hard to find alcohol to jet fuel produced in appreciable quantities. Not for the lack of science, engineering, or entrepreneurs who see opportunity (and margin) in military contracts. All of that is there, and real.

The problem is NLACM, which shuts down wildly non-financeable processes hitherto shepherded by brilliant scientists, engineers and the entrepreneurs who lead them.

For them, it is a cruel life that lies ahead — repeated experiences of dismay when projects fail to raise commercial-scale equity from strategics or private investors, or debt from commercial banks, surprising everyone involved.

McAfee warns, “The Natural Law of Alternative Commodity Markets it is not merely an “Economic Law”, of interest to those caught in the drab tan robes of business, but rather is a Law of Science that unleashes wrath upon those whom defy it.

“For investors and operators, the glaring reality that an intermediate product has commodity market value usually quickly causes a loss of interest in downstream processes that decrease the value already created.”


The test

But here’s the test.

We’ll measure here in Digestville the howls of protest, following the publication of this column, received via our built-in, shock-proof “I hate you, you’re stupid, go away” email in-box.

Doubtless we will receive them – after all, we received a thundering stream of them when we ran columns suggesting that there might be problems at Range Fuels.

We’ll compare the ratio of “you know nothing!” emails received from finger-wagging entrepreneurs, scientists and engineers, to those received from debt issuers and sources of material amounts of private equity.

When the bankers protest, you know it’s financeable. And that’s how we’ll know.

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