Routes to the summit: 3 keys to first commercial advanced biofuels, and beyond

The players

Obligated customers – downstream.

As we have noted, not a good source of capital unless they lack exploration divisions. They’ll buy upgradable feedstocks – be they crude oil, bio-oil or what have you – if the economics are there. And they may wheel out their balance sheet if they see

Preferential customers – downstream – customers would prefer to use biobased fuels, chemicals or materials, but are not facing a mandate.

If you have a cost-advantaged molecule for them — especially if it smooths out volatility issues with fossil feedstocks — you may well have a winner. Green will be a tie-breaker, no more.

The bigger their balance sheet and the smaller their other opportunities, the more likely they will be to make a direct investment at scale. Otherwise, they may push technology along with a strategic investment and wait to buy the product. Or, they may co-operate in the form of testing and R&D collaboration, but not make a direct strategic investment — especially the consumer product companies will line up this way.

Growers and biomass aggregators

The best source for capital, long-term. After all, they have the real upside of a new market for their feedstock. It’s like getting a country that has discovered oil to get excited about supporting technology development that builds new applications.

The problem here? Usually they are disaggregated, and badly capitalized. Fixed-cost feedstock contracts may well help secure interest from purely financial players who can work within the project finance structure.

But seeking owners of aggregated sources of feedstock and have balance sheets — well, that should be job #1 on the list of any financier looking for dollars for a first commercial.

Government entities

Governments are pretty good at supporting long-term basic research, less so in mid-term advancement of technologies to commercial-readiness, generally terrible at helping companies to go forward to commercial scale. The best regimes are those where government has a cost-share role — limited a project sweetener of, say 20-40% of the total cost, and where there is a clear benefit to the local economy in adding value to biomass.

Carbon tax regimes are virtually useless except to the extent that they force obligate parties to get active in searching for partners. But at less than $10 per tonne for a carbon credit, it’s barely a sweetener for a bioenergy project.

Mandates are too inherently unstable to reduce financial risk. Especially when they have an offset mechanism such as the purchase of a credit in lieu of the fuel. Those regimes allow obligated parties to buy the credits until they can mount enough “why are we obligated to use non-existing fuels?” noise in government circles to tear the mandate down, or otherwise de-fang it.

Processing technology developers, catalysts, enzymes

Good source of capital for first commercial projects — no more. They rarely make early-stage investments, but often recognize that technology is coming along that needs to get through the valley of death to open up some real new market opportunity for the catalyst or enzyme maker. But the appetite for investing will rarely stretch beyond the first commercial.

Financial investors – aggregated (hedge, private equity, VC, institutions)

Good source for early-stage capital for technologies that have low market, policy risk but have technology risk. VCs will take technology risk all day long. Hedge and private equity are more interested in the “I’ll finance your third plant” strategies, if they have an interest in the sector.

Financial investors – disaggregated (retail, IPO)

Small investors beat up on technology stocks, and especially cleantech plays, and extra especially on advanced biofuels. Going public in advance of revenues and cash flow – yikes, the heat will be tough, and must be measured against the reduced cost of capital that a successful IPO can offer, and the opportunities to raise debt and equity through subsequent offerings that public entities have.

Once the revenue and cash flows are in place – once the stock has evolved from “story” to “value” — well, that’s different. But markets can still beat up on cyclical companies, badly. Look at all those revenue-generating ethanol plays.

Vehicle/engine manufacturers

Can join and even lead your R&D consortia — or help immensely with your roadmap to establishing a new fuel. Look at Boeing, practically investing aviation biofuels in terms of fostering the commercial testing and assisting where possible in fostering policy support.

Financial support – well, it will be minimal. GM has done some, Honda and Toyota too. It’s been early-stage, and not a huge amount lately.

Seed/plant developers

Generally, the Big 6 seed and plant companies have been investing where they also have technology arms that see customer sales or technology license sales down the line. BASF has been getting very active of late with companies like Renmatix and genomatica. So, Dow’s been active as an investor in companies like OPX Bio, while DuPont has been hugely active via its cellulosic ethanol venture and in biobutanol.

Monsanto, Syngenta, Bayer — not much activity – though Monsanto has shown some interest in Sapphire Energy’a algal technologies.