The Chalice from the Palace: Canada’s NextGen Biofuels Fund backs Enerkem, Greenfield cellulosic ethanol project

September 30, 2013 |

danny-kayeAfter a long period of project development and project selection, the NextGen Biofuels Fund identifies what it believes is the “brew that is true”

In Canada, sprightly news arrives from the north, that Sustainable Technology Development Canada, through its NextGen Biofuels Fund, could be investing just shy of $40 million in the Vanerco project – a joint venture of Enerkem and Greenfield Ethanol, slated for construction in Varennes, Quebec.

The initial investments is $734,500, that will support the initial development of the facility as a repayable contribution, and the final amount that could go up to $39.8 million.

Overall, its a 10 million gallon, 38 million liter waste-to-energy project that will use The non recyclable waste from institutional, commercial and industrial sectors, and from construction and demolition debris.  Construction of the facility, which will use Enerkem’s proprietary waste-to-biofuels technology, is planned to begin in 2014.

The plant

Enerkem, in partnership with GreenField, intends to build a facility that will convert 100,000 metric tonnes per year of urban waste in 38 million litres of cellulosic ethanol. This ethanol can be used to produce transportation fuels. The Enerkem thermo-chemical process, which is currently being demonstrated in Wesbury, QC with support from SDTC’s SD Tech FundTM, includes feedstock preparation, gasification of biomass, syngas conditioning and catalytic synthesis of ethanol – the steps necessary to convert waste to ethanol. The gasification capacity scale-up factor is seven times from Westbury to this facility.

The deal parameters

The NextGen Biofuels Fund supports up to 40% of eligible project costs. The contribution is repayable based on free cash flow over a period of up to 10 years after project completion.

Suggestive that the total project cost will be in the $100 million range, or around $10 per installed gallon of capacity.

The pellet with the poison’s in the vessel with the pestle

So, why exactly are governments in the biofuels financing business, anyway? The practice is controversial, and expensive, and occasionally leads to failed projects that attract more publicity than anything else going on in the sector.

Well, consider it a variant of the problem that Danny Kaye faced in the 1956 film, The Court Jester. Two confusingly similar containers, one containing a deadly poison, but which one? The pellet with the poison’s in the vessel with the pestle; the chalice from the palace has the brew that is true!”

In our Danny Kaye variant, suppose we have two technologies, Both have had successful pilots. One is going to succeed. One is going to fail. But we don’t exactly know which one is which. So we are stymied in our investment.

Now, seen from a broad societal view — the course forward seems clear. Invest in both technologies. One fails, one succceds. You never build a second of the failures, but you build 100 iterations of the successful design. Net gain? Lots of renewable fuels, and only 1 project in 102 failed – less than a 1 percent default rate. That’ acceptable, even in the risk-averse project finance market.

But look at it from the point of view of the debt holders on those first two projects. Each — at the outset, has a 50 percent chance of failure. Now, that’s unacceptable risk — completely unacceptable. So, how do you get down the road?

Well, one way is through all-equity investments. But without the debt component, the returns get spread over more deployed capital. Like one pat of butter spread on an oversized pice of bread, the returns are too thin.

That’s where governnent steps in, to assist with the debt risk — where the societal benefit is strong, either in terms of energy independence, emissions reduction, or domestic economic development. Probably, a combination of all three.

By catalyzing the sector (through helping with pilot and demonstration projects that derisjk the first-commercial bets, and taking a key role in financing first commercials, the government does more than make a project come to life. It makes a sector come to life — not by picking winners and losers, but using its financial muscle to identify the winners and losers.

More on the NextGen Biofuels Fund

The NextGen Biofuels Fund is positioned downstream from the SD Tech Fund. The SD Tech Fund can therefore be a feeder to the NextGen Biofuels Fund. The NextGen Biofuels Fund, however, is open to all cellulosic ethanol and new biodiesel technologies once they have been successfully demonstrated at the pilot scale.

To be eligible, a project must:

• be a First-of-Kind facility that primarily produces a next-generation renewable fuel at large demonstration-scale;
• be located in Canada;
• use feedstocks that are or could be representative of Canadian biomass; and
• have demonstrated its technology at pre-commercial scale.

Currently, these next-generation technologies, which are capital equipment intensive, are not progressing to market because they present too great a risk for the debt finance community. Equity financing is not consistently available and has been difficult to source in Canada at sufficiently attractive rates of return.

The aim of the NextGen Biofuels Fund is to help bridge this High CAPEX (Capital Expenditure) gap and remove the final elements of technology risk in bringing next-generation biofuels into the market. This outcome will enable larger volumes of next-generation biofuels to be produced, helping Canada achieve its current renewable fuel standard using environmentally superior technologies.

Reaction from the key parties

“Our government is investing in advanced clean energy technologies that create well-paying jobs and generate economic opportunities,” said the Honorable Joe Oliver, Canada’s Minister of Natural Resources. “By supporting innovative projects like VANERCO’s, we are helping Canadian companies develop an idea into a marketable reality.”

“This project truly puts industrial waste to work, creating jobs in the community while producing as much as 38 million litres of ethanol a year. SDTC is proud to be a partner in this pioneering project,” said Vicky Sharpe, SDTC President and CEO. “Getting technologies such as this to a commercial scale will be crucial in helping Canada play a key role in the dynamic global cleantech marketplace, currently valued at $1 trillion.”

“Clean technologies which offer a true global alternative to fossil fuels emerge when industry pioneers, governments, venture capitalists, and academics work together to ensure a successful transition to the commercial stage,” said Vincent Chornet, Chairman of VANERCO.  “SDTC played a pivotal role by becoming the catalyst that helped all these players join forces.  We are glad to see them on board with us in this commercial project.”

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