Thought Leadership: What cellulosic can learn from solar and other clean-tech industries?

Thought Leadership: The Digest speaks with Sebastian Soederberg, Novozymes’ VP for Biomass Conversion on the cellulosic ethanol industry.

Sebastian, you are fond of saying that the cellulosic ethanol production is a technology that is evolving beyond market hype to commercialization. Why?

If you look at charts of installed capacity since the 1990s for a variety of clean-tech industries, it’s easy to see a clear pattern of development. The industries include starch-based ethanol, gas production from shale gas, solar and wind power. All of these started with long, gradual takeoff periods that lasted 5-10 years. Then all of them entered a faster period of growth that, seen in hindsight, is quite clear. A number of factors must come together – and then they take off.

Gartner consultants have published a model they call their “Hype Cycle” that gives insights into how technologies evolve from market hype to becoming a mainstream part of an industry. And guess what? The evolution of clean tech follows this model very closely.

For cellulosic, you can argue about which stage started when but, roughly speaking, we believe that the phase that kicked things off – what Gartner calls “the Technology Trigger” – happened between 2007 and 2010. In cellulosic ethanol, there were a number of triggers, including the launches of potent new enzymes and yeast technologies, the first cellulosic ethanol pilot and demo facilities showing promising results and building confidence in production economics and yields. At the same time, you had rising oil prices, a financial crisis accentuating the need for sustainable, future-oriented job creation, and increasing consensus about climate change.

This was followed by the “Peak of Inflated Expectations” phase, roughly from 2010-2014, with strong capital inflow allowing the construction of the first commercial plants and boosting R&D programs.

This phase also saw an increased number of partnerships between companies in the industry, international climate summits as part of a political focus to reduce global carbon emissions, and the first commercial-scale plants in the world starting operation.

I’d say that the industry probably went into the next stage, the “Trough of Disillusionment,” sometime during the second half of 2014 , with challenging ramp-ups, climate skepticism or apathy and uncertainty about the political support for biofuels, especially in the U.S. More recently, macroeconomic turmoil with a dramatic drop in oil prices have been added to the mix.

Projecting into the future, the Gartner model predicts the “Slope of Enlightenment,” phase where we can expect to see a wave of cellulosic plants operating in a consistent, optimized manner across a number of regions and running on a number of different feedstocks. This stage will include the launch of improved biotechnologies to boost yields and improve production economics, more stable political legislation, as well as a revitalized international focus on environmentally sustainable energy sources.

Finally, somewhere far in the future, probably past 2025, the Gartner model predicts a phase called the “Plateau of Productivity” in which bio-based fuels and chemicals reach cost-parity with – and increasingly replace – oil as the main building block for liquid fuels and chemicals.

It’s important not to get too fixated on which exact year in the evolution of cellulosic ethanol corresponds to each phase of the model. What’s important is to realize that everything happening in cellulosic right now is just part of the normal cycle that you see whenever you create a new disruptive technology and industry.

What can the cellulosic ethanol industry learn from solar? And from shale gas?

If you look at the history, it took the solar industry well over 15 years to develop through a number of regulatory changes and market disruptions. The technology had been around since the 50s, and became more common after the oil crisis in the 70s. The current industry structure began forming in the 90s, then in the early 2000s the first big players entered and the market began its slow growth.

Prices came down, with module costs falling by nearly 30% per year between 2008 and 2013, and installed PV capacity began to expand at higher rates – the industry hit traction.

Similarly, it’s taken 35 years for the U.S. shale industry to reach its current scale. It wasn’t until 1998 that the first shale well became commercially viable. Until then, a few small-scale pioneers had continued to innovate, supported by partnerships and subsidies. It’s only in the last 15 years that major companies have entered and consolidated the market.

It’s clear from this brief history review that new industries in their early phases need a combination of venture capital, visionary entrepreneurs, a few dedicated strategic players with a long-term view and government subsidies. It takes a long time to build the infrastructure, and a lot of innovation and optimization to make it consistently profitable. The majority of players from adjacent industries often enter late in the game, after CAPEX costs have come down, as happened in starch-based ethanol.

But it’s also clear that the development of new industries is cumulative. Optimization is a crucial part of this, and the economic magic of biorefining is that optimization efforts can have a huge and sustained impact. In the past, development has been helped along the way by some sort of crisis or growing concern. For cellulosic, the driving factors could be fluctuations in oil prices, the need to establish energy independence from unstable regions, a drive for sustainable job creation in the wake of slower growth and environmental concerns.

So, now that we’re in the “Trough of Disillusionment”, how do we get out? What are your recommendations?

We need to adjust our expectations to match reality – accepting both that the industry will take time to develop, and also that the business opportunity is still real and substantial. We need to capture significant learnings from the first commercial-scale plants. As an industry, we need to come together more – to share these learnings, to learn how to stretch CAPEX investments over as many income streams as possible, and to communicate effectively and with one voice, particularly with the public and policy makers.

Isn’t it true that the cellulosic industry has failed so far to attract institutional investors? When will this come?

We know that the normal pattern in emergent technologies is for the investor profile to gradually shift from smaller venture capital firms with a preference for high-risk investments over to larger institutional investors with a preference for medium- to low-risk investments. And we know that it’s too early for the cellulosic industry to be interesting for anyone with a low-risk investment profile.

Again, what’s happening today is absolutely normal.

One interesting recent development was Citi’s announcement this month of a new five-year strategy to invest $100 billion in projects combating climate change. They’re doing that for business reasons.

Why does Novozymes continue to invest in cellulosic?

Estimates vary quite a bit, depending on who you ask, but global demand scenarios for cellulosic ethanol show significant potential. Estimates from Goldman Sachs, Boston Consulting Group and Bloomberg New Energy Finance for example, predict that the cellulosic industry will grow by billions of gallons within a decade.

These estimates make sense when you look at the demand side. According to the U.S. Energy Information Administration, the demand for liquid car fuel is predicted to grow by 40 billion gallons globally by 2030 compared to today’s level. That’s even allowing for more fuel-efficient cars and electric-powered ones.

If you add on the demand from the aviation industry, the advantages of job-creation in rural areas, and the desire to produce energy locally and independently, then cellulosic ethanol production looks like a good thing for a lot of different reasons.

Novozymes began investing in this area in 2001 with more than 100 dedicated scientists and a lot of public affairs activity. Ever since, we’ve been at the forefront of innovating this industry into existence. We launched the first commercially viable enzymes for biomass conversion in 2010 and since then we’ve been helping to continuously drive down the cost of production. We’ve always believed that this industry is essential, now we believe that it’s about to get very exciting. There’s no question that we plan to be a part of that.