Financing the Olympics & the $100 Billion Gen 2 Biofuels Rollout

August 16, 2015 |

OlympicsBy Sam Nejame & James Evangelow, Special to The Digest

Two weeks ago the International Olympic Committee pulled Boston’s bid to host the 2024 Olympics. If you lived here, you couldn’t avoid the controversy over how much it might cost and the nagging questions about how the gargantuan facilities would be used afterward. The lost bid represented a dramatic reversal for a competitive little city. Yet, given Boston politics the implosion was not entirely unexpected. Hosting the Olympics is big, but then so are the hangovers and tax payer liabilities, went the arguments. So it is in Greece today… and so feared Boston, the Athens of America.

Turmoil, white elephants and finance problems also cloud the rollout of Gen 2 biofuels. As everybody knows, fulfilling the US RFS as laid out in 2007 will require 16 billion cellulosic gallons by 2022. True, a lot can happen between now and then, but at the rate we’re ramping, we’ll be lucky if we can ever count a billion gallons of D3 liquids sloshing around in car tanks.

Whether we like it or not the basis for comparison for all renewable fuels are Gen 1 ethanol plants. They are cheap and they are legion. As we contemplate pouring money into new non food/grain facilities what do we know? Actually quite a lot. Forget nth plant economics. Compared to corn ethanol, Gen 2 facilities are expensive, they are small, and they rely on hyper-local feedstock.

The Commercialization Hurdle

Over the last ten years, numerous companies have made Gen 2 investments at substantial corporate risk. You know the list. Typically over time risk declines, but today, issues with cellulosic waiver credits, the blendwall and no visibility beyond 2022 demonstrate the RFS is badly broken. Add some self inflicted wounds in the form of high profile technology failures, expensive enzymes, and finicky gasifiers… Then sum up the policy risk and there is no mechanism on the horizon to finance the massive wave of Gen 2 biofuels facilities needed to meet the mandates. So, that’s the reality. We are not going to meet the cellulosic mandates.

Things in the Gen 2 biofuels sector are not rosy, but then the American Petroleum Institute isn’t gloating either. Sub-fifty dollar crude hasn’t made the oil industry very happy with big losses and job cuts looming. Cheap oil it seems isn’t good for anybody in the energy sector. You can curse the Saudis, but whoever’s to blame, if you’re a petrochemical company you need a renewables strategy if for nothing else but hedging. If you’re a bio-based company you need to understand how to work with fossil fuel and chemical giants.

Keep your Eye on the Ball

Of course, nothing we’ve written here is new, but sometimes we get the feeling that people have taken their eye off the ball. In this case infighting among trade orgs. With or without the bickering, you can be sure if the ambivalence does not change soon we will be staring at our own herd of Olympic size white elephants. Worse maybe the flogging our sector gets throughout the 2016 election cycle. It doesn’t matter how you define transportation fuel, at this point in time we’re all one big unhappy family.

Not to push the analogy beyond reason, but there are many similarities between hosting the Olympics and financing the Gen 2 biofuels rollout. Here are a few:

• The Olympics and Gen 2 biofuel investments make a global statement that a society has arrived at a critical point in history and both represent large financial risks
• Like Gen 2 biofuels, the Olympics represent much that is good about human endeavor, pushing the boundaries of what is possible
• Like the Olympics, cellulosic biofuels make people feel good (in a food v. fuel kind of way) and there’s a race to build infrastructure
• And like Gen 2 biofuels, the Olympics are about overcoming adversity

When I think about it, it’s hard for me to imagine facing greater adversity, not the technical aspect of converting biomass into fuel, but that of convincing the non-scientific world that human activities may trigger suffering on the scale of extinction. Any way you slice it that’s a big expensive message and it’s a big social message. Seems to me climate change and global warming are the marketing problem of our generation. Of course transportation fuels aren’t the whole problem, but they are an important contributor (~28%) to US GHG production.

So, who is going to pay for the Gen 2 biofuel rollout?

God only knows. When it comes to new infrastructure, large strategic investors look pretty tapped out; true banks backstopped by government loan guarantees may be good for some cash and public markets are also possible, but neither bank loans or IPOs will happen before the technology is de-risked. And unfortunately we’re not there yet.

Like Boston’s 2024 Olympic bid, the Gen 2 biofuels rollout has been plagued with fear. In the end the IOC gave the US 2024 Olympic bid to Los Angeles, a larger city with thick veins of roads and a history of putting on big shows. Bottom line, Boston is a great city with many world class attributes, but honestly I can’t imagine how we’d fit all those people in what is truly a small place. The physical limitations alone were daunting. Bottom line, Boston is probably better off without Olympic aspirations.

In the case of Gen 2 biofuels, punting to China or some other city state is fine, but it doesn’t solve the US problem. Undoubtedly, there’s value in vigorous debate. It may even make for better policy, but until Washington settles no one’s going to put up the $100 billion necessary to construct 500 new plants to produce 16 billion gallons of any fuel.

We’re in a strange time, made stranger by the upcoming election. To say Washington seems ambivalent strikes me as understatement. All well and good I guess, but if things don’t get better soon and the GHG reduction benefits of Gen 2 biofuels cease to be understood we may be looking at our own Olympic sized herd of white elephants.

Sam Nejame is CEO of Promotum, a management consulting firm focused on technology commercialization. His practice covers the fields of petroleum, bio-based fuels, chemicals and biologics. He can be reached at [email protected]

James Evangelow is President of Chemical Strategies, a consulting firm focused on renewable and petroleum based chemicals and fuels. He is one of the world’s most sought after consultants in the field of synthetic and bio-based ethanol. He can be reached at [email protected]

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