In the Background, Cellulosic Ethanol Moves Forward
November 25, 2008
By Dale Buss
It's hardly front-page news at a time of high drama over the entire future of the domestic auto industry, but the cellulosic-ethanol business is advancing by baby steps at a time of significant financial peril for many of its members - and for the entire economy.
Startups linked with General Motors Corp. represent a huge microcosm of the unevenness of the so-called "second-generation" - non-food-based - ethanol business. Coskata Inc. has just inked a major deal with U.S. Sugar to site a 100-million-gallons-a-year ethanol plant in Florida that will use sugar-cane leftovers as the raw material.
But competitor Mascoma Corp. just laid off 10 percent of its executives and workers.
"We'll see more milestones with each company," Beth Lowery, GM's vice president of energy and environmental policy, told AutoObserver. "It's okay if it's not front-and-center right now."
Overall, the last two years have been great for players in the nascent cellulosic-ethanol industry, collectively fueled by bushels of venture-capital money and capitalizing on strong overall investor interest in alternative energy.
But the nation's economic woes have hampered nearly everything related to the auto business, and the credit meltdown has created a major immediate financial hurdle that is quickly dividing ethanol startups into those that can leap over the beam - and those for whom it poses an insurmountable obstacle, at least for now.
Credit Crunch Here, Too
Cellulosic-ethanol developers that had begun scaling-up manufacturing before the credit crunch largely will be able to remain on a timetable to get equity infusions in a couple of years that will boost them toward large-scale commercial viability.
But cellulosic-ethanol startups that still are proving out their processes will find it extremely difficult to obtain funding to move into manufacturing scale-up over the next two years.
About one-quarter to one-third of venture-capital-backed cellulosic-ethanol companies are yet to build plants, "and the costs are more than VCs can support," said John McKenna, founder and managing director of Hamilton Clark & Co., a McLean, Va.-based investment bank with long experience backing energy companies. "The question is, will banks lend to them - or be able to lend to them?"
"The ability to obtain financing in this difficult period we're in is the most critical issue," said Murray Burke, president and chief technology officer of SunOpta BioProcess Inc., a Brampton, Ontario-based company.
Guy Ouimet, who advises the Canadian government on biofuels, agreed that the industry "is transitioning from technology development and small-scale demonstration - which is basically the environment for venture-capital culture and financing."
Ouimet, the senior adviser to NextGen Biofuels Fund, a $1-billion Canadian-government technology fund, said second-generation ethanol is heading "toward more of a project-financing culture, where they will need to adapt their modus operandi, partnerships and ways of doing business."
Unrealized Potential
A great big spot in the marketplace awaits cellulosic-ethanol companies that can muster themselves. The federal government has called for domestic supply of 36 billion gallons of ethanol annually by 2022, up from the 10.4 billion gallons a year that now is available and additional planned capacity of 2.7 billion gallons a year, said Richard Bain, principal research supervisor of the National Bioenergy Center of the U.S National Renewable Energy Laboratory.
"Of that amount, it's reasonable to expect 15 billion gallons a year to come from corn (to now, almost the sole source of ethanol feedstock)," he said. "That means 21 billion gallons a year has to come primarily from cellulosic ethanol."
Bain maintained that American companies have the potential to replace about one third of the petroleum that is used in the U.S. market for liquid fuels - "equal," he said, "to our maximum domestic [oil] production."
In addition to the ability to potentially reduce high gasoline prices, interest in cellulosic ethanol has been fed by troubles for the initial wave of corn- and soybean-ethanol plants in the Midwest, and anxiety over the global food-versus-fuel tradeoff involving grain feedstocks.
Six of the biggest publicly traded U.S. ethanol producers lost nearly $9 billion in market value between the peak of the boom in mid-2006 and the beginning of October, according to a Financial Times analysis. The suffering companies include Pacific Ethanol, and the dazed investors include Microsoft Corp. Chairman Bill Gates, whose firm, Cascade Investments, has lost millions in Pacific Ethanol.
Second Chance
In best position to take advantage of the woes of "first-generation" ethanol producers are second-generation startups that have tapped capital not only from VCs but also in the form of U.S.-government grants, proceeds from initial public offerings and equity investments by major corporations. This group includes DuPont Danisco, Range Fuels, BlueFire - and Coskata.
Based in Warrenville, Ill., a Chicago suburb, Coskata burst from the gate early this year with an equity investment from GM, an experienced management team, a proven process, and a promise to begin producing enough cellulosic ethanol by next year to fuel the fleet at the GM Proving Grounds in Milford, Mich. Coskata is building a demonstration plant near Pittsburgh.
One of Coskata's biggest advantages is that its process can use a wide variety of carbon-based feedstocks - ranging from crop residues to discarded tires to municipal waste - to yield ethanol at a production cost that the company maintains will come in under $1 a gallon.
Key to proving its business model are more deals like the one Coskata announced this week with U.S. Sugar to explore using sugar-cane "bagasse" to supply what would be the world's largest second-generation ethanol plant so far, in Clewiston, Fla.
"We've been working on this since not very long after the GM deal" that was announced in January, said Wes Bolsen, Coskata's chief marketing officer. "This is the first of a number of announcements we will be making."
Rough Path
Meantime, however, in mid-November - less than six weeks after announcing it had raised $49 million in government funding to build an ethanol-production plant in Michigan - Cambridge, MA-based Mascoma cut a handful of employees, including President Colin South.
The company was founded in 2005 with a mission of developing enzymes for the conversion of organic material to biofuels. GM saw such promise that it invested in a round of Mascoma financing last spring, along with Marathon Oil, and placed an executive on its scientific board.
Mascoma CEO Bruce Jamerson said that the trims were a reaction to the overall economic climate rather than to some danger specific to the company. "This is just prudent business practice when you see economic turmoil," he told Mass High Tech. "It does not reflect our growth nor affect our projects. If anything, our business is doing the best it has done since I've been here."
VC investor Todd Kimmel explained the recent "market correction has put a ceiling on, or at least [has] bound, how these companies can get to market." A principal of Advanced Technology Ventures, a Palo Alto, Calif.-based "green-tech" venture-capital concern and an initial investor in Coskata, Kimmel said that "it will be much more difficult now for other companies to do what Coskata and some other startups have done, where they've already begun commercializing their technology.
"The situation you really hate is when you know you have something great but you don't have the cash to get it to market."
PHOTO:
General Motors Director Environment and Energy Policy & Commercialization Mary Beth Stanek (l to r), Michigan Governor Jennifer Granholm and Mascoma CEO Bruce Jamerson pose with an ethanol-capable E85 Chevrolet HHR after announcing Mascoma's intention to build its first commercial-scale cellulosic ethanol plant in Michigan. (Photo by John F. Martin for General Motors)
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