VC Taskforce: Next Generation Biofuels

This past Wednesday, the VC Taskforce held a panel discussion: "Next Generation Biofuels: The Prospects and the Challenges of Non Food Crop Energy". This link may work for the summary.

Moderator: Michael Ward, Partner, Morrison & Foerster
Panelists:
Jim Mullen, Partner, Morrison & Foerster
Michael Burnside, President & CEO, Catchlight Energy
Jim Imbler, President & CEO, Zeachem Inc
Neal Gutterson, President & CEO, Mendel Biotechnology

Without much editorializing, here are the highlights of the panel discussion.

First generation fuels were "small kernel" (corn, soy) -- contrast this with using the entire plant's biomass. In addition, this first gen fuels created tension between crops as food and crops as fuel. The positives for these first generation fuels is that humanity knows how to create ethanol from them, we've been doing it for a long time. Second generation biofuels require more science, but are better long term. On an interesting historical note, Diesel (inventor of the eponymous engine) powered his original engine using peanut oil.

A key component of biofuel production must be sustainability: minimize food conflict, minimize biodiversity issues (no monoculture crops), minimize acreage used (especially, land for food production).

Another consideration is feedstocks: engineered vs. existing. Engineering creates concerns over GMOs (Genetically Modified Organizisms), whereas existing plant material may be less efficient during conversion process.

There was some discussion regarding residuals (e.g. McDonald's fryer oil). The fryer oil is considered a hazardous pollutant and restaurants used to pay to have it removed and processed. At first, they were giving it away to anyone who wanted it. After a while, they began to sell it. Finally, organized crime has gotten involved and steals it. However, the ultimate challenge for residuals is one of distribution and scale. If fryer oil is to be used as a fuel in vehicles, can it really be an infrastructure play?

For the biofuel industry, it's important to take into account public reaction to the entire process. The facts/myths behind the food reducing first generation products should be a warning to those wading in, now. Fuel generation facilities should be built with aesthetic qualities and low/no emissions to reduce NIMBY reactions. Crop diversity (mosaic of feedstocks) is vital, both from a sustainability and economic perspective.

Switchgrass and miscanthus are excellent, fast-growing, non-food plants. The estimate is that 200-400 million acres could produce enough biomass to meet the world's needs. However, the dangers of monoculture must be avoided. Pestiticide use must be low/no. Plants should grow on their own with minimal water, minimal chemicals and minimal work. Another important point was that perenials (vs. annuals) must be used. Generally, we don't eat perenials and they are better for the soil. They renew it, retain water, fix nitrogen, add to the top-soil and grow well on lands that currently make poor food production lands and are not used for grazing. 40-50 Million acres of unused annual production land could well serve the US biofuel needs.

That brings us to the key to making biofuels profitable: efficiency. The beautiful thing about efficiency is that when achieved it is both environmentally sound and makes money. The objective is to plant as little as possible while reaping the rewards.

Three elements of efficiency are: biomass (great CO2 footprint, no chem/H2O), conversion (high biomass to fuel conversion ratio), mileage (fuel allows higher mileage, transportation is more efficient).

Another critical part of making biofuels work is energy density. I didn't quite follow the numbers, but the comparison was made between petroleum and biofuel production (150-200K barrels/day petro vs. 7.5K barrels/day biofuel). There's a 20x difference between the two, right now. In addition, petro refineries are very efficient at extracting, while bio refineries are around 5-10x for their production costs.

Investment opportunities are in the movement of feedstocks from farm to production plant as well as various fuel conversion pathways (biochemical, thermochemical, biological).

However, the key for the big dogs to jump in the game is in the Execution phase kicks in. During R&D phase, most energy companies just cannot think in high risk terms, and R&D looks like high-risk. Once R&D is completed and execution phase starts, then the large energy conglomerates would be willing to venture.

Some economic figures were tossed around. $50/ton of biomass is roughly equivalent to $0.50/gallon. That becomes a baseline, on top of which everything else must be added, profit margin is slim. The figure of $70/barrel for petro was felt to be the critical point where biofuel begins to make sense. This is quite similar to the coal liquidation number (unfortunately).

Sometime in the next few posts, I'll write an analysis of all of this.