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It’s become an cliché of late that “financing is tough” and that
“the US is slowing” while “China is speeding up” on advanced
biofuels. It’s also become a cliché that “cellulosic biofuels are
slow, the economics are unworkable” and that “the next wav of
investment will wait until 2015 or 2016, especially for
Like all clichés, they have their origin in real experience, but are
generally over-broadened to represent a general trend — whether it
is “white men can’t jump” or “women are lousy drivers” or “it never
rains, but it pours” — it is important from time to time to
re-validate the cliché against the hard data.
Here at the Digest, we see a lot of the same conditions that
everyone else does. True, not every company is getting all the
resources it could use, financially or otherwise. Neither did every
US automotive company during the period when 200 carmakers were
winnowed down to around five majors between 1920 and 1980. Not that
there was anything wrong with a Stutz, DeSoto, DeLorean, Tucker,
Packard, Checker or Olds — but the market generally supports a
winnowing process, and financing is where it bites.
Key #1: Route to the Summit
In biorefinery financing, we have seen three trends emerge for
1. The successful ones are generally integrated with others — so
that resources such as infrastructure (e.g. rail, power, water), and
biomass or residue aggregation are in place to the extent possible.
Even existing refining units that can be utilized in a bolt-on
Think of this as simplifying the inputs and outputs — feedstocks
into the plant and distribution of product out of the plant — so
that as much financing as possible goes to the core technology,
which often can be as little as 10 percent of the overall cost and
footprint of an integrated biorefinery.
For this reason, we see wood biomass, sugarcane bagasse, corn stover
and wheat straw projects getting the most traction, now. It’s been
easier to use existing residues (bagasse), existing aggregation
resources (wood) or at least an existing network of growers and
delivery mechanisms (corn stover and wheat straw).
New feedstocks such as carinata, jatropha, sorghum and algae are
incredibly exciting and getting closer every day — but it is tough
to finance a first commercial plant when there is agricultural risk.
2. The successful projects typically involve a shared financial
burden. There have been some notable go-it-alones — DuPont (DD
and Abengoa (ABGOY
come to mind, and they have really “put their back into it” on
advanced biofuels in terms of getting a first commercial project
But there’s the Beta Renewables group – Novozymes, Chemtex, and
Texas Pacific Group. Poet and DSM have teamed up. Shell and Cosan (CZZ
are in their Raizen JV and have Iogen in the mix.Fibria is tied up
with Ensyn, Versalis with Genomatica. Darling (DAR
and Valero have tied up in Diamond
l, as have Tyson and Syntroleum (SYNM
and Bunge (BG
have their sugar-to-oils JV. GranBio and American Process are tied
in together now. Renmatix has JDAs with both UPM and Waste
and WM is also backing Enerkem and Fulcrum BioEnergy. British
Airways has tied up with Solena. BP and DuPont tied up in Butamax.
The trend usually involves a company with access to feedstock — or
at least a key cost element like enzymes — teamed up with a
processor. In some cases — such as BP, BA and Eni’s Versalis unit,
the tie-in is between a downstream marketer and a processing
3. The successful projects have, so far, been the ones that are most
cost-advantaged in terms of product cost — and cost advantaged
within the universe of opportunity available to a given investor.
Carbon anxiety only goes so far, it turns out — it can attract
players into the market in terms of inspiring them to investigate a
sector. But those players will definitely measure the cost of buying
mandatory renewables credits against the returns from a project, as
Chevron’s many partners found out.
Enthusiasm and genuine interest will only find its way into project
financing if the returns are there — measured against the other
returns available to that company in other opportunities it has.
That means, generally, targeting companies not that have strong
balance sheets — only — but companies that have low returns from
other project opportunities. It means nothing that a biofuels
venture can make a 10 percent IRR if this is measured against 18
percent available to that company in terms of its existing upstream
opportunities in oil & gas.
Companies that are primarily refiners have smaller option sets than
those deeply involved in upstream oil & gas exploration. Pulp
& paper industries have fewer options, and challenged ones.
Feedstock providers — such as companies that own large tonnages of
palm residues or bagasse — see attractive upside economics in
biofuels. As do owners of large caches of low-purity CO2, such as
flue gas — if their other generation projects have low potential
In short — it is not all about ROI. It is about comparative ROI.
Key #2: The geographies
You can divide the world according to three questions.
1. Is there a lot of carbon feedstock (e.g. biomass, CO2, etc) that
has high potential but currently is sold for low values, or wasted?
3 points for Yes.
2. Is there a carbon emissions regime — e.g. mandates, carbon taxes
and so on. Discount renewables targets, think only in terms of
obligations. 1 point for Yes.
3. Is there a long-term energy shortage looming — e.g. rapidly
declining domestic sources of energy, or a fast-growing economy that
will outstrip growth in domestic resources. 2 points for Yes.
This region is hot to trot on biofuels, and is
probably rapidly developing already, or will be.
This region is looking into biofuels — likes
it, but the economics or existing infrastructure will weigh heavily.
It’s tough to deploy alcohol fuels, tough to aggregate feedstock. If
the resources are there for the products produced — look for
biofuels. Otherwise, think chemicals, fragrances, flavors,
nutraceuticals and other high-margin, small-volume markets where
niche plays will be the order of the day for some time to come.
This region may make a lot of noise about
biofuels — but mandates and targets will ultimately be too soft to
inspire investor confidence.
Key #3: The players
Obligated customers – downstream.
As we have noted, not a good source of capital unless they lack
exploration divisions. They’ll buy upgradable feedstocks – be they
crude oil, bio-oil or what have you – if the economics are there.
And they may wheel out their balance sheet if they see
Preferential customers – downstream – customers would prefer to
use biobased fuels, chemicals or materials, but are not facing a
If you have a cost-advantaged molecule for them — especially if it
smooths out volatility issues with fossil feedstocks — you may well
have a winner. Green will be a tie-breaker, no more.
The bigger their balance sheet and the smaller their other
opportunities, the more likely they will be to make a direct
investment at scale. Otherwise, they may push technology along with
a strategic investment and wait to buy the product. Or, they may
co-operate in the form of testing and R&D collaboration, but not
make a direct strategic investment — especially the consumer product
companies will line up this way.
Growers and biomass aggregators
The best source for capital, long-term. After all, they have the
real upside of a new market for their feedstock. It’s like getting a
country that has discovered oil to get excited about supporting
technology development that builds new applications.
The problem here? Usually they are disaggregated, and badly
capitalized. Fixed-cost feedstock contracts may well help secure
interest from purely financial players who can work within the
project finance structure.
But seeking owners of aggregated sources of feedstock and have
balance sheets — well, that should be job #1 on the list of any
financier looking for dollars for a first commercial.
Governments are pretty good at supporting long-term basic research,
less so in mid-term advancement of technologies to
commercial-readiness, generally terrible at helping companies to go
forward to commercial scale. The best regimes are those where
government has a cost-share role — limited a project sweetener of,
say 20-40% of the total cost, and where there is a clear benefit to
the local economy in adding value to biomass.
Carbon tax regimes are virtually useless except to the extent that
they force obligate parties to get active in searching for partners.
But at less than $10 per tonne for a carbon credit, it’s barely a
sweetener for a bioenergy project.
Mandates are too inherently unstable to reduce financial risk.
Especially when they have an offset mechanism such as the purchase
of a credit in lieu of the fuel. Those regimes allow obligated
parties to buy the credits until they can mount enough “why are we
obligated to use non-existing fuels?” noise in government circles to
tear the mandate down, or otherwise de-fang it.
Processing technology developers, catalysts, enzymes
Good source of capital for first commercial projects — no more. They
rarely make early-stage investments, but often recognize that
technology is coming along that needs to get through the valley of
death to open up some real new market opportunity for the catalyst
or enzyme maker. But the appetite for investing will rarely stretch
beyond the first commercial.
Financial investors – aggregated (hedge, private equity, VC,
Good source for early-stage capital for technologies that have low
market, policy risk but have technology risk. VCs will take
technology risk all day long. Hedge and private equity are more
interested in the “I’ll finance your third plant” strategies, if
they have an interest in the sector.
Financial investors – disaggregated (retail, IPO)
Small investors beat up on technology stocks, and especially
cleantech plays, and extra especially on advanced biofuels. Going
public in advance of revenues and cash flow – yikes, the heat will
be tough, and must be measured against the reduced cost of capital
that a successful IPO can offer, and the opportunities to raise debt
and equity through subsequent offerings that public entities have.
Once the revenue and cash flows are in place – once the stock has
evolved from “story” to “value” — well, that’s different. But
markets can still beat up on cyclical companies, badly. Look at all
those revenue-generating ethanol plays.
Can join and even lead your R&D consortia — or help immensely
with your roadmap to establishing a new fuel. Look at Boeing,
practically investing aviation biofuels in terms of fostering the
commercial testing and assisting where possible in fostering policy
Financial support – well, it will be minimal. GM has done some,
Honda and Toyota too. It’s been early-stage, and not a huge amount
Generally, the Big 6 seed and plant companies have been investing
where they also have technology arms that see customer sales or
technology license sales down the line. BASF has been getting very
active of late with companies like Renmatix and Genomatica. So,
Dow’s been active as an investor in companies like OPX Bio, while
DuPont has been hugely active via its cellulosic ethanol venture and
Monsanto, Syngenta, Bayer — not much activity – though Monsanto has
shown some interest in Sapphire Energy’s algal technologies.
Jim Lane is editor and
publisher of Biofuels Digest where this
article was originally published. Biofuels Digest is the most widely read Biofuels
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Photo: Mt Everest from Rombok Gompa, Tibet. Taken in 1994 by John Hill.