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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 commercial-scale.”
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 successful projects.
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 strategy.
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 going.
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 Green Diesel, as have Tyson and Syntroleum (SYNM) Solazyme (SZYM) 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 Management (WM) 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 technology developer.
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 returns.
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.
4-6 points. This region is hot to trot on biofuels, and is probably rapidly developing already, or will be.
2-3 points. 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.
0-1 points. 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 eco
nomics 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 mandate.
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, institutions)
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 support.
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 lately.
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 in biobutanol.
Monsanto, Syngenta, Bayer not much activity – though Monsanto has shown some interest in Sapphire Energy’s algal technologies.
Photo: Mt Everest from Rombok Gompa, Tibet. Taken in 1994 by John Hill.