Beneficial Biofuels and the Trilemma

Robert Socolow, Princeton

Robert Socolow, Princeton

We saw a recent article published by www.sciencemag.org, co-authored by Robert Socolow. The following quote stood out: “The search for beneficial biofuels should focus on sustainable biomass feedstocks that neither compete with food crops nor directly or indirectly cause land-clearing and that offer advantages in reducing greenhouse-gas emissions.”

The bio-fuels and ethanol discussion is certainly not new. Yet, we agree that the ‘trilemma’ between a need for a reduction in green-house gas emissions, increased transport and the wealth effect (leading to higher consumption of protein rich meats etc.) conflict. We previously addressed the issue in a post ‘Crop per Drop‘ which looks at the global pockets that could drive yields. We reiterate here that Deutsche Bank’s report on the agricultural sector is relevant for anyone looking at the food chain and vis-a-vis at the biofuels/ ethanol market.

Agricultural output is only possible and yield enhancing methodologies can (only) work if access to water is procured and secured. We looked at the water play in the ‘Water Scarcity‘ post. To round up, if one plays the bio-fuels and ethanol market, one invariably plays also in the water sector: ‘Why invest in water‘.

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Start Ups vs. Large OEMs

Before one can invest in a technology or firm, an investor must first believe in the relevant sector. If this prerequisite is satisfied to a high degree, the next logical step is to decide how to best capture the upside of the sector. In Clean Technology many start up firms hope to be bought out by larger, more established firms. Very few firms will be lucky enough to IPO and establish themselves as an independent player in the market, while many other start ups will unfortunately die a slow, financial bleeding death.

Several years ago I spoke to a Senior Executive for Exxon Corporation. The gentleman I spoke with, while agreeing with much of what I said about the need for Exxon to hedge its position in oil with at least a few of the upcoming alternatives told me that Exxon, in 2003 anyways, had absolutely no desire nor immediate plans to get involved with Clean Technology. After an awkward pause on the call he said, “Why should we risk money and waste time developing something when we have enough cash to just buy whatever we want once it becomes established?” Wow, how could I argue with that- he did have a valid point. Which brings us to 2010:

This blog often profiles technology developments from the investor’s perspective. Many of the VC firms we discuss invest in small start ups in sectors like biofuels, solar, wind and energy storage. But there’s another way to capture these sectors if you want to participate- investing in the large OEM. In fact, Exxon later on did invest $600MM in a biofuel firm called Synthetic Genomics and is “prepared to invest billions more to scale up the technology.”

While we won’t perform an individual investment analysis of each sector and firm here, we can highlight some key options as well as investment pros and risks.

Investing in the large, diversified OEM Pros:
Limited Downside, Economies of Scale/Faster route to mass market, more established vertical infrastructure and brand name recognition
Cons: Limited Upside/No IPO potential, less nimble & dynamic management team & the fact that you are also investing in many other sectors or technologies you may like/dislike.

Flip all of the above pros/cons when investing in the Start Up Firm. Now- a brief look at investment options:

The Start Up vs. the Large, Diversified OEMs!

Energy Storage
A123, Ener1, EEStor, PowerGenix Panasonic Sanyo, Bosch, Samsung, LG Chem

Wind

Vestas, FloDesign, Ramco GE Wind, Samsung, FPL

Water

Statkraft, Saltworks, Pentair, Israeli Start Ups Zenon (GE Water)

Biofuels

Joule, Cereplast Exxon, BP, Shell

Joule Biotechnologies

Joule Biotechnologies, based in Cambridge, Massachusetts, is a novel and more efficient technology to produce either ethanol or diesel, using the sun, recycled water and their patented photosynthetic organisms. These organisms, mixed with solar energy and CO2, produce the desired biofuels in a game changing, highly productive manner. The firm refers to the end product as “SolarFuels”- not biofuels.

Product: Unlike existing approaches to producing renewable fuel, Joule’s process achieves a high net energy balance while avoiding the harmful depletion of arable land, fresh water or crops. This is made possible by the company’s technology which leverages solar energy and genome-engineered organisms to convert waste CO2 directly into multiple solar fuels and chemicals. The continuous production process requires no biomass intermediates, removing resource limitations and costly processing from the equation. This process can use recycled wastewater.

Joule has successfully achieved the production of both ethanol and diesel at lab scale, with the former already reaching productivity rates exceeding 6,000 gallons/acre/year. At full-scale production, via future commercial sites, the company estimates the potential to deliver 25,000 gallons/acre/year of ethanol and 15,000 gallons/acre/year of diesel. Cellulosic ethanol typically produces 2,000 gallons/acre/year- therefore you can easily see the level of technological advancement possible!

This process avoids the depletion of precious natural resources, with no dependency on agricultural land, crops or fresh water. Joule expects to deliver ethanol and diesel at the energy equivalent of as little as $50 and $40 per barrel respectively.

Competition: Solazyme, Poet, Amyris, BP Biofuels, Coskata, Sapphire Energy, LS9 and many more.

Funding: Flagship Ventures founded and funded this company in 2007 which was under stealth mode until August 2009.

Management: William Sims, President & CEO: While his career is that of a proven leader of start up firms- much of this experience involved electronic technology plays such as Color Kinetics, Zenith, JVC and e-SIM. While at Color Kinetics he did help the firm grow 30% annually, IPO and sale to Phillips for $800MM in 2007. He does have an educational background however in Biological Sciences from Cal State Fullerton.

Recent News: Today announced the signing of a lease agreement to build its first pilot plant in Leander, Texas, where the company will further develop and test its transformative system for the production of renewable solar fuels. The plant will be operational within the first half of 2010.

Comment: As noted in the product section, Joule presents the possibility of a game changing biofuels technology that can use recycled water and improve productivity by a factor of about 10. (Much like EEStor teases people with for batteries!) We bring this firm to our readers’ attention as it is likely to garner much focus from investors and enthusiasts in the next few years while moving forward through both funding rounds and technology tests. Oh yes, and the technology needs to work economically for all of this to matter!

Cereplast

Strategy: To replace oil based plastics with bio-degradable replacements for global packaging needs by development and licensing of innovative products for packaging companies. Lessening dependence upon oil and capitalizing on consumer and government preferences for clean, organic packaging.

Product: At pricing that is 20-25% higher than comparable oil based products; Cereplast designs and manufactures proprietary bio-based, sustainable plastics used in all major converting processes – such as injection molding, thermoforming, blow molding and extrusions.

Market- On November 11, the company said it expects the U.S. bio-plastics market to reach $10 billion in sales by 2020.  The U.S. market accounted for approximately $1 billion in sales in 2007, with some estimates pointing to bio-plastics capturing 30% of the total plastics market by 2019. Cereplast has some products that are food based, with a focus on algae based products as well. Cereplast is an investment in their technology and the market.

Competition: Metabolix, Archer Daniels Midland, Alcoa, Synthetic Genomics, Martek

Funding: A private investor group led by a Swedish Bank has contributed funding in 2009, Cereplast has the right to sell $20MM of common stock to Cumorah Capital, and most significantly in 2007 the company announced it received $14.5 million in new capital through a private placement of common stock from a group of leading “green” institutional funds, including UBS Global Innovator Fund, Swisscanto Green Invest Fund, Fortis L Fund Equity Environmental Sustainability World, and Credit Suisse Future Energy Fund.

Stock Symbol (OTCBB:CERP)

In a related note, Exxon has invested $600 million in Synthetic Genomics and BP has a $10 million investment in Martek Biosciences that compete with Cereplast.

Management: Frederic Scheer, Founder, Chairman and CEO of Cereplast

Comment: This company is an investment in a growing sector, but is their technology superior to larger and better funded competitors? Will their food based products overcome the hurdles that corn based ethanol faced?

Sources:

http://www.cereplast.com/pressrealeasedetail_ir.php?newsid=118
http://cleantech.com/news/4597/cereplast-unveils-bio-based-compost

http://www.businesswire.com/portal/site/google/?ndmViewId=news_view&newsId=20091111005157&newsLang=en

http://www.tradingmarkets.com/.site/news/Stock%20News/2592242/
http://www.europeanplasticsnews.com/subscriber/headlines2.html?cat=1&id=1256200526

Another replacement for oil

Think we need oil to make everything that is plastic? Nope. According to researchers at Utrecht University in The Netherlands, up to 90% of the total plastic demand in 2007 (270 Mt) can be replaced with bio-based plastics. What is possible and what will actually happen of course are two very different things- however technical feasibility is of course the first major step. Annual growth rates of bio-based plastics are forecasted at approximately 37% thru 2013. Learn more about the study at the following link: http://www.european-bioplastics.org/media/files/docs/en-pr/PR_ProBip09_091106.pdf

B Plastics

Growth rate of Bio-Plastics