Tuesday, August 3, 2010

The Ethanol Path Forward

   People on all sides of the ethanol industry are talking about the 10% blend wall.  Is the 10% blend wall really the a problem or are we not looking at it from the correct perspective.  It is a significant accomplishment that we are at the point of replacing 10% of the US need of gasoline with ethanol.  We should celebrate this fact and look at the opportunities going forward.
   I read a recent article by Robert Rapier which jogged my thinking a bit.  Robert in his usual fact based thinking was comparing the cost of the $4 billion ethanol pipeline to increasing the utilization of E-85 in the Midwest to displace fuel usage instead.  The lights turned on in my head and I started thinking about how this could really affect the ethanol markets and how could we encourage this new strategy to quickly provide demand for ALL ethanol produced.  Even the sugar cane ethanol!
   Here are some rough numbers just to prove illustrate the point.  If we say that  annual gasoline usage in the US is about 130 BGY (billion gallons per year) and we currently have a 10% maximum we have a maximum ethanol blending of 13 BGY.  If we say 10% is going to be the limit for non flex fuel vehicles in the US and we are going to increase the biofuels usage to 18 BGY by 2014 as projected in the RFS2 where does the growth come from?  Increasing the overall blend maximum to 15% will get us there.  But we have an alternative which may prove to be better in the long run.
   What if we did not increase the blend ratio to 15% and started adopting a strong E-85 strategy?  OR maybe even better yet we did both?  We could significantly shift the demand upward by placing incentives in the market.  We could develop the 36 BGY demand by 2022 as projected in the RFS2 by replacing less than 25% of our current needs with E-85 even if we left the remainder of the fuel blended at 10%.
   The current ethanol blenders credit is going to expire at the end of this year.  It is already getting cut back.  Why don't we redirect those funds to foster the development of E-85 blending and infrastructure.  What if we cut the E10 blenders credit but left the credit the same if ethanol was used for E85?  What if we let people who invested in ethanol blending and distribution equipment accelerated tax benefits for their investment?  What if we required auto manufacturers to make all gasoline vehicles flex fuel and we subsidizes each vehicle a little?  We could put this money not spent on the E10 blending to good use and have the infrastructure in place to move into more renewable fuels.
   This would all be done with the limits on corn ethanol staying the same at 15 BGY.  We would drive the demand so far past our current corn capacity that we may be able to eliminate the import tariffs on sugar cane ethanol.
   This brings about the possibility of halting the increase in crude oil usage in the near future.  Isn't that what we really want to do?  Additional developments in drop in replacement fuels may actually allow us to REDUCE the use of crude oil to much lower levels.
    There are many ways to win.  We need to use what we have and move forward.  Pontification on the ultimate solution prevents us from making good changes today.



Wednesday, July 7, 2010

Renewable Energy Support

     When will we finally realize that in order for the US to develop long term renewable energy sources that the government and consumers will need to be behind it?  We have watched the ebb and flow of wind and solar power investment as the production tax credits expire and get renewed.  We have watched the biodiesel industry die in 2010 to less than 20% of the total production with the expiration of the tax credit.  
     We can't have our cake and eat it to.  At least not right now.  The cost of renewable electricity and fuels are higher than their "dirty" alternatives.  We have to go into this with our eyes wide open knowing that it is a path we must take but it is not the least expensive today.  It will be in the long run, but not today.
     I urge everyone to educate themselves on these support programs and then contact your elected officials to ensure that they are supporting the programs for the long term.
     Investment in the renewable energy space is drying up right before our eyes.  The lack of decisive governmental support is going to set the renewable energy industry back decades if we do not make it a priority.  We have banks that are too big to fail, we have auto companies which are to big to fail, we have multi billion dollar war efforts under way, and the government supports these efforts consistently.
     There are billions of dollars invested in renewable energy infrastructure and projects in the US alone.  Many of these investments are sitting idle due to lack of support or adequate investment.  Why can we not see the importance of supporting renewable energy development?  The government wants to create jobs.  Ensuring that these facilities are running consistently provides thousands of full time jobs.  In the coming decades as these resources become more valuable our choices to support renewable energy will make an ever increasing impact in our daily lives.  We need to ensure that we making the right decisions today.

Sunday, May 30, 2010

Another Scientist on "The End of Cheap Oil"

Here is a scientist which points out the Energy Return on Energy Invested in oil recovery.  He makes a good point about the fact that oil is not going away but "cheap" oil is slowly but surely leaving.

The End of Cheap Oil

Saturday, May 29, 2010

The Corn Ethanol Industry Making Improvements

     The corn ethanol industry has been working very hard to improve their efficiency.  The difficult financial times forced many producers to refine their processes and make changes to simply stay in business.  This industry is not a perfect solution by far but is making improvements.

Corn Ethanol Becoming More Efficient

Wednesday, May 5, 2010

Using Renewable Energy Policy to Build The Renewable Energy Industry

     When are we really going to change our policies, mindset, expectations, and provide the appropriate support to develop the renewable energy industry?  We can be operating with more renewable energy every year but it takes persistence and a unilateral commitment to the long term goal.  The renewable energy industry is going to require long term bi-partisan support programs. The trillions of dollars of investment in fossil fuels did not happen overnight and the renewable energy industry simply has little or no chance of competing against it.  We need to accept this fact and move on to support the industry or simply let the renewable energy industry develop ad hoc and see what happens.  We have to face the facts that our energy demands are only going to increase and fossil supplies are a limited commodity.
     The government must provide the support necessary to develop and sustain a strong US renewable energy industry.  The infrastructure investments require solid long term support.  Adequate capital will not flow into new industries where you are the underdog and existing energy players can squash your efforts with minuscule amounts of money compared to their profits.  Investments must be enhanced through fair guaranteed minimum returns.
     The expiration of the bio-diesel tax credit at the end of 2009 started a chain reaction which has basically shut this industry down.  The bio-diesel industry had already been hurt significantly by the drop in fuel prices during the economic down turn and the loss of the tax credit has added further strain.
     The entire renewable energy industry would benefit immensely by using a price based model which allows investors to know that they will be guaranteed a fair return on their investments.  We can forget the tax credits, blenders credits, producers credits, production tax credits, investment tax credits, and roll them into one universal renewable energy program.
     If we define base technologies which are covered and appropriate margins for each we would have a self regulating system which would spur new investment in proven technologies and eliminate the subsidies when market prices provided the necessary support for the projects.
     Maybe it is as simple as new wind power projects get $0.XX per kwh which is the baseline industry standard given reasonable production and fair investor return.  
     Biomass and CHP systems could have their own rates which ensured a fair return based on a processing spread between the biomass cost and the energy revenues.
     You could use a crush margin for ethanol.  The commodity prices for corn, ethanol, and energy  will fluctuate but if you can control the crush margin you can secure investor concerns.  This would also work for cellulosic ethanol, biodiesel, and other advanced biofuels as their technology was approved for the program.
     The program would be available for facilities using approved technologies and production methods.  This would help new technology companies focus on getting their processes approved and ready for commercial application.  This would hopefully move the technology risk to the venture capital markets and away from the government as is currently common.  The majority of the tax payers money should go towards development of proven technologies and renewable energy supply, not betting on the next technology breakthrough.  The government's exposure to this risk should be limited, a small portion of the overall programs, and limited to specific areas which need to be boosted to meet renewable energy goals.
     This universal renewable energy program can provide the structure for moving the capital into these companies as new technologies are proven, added to the approved list, and taken to market.
     We need to help our government officials on both sides understand that renewable energy is not a "nice to have" option.  It is something we "need to have"

Wednesday, March 17, 2010

The Corn Ethanol Evolution and Transformation

The corn ethanol industry is at a very exciting and scary point.  We know the capacity is nearing the 10% blend wall but we also know that the blends can be increased over time.  (Brazil)  We know there are better renewable alternatives to ethanol but they have not obtained commercial scale production.

What will the future look like for these companies and their facilities?  It depends on many factors but they will have one thing in common.  These facilities will be producing products for many years to come.  It may not be ethanol from corn.  It may not be ethanol at all.  But it will be renewable fuel, chemicals, and other products.

Let's just take a look at corn ethanol.  Not so many years back a typical ethanol plant was located with reasonably priced corn, steam energy, electricity, water, transportation, etc.  The plants were designed to make ethanol and either wet or dried distiller's grains.  The plant may or may not have captured the CO2 depending on the local market.  It was a pretty standard model duplicated some 150+ times across the US.
The ethanol plant today is affected by GHG emission legislation, indirect land use, water use, and increasing economic pressures.  The corn ethanol plant of today uses advanced equipment to reduce energy consumption, water usage, is developing other valuable products, and is investing in upgrades to improve their efficiency.  Water recycling, oil extraction, anaerobic digestion, and other changes are helping to increase the value these facilities are extracting from each bushel of corn and do it more efficiently.  This is a sign of an industry which is maturing.  It is a good and necessary evolution for the industry .

The refining industry did not just appear and operate at their current efficiencies.  It has taken many, many years of distillation improvements, bottleneck elimination, and many other developments in the refining industry to get where we are at today.  They are still improving!  Why would we expect corn ethanol to be any different?

Now let's look to the future for these facilities.

Corn ethanol production stated simply is converting carbohydrates into sugars and turning these sugars into ethanol through fermentation.  Why do we use corn?  It is an inexpensive source of sugars and has a well established supply chain.

Anyone who has done a nickel's worth of research on cellulosic ethanol knows the first hurdle is getting the sugars released from the material so you can use them.  The second hurdle is getting the ethanol produced and extracted at a competitive price to corn ethanol.  When these factors are overcome for cellulosic ethanol and other products there is going to be a dramatic change in the ethanol industry.

The production of cellulosic ethanol, biobutanol, and many other products actually use the same types of equipment in many processing steps.  When these products are made at an existing corn ethanol facility it makes things very interesting.

Imagine an integrated biorefinery which has the ability to change feedstock AND final products based on availability and pricing.  When you combine the flexibility on feedstock and final product you have created a model which allows each facility to take an individual approach to their feedstock and final product choices to maximize their profits based on their specific opportunities.  This is an industry transformation which is getting closer every day.

Sunday, March 7, 2010

The "Second Wave" of renewable energy development

     The years have taught us all a great deal about renewable energy.  One of the things I noticed is if you follow the investments and the press releases you begin to see that a good portion of the investment money follows the best promoters.  I will not name any company in specific since there are more than a handful of companies who fall into this category.  Some of which I believe will be gone in the near future because they have not developed viable technologies.  In the end deep pockets do not make a technology viable.
    I think we should brace ourselves for the renewable energy fall out we are going to see in the next several years.  There are many companies which have hyped their way to large high profile investments.  They have secured large government grants, loan guarantees and still not met their milestones for technology development.  In the end viable processes and technology is necessary for success.
     In the background far removed from the press and high profile investments are companies that are beyond announced milestones and working hard to refine their technologies and scale up their processes.  I believe that some of these companies will lead what I call the "second wave" of renewable energy development.  These are the companies which have developed frugal ways to utilize capital, feedstock, and existing infrastructure to develop truly viable options for our future.  These companies have quietly developed economically viable processes and are ready to scale.
     What does this mean for advanced fuels development?  I think it means we will not see significant production for at least 5 more years.  The key word in this is "significant".  This is because the remaining high profile and second wave companies need to get their technologies into commercial scale and this is not going to be an easy process.  Some high profile companies are going to fall flat on their face.  Investors are going to be wary of putting good money after bad.  The normal technology challenges of scale will also be encountered.  There will be success stories.
     In 2 years there will several companies producing advanced renewable fuels at prices competitive to the market.  There will be demonstration and commercial scale operations.  There won't be significant amounts in overall terms but these companies will have scale facilities which can develop into significant production over time
     We will be at a significant point in advanced fuels development.  We could be entering into a build out phase which could provide the investment, employment, and environmental opportunities we have envisioned for many years.

Friday, February 19, 2010

Ethanol At The Crossroads

We have been studying the corn ethanol market closely the last few years.  There are some interesting trends in the market and the makeup of the industry.

The corn ethanol market is maturing and you can see that in a couple key indicators.  The latest RFS2 indicates a significant drop in production and slow down in the construction of corn ethanol capacity.  It appears that the capacity is in line with the RFS demand.

The new capacity coming on line or under construction plus the existing capacity is actually went down in 2009 and is projected to stay down in 2010.

The RFS mandate for corn ethanol is 12 billion gallons per year (BGY) in 2010 and rises to 15 BGY in 2015.  This should mean a reasonably stable period for corn ethanol capacity in the US.  The RFS allows for a slow and steady growth rate.  This will help to reduce the wild speculative market affects on corn and help to keep ethanol at reasonable price for producers and users.

What about the ethanol producer's profitability?  Ethanol profitability is a simple equation.  The price must be higher than the input costs plus the operating cost.    The two highest input costs are corn and natural gas (or other energy source used for heat generation).

The price of oil could go very low again and drag ethanol prices down.  If the currently fragile world economy is  supporting near $80 per barrel oil what will it be when the economy picks up again?  I don't think we are going to see $30 oil for quite some time.  Take a read of other blogs like R Squared energy blog for another opinion.  The price of oil is probably on it's way up before down.  Ethanol should track with a similar ratio to crude.

The price of corn could go up.  We think that we are definitely going to see higher corn prices.  The price of corn has a new floor.  You can't expect the increased demand from corn ethanol to not affect the market.  I don't think corn is not going to fall below $3.00 for a long time and maybe not in our lifetime.  I think that is a good thing. The higher price of corn has effectively eliminated a great deal of the agricultural price subsidies.  I think the increases in corn will be modest because the commercial and speculative demand is not going to shoot up like it did in the ethanol expansion of 2006-2008.  I also think that the corn increase will be mostly offset by the increases in ethanol prices as oil rises.

The price of natural gas could go up considerably.  Every $1 change in the price of gas changes the cost by about $3,000,000 per year.  A swing in gas can really hurt especially if the margins are thin already.  The good thing about natural gas is there is an abundant supply.  We produce the majority of the natural gas we need and Canada has huge supplies backing this up for many years.  The natural gas prices tend to fluctuate with the temperature and weather conditions mainly because of supply constraints.  We feel that while there will still be periods of high gas prices we won't see them go up and stay high for extended periods of time.

We think these 3 factors combine to produce a reasonable ethanol market for the next 5 years.  It may not be see the highs of 2006 and 2006 but we probably won't see the lows of 2008 and 2009.  We think ethanol should provide reasonable return on investment and grow with the RFS demands.

Thursday, February 11, 2010

The Never Ending Cycle of Renewable Energy Trade Offs

     We are fairly diligent in our review of information regarding biofuels, renewable energy, biomass, etc.  I am always amazed at the comments which bring up new and inventive ways in which these technologies are "potentially harming" the environment and our economy.
     I wanted to share some observations that have stuck out in my mind over the years.

1.  Biofuels are causing habitat reductions for orangutans.  There are no doubt habitat reductions for many species but let's be realistic.  How much are biofuels really contributing compared to urban sprawl and the standard of living increases in countries?

2.  Food vs. fuel.  I will not get into detail on this other than make a couple comments.  How many food shortages would be prevented if we stopped all corn ethanol production?  How much would the US agricultural community be affected if the 30% of the corn which is now locally bought and converted to higher value products was sold overseas at commodity prices?  When you look at the price of food on the shelves how much is related to raw agricultural products and how much is related to processing costs and distribution?  How much has the biodiesel and corn ethanol production helped us to move towards a greener future?  Isn't there some value in trying?  It is better than setting on our hands waiting for a perfect solution.

3.  Removing forest and agricultural biomass for energy production will harm the land.  This is correct.  Removing biomass without first understanding and considering the effects can harm the land.  Landowners and policy makers have been regulating the management of land with economic or policy based decisions for many years.  It is not in any stakeholders best interest to harm the land.

4.  The best solution may never make economical sense.  I know there are cleaner and more efficient means of generating power and fuels.    If they don't make economic sense they are not going to scale and displace a significant portion of capacity.  This also goes for making environmentally "dirty" processes clean.  Dare I say clean coal technology.

The point is nothing is perfect.  We seem to forget the environmental harm fossil fuels create just because they are widely used and main stream sources of energy.  We also think that renewable energy should cost the same as fossil fuel derives sources.

Renewable energy solutions are not and will probably never be perfect or the lowest cost.  We have to be striving to make each solution better than the last.

Monday, January 25, 2010

Biomass Supply Challenges for the Renewable Industry

     I wanted to share a little of the information from a white paper we wrote last year which combined and analyzed information from a few of the government studies which have been published regarding biomass supply.  The paper identifies some of the biomass sources and talks about how as we develop commercial scale biomass based projects the sustainable production and logistics of providing biomass is going to be the major contributor to the success of the project outside the processing technology itself.  If you are interested in receiving the “Feedstock Supply Solutions for Biomass Based Renewable Energy Companies and Rural Economic Development”  white paper drop me a note and I will send a copy.
     In this white paper we discuss how the actual demand for biomass is may go well beyond the billion tons per year as mentioned in these studies as economic conversion technologies develop.  We contend that it will be 1.2 - 2.0 billion tons per year in the foreseeable future depending on our desire to reduce dependence on fossil fuels.  It also details existing biomass resources and opportunities.
     Let's take a quick look at the biomass sources.

Forest Biomass - The DOE/USDA Billion - Ton report shows 368 million tons of forest resources available annually in the US. This breaks down into 141 million tons in use already, 139 million tons available with better land management, and 88 million tons not currently utilized.   This leaves 227 million tons potential forest based biomass for use.

Municipal Solid Waste (MSW) - MSW Municipal solid waste is getting much attention as a potential feedstock for renewable applications.  MSW has some very attractive qualities.  It is a feedstock which is generated in center of population.  The use of MSW has tremendous greenhouse gas benefits with reductions in methane production and landfill storage requirements.  MSW has it's own challenges as a feedstock.  We have not studied MSW in detail as it is not currently a part of our operating plans. If future conversion methods for MSW can economically generate liquid fuels or syngas it will be very beneficial.

Agricultural ResourcesThe DOE and USDA joint report, “Biomass as a Feedstock for a Bioenergy and Bioproducts Industry: The Technical Feasibility of a Billion-Ton Annual Supply,” lays out in great detail three possible scenarios for the availability of biomass feedstock from agricultural lands.  In the first scenario with moderate yield increase and no perennial energy crops indicates about 421 million tons annual capacity.  In the highest capacity scenario with high yield increases and perennial energy crops the annual capacity is 997 million tons per year.  This indicates that agricultural resources can be utilized to produce a significant and possibly the largest portion of our biomass energy feedstock.

The economical challenge with all biomass sources is the delivered price to the conversion facilities.  The aggregation and transportation can quickly drive the prices for biomass feedstock out of the economical price range for the conversion facility.   The existing market demand is also a concern in biomass sourcing.  If a facility will increase regional demand for biomass significantly there will likely be an increase biomass prices overall.  Knowing the other uses for biomass and their acceptable levels of feedstock cost is also very important.  The facility operator who requires the lowest cost feedstock in the region will surely experience economic troubles down the road.

In order for the biomass industry to grow and survive long term the biomass feedstock supply chain stakeholders need to focus on increasing the production per acre and reducing the total costs to the conversion facility.  Conversion facility owners and operators also need to participate in the feedstock supply chain by supporting the producers and developing technologies which will help them reduce the overall costs of biomass to the facilities.

The consistent economical feedstock supply for biomass based operations will continue to be the major challenge in scaling and industry growth.  Companies that do not understand the biomass capacity and sourcing very well will not survive.

Tuesday, January 5, 2010

Is 2010 going to be the year renewable energy goes main stream?

     The growth of renewable energy has been filled with stops and starts over the last decade.  The economic turmoil of 2008 and 2009 slowed the progression of renewable energy projects and especially projects requiring significant equity investment.
     Wind energy has taken a firm hold and is really beginning to make a difference.  There are more wind projects coming on line and when electricity demand increases wind power is ready for more expansion.
     The corn ethanol industry which was hammered in 2008 by high corn and energy prices seems to be coming back a bit with the purchase of distressed assets by Valero and others along with many plants running at full production and making some money.  If commodity prices remain somewhat stable in 2010 it should be a decent year for ethanol producers.
     Several cellulosic ethanol companies are saying they will have demonstration scale plants on line in 2010 and some are even going to commercial scale.  I wish them well but will not hold me breath.  I think there is a big shakeout coming in 2011 when some of these companies simply have not been able to prove their technologies commercially viable.  All the DOE money in the world won't make a company successful in the long term if the process is not competitive.  I hope there are at least a few of these companies who have something to sell at the end of the day.  That will be great news.
     Drop in replacement fuels may arguably be the most exciting renewable area for the foreseeable future.  Torrefaction and pyrolysis hold huge potential for replacing fossil fuels in power generation and crude oil applications.  The economics of these processes in main stream applications will hopefully be tested in 2010.
     If carbon cap and trade legislation passes these two technologies may move forward very quickly.
     I don't think about about solar power much living in the Pacific Northwest but solar power generation has really made some good progress in 2009.  I think we will see the expansion of rooftop arrays and larger generating sites simply because the conversion is getting more efficient and there are companies "managing" the solutions rather than having to figure it out yourself.
    Who knows what 2010 holds for renewable energy?  With a little nudge from the government and some advances in technology we may see some good results in 2010.