Ethanol stories, along with solar, continue to drive the cleantech market upwards, securing aggressive valuations. Unlike the solar industry, with many of its major IPOs overseas, ethanol still has big appeal as a homegrown US industry. Check out some of the numerous ethanol posts on Cleantech Investing blog, investor debate, ethanol IPOs.
Last week Pacific Ethanol, Inc. (Nasdaq:PEIX) announced a $145 mm PIPE.
VeraSun, which had filed for an IPO in March for $150 mm, has announced it has upped its IPO proceeds to $300 mm. It is anticipating pricing at $18-20/share. See my previous blog on an analysis of VeraSun’s IPO. I still think this one and most the others are priced on the high side.
Also, check out the Energy Blog’s article on Goldman Sach’s investment in Iogen. Iogen is a fully-integrated cellulosic ethanol play.
Interestingly enough, I had an opportunity to review the ethanol case investment model being developed by scientists at NREL last week. They are looking to model the way investors analyze investment into ethanol technology and plants to evaluate future supply of ethanol and the ability of the private sector to meet the DOE’s 30/30 target for ethanol production (30% of current gas use by 2030). The discussion gave me a great overview of the issues surrounding the growth of the ethanol industry. The NREL team has obviously done a lot of homework. A couple of interesting concepts we discussed made me come away from the discussion with a greater respect for corn-based ethanol, and a healthy skepticsm for cellulosic ethanol.
Item 1: The DOE (and others) are pushing cellulosic ethanol because of a concern that corn supplies available for ethanol production will top out at c. 10 to 20 billion gallons per year based on on current corn supplies available without signficant increase in food costs.
Item 2. The logic runs that therefore, cellulosic ethanol will be needed to fill the gap, not withstanding the fact that while corn ethanol currently is somewhat on par with gas prices based on c. $50 /bbl of oil, cellulosic is still well out of the money. This alone made me ask why we are even bothering with cellulosic ethanol, when corn-based is working economically today.
Item 3. Part of my comfort with corn is that I do not buy the limit on corn-based supplies that are driving the push for cellulosic ethanol. We produce something on the order of 11 billion bushels of corn per year. Currently about 80+% of that goes to animal feed – cows and sheep predominantly. According to NREL’s model, to meet the 30 billion gallon per year target, we would need on the order of 50+% of that 11 billion bushels per year. However, animal feed is a very price sensitive market, and while we do not import corn today, we do import beef. My feeling is that the market is quite able to substitute a reduction in corn for animal feed to support corn as a fuel feedstock, with a price rise of well less than 50%+ increase the NREL models say would force us towards cellulosic. Basically, instead of importing foreign oil, we’d import foreign beef (or export less), or run more cows on winter grass and hay, and switch that corn supply to feedstocks. Having grown up with a family cow-calf operation, I can tell you that substitution happens at a much lower price increase than NREL is concerned about.
Item 4. The NREL team pointed out a few facts that I consider serious threats to cellulosic (though NREL does not currently consider them as critical as I do). While we think of corn as a regional commodity, corn is a very transportable feedstock relative to things like switchgrass and residual biomass that are expected to be the major feedstocks for cellulosic ethanol. The cellulosic feedstocks are extremely costly and difficult to transport. The general rule of thumb is 50-75 miles. And in that 50-75 mile radius, even a small scale plant (well less than the size of the corn ethanol plants today), will need c. 10-20%+ of the total productive land planted in its feedstock to maintain its supply. That’s a lot of risk for an operator of a cellulosic plant. Imagine a 3 year drought wiping out the economics on your plant. And keep in mind, we are still talking plants on the scale of 5-10% of the size of typical oil refinery. Unless feedstock transport becomes a lot cheaper, all ethanol plants, but cellulosic ethanol in particular, will have a very hard time reaching economies of scale at any given plant.
The parallel is biomass power. Today biomass is the largest non-hydro renewable power source in the US. Like cellulosic ethanol plants, biomass power plants are out of the money on cost, and have signficant feedstock transportation issues (limited to a similar size range). The industry’s answer? Virtually all of the biomass power plants in the US are captive. They are built adjacent to a pulp mill or carpet mill or other facility with its own long-term supply of fuel, eliminating fuel and transport risk.
Bottom line: the corn market is extremely liquid, has lots of ability to hedge price, ability to secure supply in a spot market, and is much, much more weather proof than the cellulosic feedstock will become anytime soon. And its cheaper.
My Predictions on the Ethanol Market:
The corn market will likely be able to handle significantly more corn based ethanol production through substituting corn from the animal feed market than is currently anticipated.
Cellulosic ethanol will come on line to replace a lot slower than anticipated – even when the technology arrives.
The early cellulosic plants will likely be residual based, perhaps corn stover from fields already producing for corn ethanol – NOT purpose planted fuel crops.
Cellulosic technologies that allow fuel switching and co-firing will have an advantage.
Because of the transport issues – cellulosic ethanol will be relegated primarily to vertically integrated plants like the biomass power industry for the near future (where the operator owns its own fuel supply). They will struggle to compete on price with corn based ethanol.
And if ethanol succeeds like DOE expects, our beef prices are headed up.