Cellulosic Ethanol – Always the Bridesmaid?

I have a new set of predictions for ethanol technology, and so far my predictions on ethanol have been dead on. Cellulosic ethanol has been the thin film of the ethanol industry, always the bridesmaid. But perhaps, like with the breakthrough by First Solar (NASDAQ:FSLR), it’s time is coming.

I have written extensively on the topic of ethanol and biofuels, including an early 2006 analysis of the VeraSun (NASDAQ:VSE) IPO right before its pricing that predicted an appropriate price at the time in the range of $2.77 to $8.82 share. The business has grown since then, but EBITDA margins have slipped even farther than I predicted they would, but the forward PE has come right into line with my predictions way back then. After listing well above my range, the stock hit a high north of $30 before pulling back until it is finally in my original lrange, trading in the $7-8 per share range.

Nearly two years ago in mid 2006 I did another article on predictions for cellulosic ethanol:

My Predictions on the Ethanol Market:

  1. 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.
  2. Cellulosic ethanol will come on line to replace a lot slower than anticipated – even when the technology arrives.
  3. The early cellulosic plants will likely be residual based, perhaps corn stover from fields already producing for corn ethanol – NOT purpose planted fuel crops.
  4. Cellulosic technologies that allow fuel switching and co-firing will have an advantage.
  5. 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.
  6. And if ethanol succeeds like DOE expects, our beef prices are headed up.”

And then I wrote an article in late 2006 entitled “Are Ethanol Companies Risky Investments?” for AltEnergyStocks.com. The conclusion – yes, of course.

“In the short run ethanol stocks are in a land grab phase ramping to meet demand, and some of these stocks may do well while demand still outstrips supply and the industry is still small, but when this dynamic changes – watch out as the margin pressure will be brutal, and could turn already aggressively valued stocks into a dot bomb style free fall as per gallon profits get crushed. So, make your profits while you can!”

So here are my new cellulosic ethanol predictions:

Prediction #1 – Both market entry and market share for the next several years in ethanol will roughly be governed by this ranking on preferred processes (with some allowance for process that involve more than one), and given feedstock, scalability, yield, and transport issues, sugar cane and corn fermentation will remain the market and cost leaders for some time.

  1. Fermentation
  2. Thermochemical
  3. Catalytic
  4. Enzymatic
  5. Wildcards

Roughly the farther down we go on this ranking the higher the risk of failure, the higher the current cost, the more difficult the scalability (if you swap #1 and #2), the higher the reliance on future technological advances, and the higher the requirements for vertical integration to make the economics work.

Prediction #2 – As ethanol and biofuels scale into significant portions of our fuel supply chain, most of the profits will be made by energy, refining companies, and Ag companies, who are more likely to build rather than to buy when it comes to expansion.

Prediction #3 – Despite all protestations to the contrary, ethanol and biofuels will continue to be our highest cost liquid fuel for at least a decade, though at $100 crude oil prices, even a high cost fuel can be competitive. Note: As I have said many times before, on a fully integrated direct cost basis, gasoline from oil can be profitably found, manufactured and distributed down well into the sub $0.50/gallon range, depending on the nature of the resource base in question, where as even the lowest cost forms of ethanol today are well over double that. Just because crude oil prices are north of $100 per barrel, does not mean that the COST of gasoline is higher than that of ethanol, it means that the PRICE of gasoline is high enough that the higher cost ethanol can be economically produced and sold. The implication is obviously that he who owns the reserves (either oil in the ground or corn in the field) will continue to do well.

Neal Dikeman is a founding partner at Jane Capital Partners LLC, a boutique merchant bank advising strategic investors and startups in cleantech. He is founding contributor of Cleantech Blog, a Contributing Editor to Alt Energy Stocks, Chairman of Cleantech.org, and a blogger for CNET’s Cleantech blog.

6 replies
  1. Benoit
    Benoit says:

    It seems to me that biodiesel makes more sense than ethanol. I remember learning about energy levels in the food chain in an environmental science class. What they told us was that when you go a level in the food chain there is a big loss in energy. Eating meat is not energy efficient since it would be more efficient to use the land (thus solar energy) that produce animal feed to produce plant food for human consumption directly. It seems to me that the same principles should apply to ethanol and oil. With ethanol you harvest carbohydrates from plants then you feed those carbs to yeast which then produce ethanol. You are going through two energy steps. With biodiesel you harvest oil from the plants directly. The one step process should theoretically be more efficient when going from sun to fuel.

  2. Paul O Callaghan
    Paul O Callaghan says:

    I agree with Benoit's logic. And following that logic one step further…. there are inherent losses in any plant derived biofuel, (ethanol or bio-diesel), in the conversion of energy from the sun into biomass. You need water and nutrients and the biomass has to be processed. Solar energy or solar power is a one step process cutting out a number of steps. The problem is of course storage and transportation of that energy. We need liquid portable fuels. But in this search for liquid fuels to replace petroleum based products we are tieing ourselves to an infrastructure which was created as a result of a geological artefact, that of stumbling on vast stores of liquid fossil fuels. A handy repository of solar energy built up over millennia.That's fine for now. But fundamentally as a model I cant see the logic in having to apply water and nutrients to get plants to trap solar energy in molecules which we then burn. Current rates of agricultural production are made possible through the application of artificial fertilisers. Phosphorous is a mined non-renewable resource and we will eventually hit "Peak Phosphorus' much like Peak oil and both phosphorus and nitrogen are energy intensive to produce. Liquid fuel from waste oil and waste organic matter makes better sense.In general I would rather that we were looking at a replacement to the internal combustion engine as a means of propulsion, rather than simply trying to come up with a new way of making fuel for it. But maybe I am not being pragmatic. There is a joke told in Ireland about a tourist who stops to ask a Kerry man for directions, and the Kerry man says, 'well if I were you, I wouldnt start from here'. But the problem is of course that we have to start from here.

  3. MattKelly
    MattKelly says:

    Jeffrey makes a good point–Coskata is a Warrenville, IL company that has patented a process using a proprietary micro-organism that can eat any carbon based product including tires, diapers and even plastics and exhale ethanol. Surely a process that can fundamentally change the way we recycle and also produce fuel. Even Lifeline Foods in Missouri has a process where with every kernel of corn, they are able to separate the ethanol and the meal, which is then used in food production for companies such as Frito Lay, proving that there is in fact, enough corn to provide food AND fuel.Also, Neal’s last point is a kicker..he who owns the corn will do well. So the question is, do you want your local farmer to do well or some mid-east oil producer and Big Oil refiner. I’d gladly open my wallet for American farmers.

  4. Phil Waste
    Phil Waste says:

    Southern Resurgence Here is an idea that the Republicans, oil, tobacco companies will hate. How about we plant sugar cane or sugar beets in the states of Florida, Georgia, Mississippi, Alabama and Louisiana. We encourage them to stop planting tobacco which is killing millions. Sugar cane or sugar beets are 7 times more efficient than corn in making ethanol. You want proof that it works? Just google Brazil and find out for yourself. Now, you won’t be using a food product or even displacing a food product…… In 1798, Thomas Malthus predicted that population growth would be perennially held in “check” by inherent limits to food production. … Energy can substitute for food in his theory but when the energy is the food……catastrophe will result. Completely renewable and no one is hurt except for those purveyors of death the tobacco companies. I would sure like to know the idiot who decided to use corn (a food product) and doomed ethanol to failure. Had to be an oilman!Stop the tax subsidies to corn farmers and give them to sugar cane and sugar beet farmers, in the mean time eliminate import tariffs for ethanol. Allow the import of flex-cars made by our very own car company Chevy….Come on all you Democrats in Congress are you going to give us more of the same or are you going to make a difference? Do something now to prove you are not just more of the same…… and I mean minions of the oil companies….OH! This could all be done in one year……….No more dependence on foreign oil. What ever happened to common sense in America? You know, if we can’t straighten out a simple mess like this we deserve to fade away as a has been leading nation……It is real simple folks; America has been sabotaged by special interests namely the oil companies including those from the Middle East who want to sell oil, oil, oil. Cars are already to go, made by Chevy! They are called flex-cars and burn any combination of oil and ethanol.

  5. Phil Waste
    Phil Waste says:

    If Ford and Chevy want to survive? I hope you do, so why don't you put E85 pumps in all your dealerships and advertise your flex-fueled cars which you have been making for years now?Start pushing sugar cane and sugar beet ethanol which is 7 times more efficient than 'corn' ethanol and it doesn't rob our food supplies.You can do it now or be forced to do it later. Make your choice.

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