Cleantech Blog

Monday, August 25, 2008

When In A Hole, Stop Digging

by Richard T. Stuebi

I never cease to be amazed by the frequency and vehemence of opinions expressed on energy and environmental matters by people who are spectacularly underinformed. So in this exposition about oil, let's first begin with a Top Ten List of clear-cut facts.

1. World oil production (which is essentially equal to consumption) is at approximately 85 million barrels per day, or 31 billion barrels per year -- and has essentially remained at these levels continuously since mid-2005, even though oil prices have doubled (from about $60/barrel) since then.

2. The U.S. consumes about 25% of the world's annual oil production, implying U.S. demand levels of about 21 million barrels/day (almost 8 billion barrels per year), but holds under its territory only about 2% of the world's proven oil reserves of 1.2 trillion barrels.

3. In contrast, the Oil Producing and Exporting Countries (OPEC) control almost 80% of the world's oil reserves, yet produce only about 40% of annual oil supplies.

4. OPEC production was 31 million barrels/day in 1973, and 32 million barrels/day in 2007, despite the world economy having doubled in the intervening years.

5. OPEC includes among its members the following countries that are unstable, corrupt and/or unfriendly to the U.S.: Saudi Arabia, Iraq, Iran, Venezuela, Nigeria.

6. The Middle Eastern members of OPEC represent over 75% of total OPEC capacity, of which the single largest player (without which the world oil markets would collapse) is Saudi Arabia, alone accounting for 22% of the world's remaining proven oil reserves.

7. This year, the U.S. will send an estimated $700 billion to the Middle East to purchase oil -- more than the U.S. defense budget (about $600 billion).

8. An unknown portion of these proceeds, but widely-agreed to be a significant amount, funds anti-American (and anti-women, and anti-Semitic, and anti-homosexual, and so on) sentiment -- including outright terrorist activities.

9. About 99% of the energy consumed by the U.S. transportation sector derives from petroleum.

10. The vast majority of American citizens live and work in a manner requires oil-fueled transportation to maintain their basic lifestyles (commuting, shopping, etc.)

So, here we are, the United States of America, utterly reliant on one strategic commodity supplied mainly by a powerful cartel that doesn't hold American long-term interests at heart. What is our response to this predicament?

We complain. We complain about high energy prices, and ask the government to do something about it. When, in fact, there's very little the government can do about energy prices. OPEC makes it abundantly clear that we are price-takers, not price-setters. Why else would President Bush travel to Riyadh, hat-in-hand, to effectively beg the Saudis to supply us more oil? And, how else could the Saudi's rebuff their best customer?

This, of course, is the same President Bush that declared famously in 2006 State of the Union speech that the U.S. is "addicted to oil." Factoring in all the negative connotations of the word "addiction", that's a strong statement, coming from a proud Texan.

As Thomas Friedman so aptly noted in a recent editorial, the President has revealed his implicit strategy for dealing with our addiction to oil: "Get more addicted to oil."

You might ask what else we might do, beyond pandering to our pushers.

Cutting demand certainly helps. Unfortunately, we can't quickly/easily/cheaply reconfigure our infrastructure of buildings and roads, so we're stuck for a long time with the landscape we've created: we'll unavoidably need to move around lots of people and goods for quite a while. (See Fact #10.) So, our need for vehicle-based ransportation will not diminish rapidly.

The recent passage of Energy Independence and Security Act of 2007 tightens fuel economy standards to improve efficiencies of new vehicles - including, for the first time, SUVs. And, higher fuel prices are clearly beginning to discourage U.S. demand.

Unfortunately, U.S. demand-reduction measures won't help much in the grand scheme of things. First, over its 35 year history, OPEC has clearly learned an ability to withhold production to keep oil prices high: when others produce more, OPEC produces less. (See Facts #3 and #4.) Second, the incessant growth in energy demand from the developing world (most notably, China and India) will probably eat up any declines in oil demand the U.S. might be able to achieve on its own.

So, this leads us to what has become the hottest topic in the Presidential campaign: drilling for more oil in the U.S.

You've probably seen the bumper stickers: "Drill Here, Drill Now, Pay Less". I recently overheard someone in a bar claim with pride that the recent modest drop in oil prices can be attributed to OPEC's cowering in fear now that the U.S. is getting serious about drilling for more oil domestically.

Get real. As Executive Director of the Institute for the Analysis of Global Security Dr. Gal Luft, arguably one of the most knowledgeable observers of the world oil situation, said in a recent speech in the Cleveland area: "Go ahead, drill all you want, it won't make any difference."

This is because the U.S. only has about 3% of the world's reserves, but demands 20% of current world production. (See Fact #2.) Bluntly, we want way more than our share of the oil allotment, but there's no way around this inconvenient truth: we can't change our geography or our geology. (This reminds me of another bumper sticker: "What's Our Oil Doing Under Their Soil?")

It is true that there are significant reserves untapped offshore in the Gulf of Mexico, in Northern Alaska (Arctic National Wildlife Refuge, ANWR), and elsewhere in the U.S.: in ANWR alone, perhaps as much as 16 billion barrels. This sounds like a lot, and at $120/barrel, it is financially worth a lot. But, even with a bonanza of 50 billion new barrels heretofore inaccessible, this only supplies current U.S. requirements for not even 7 years. It supplies global requirements for less than 2 years.

Moreover, as noted previously, OPEC is capable of reducing its supply to compensate for whatever incremental production the U.S. is able to achieve, thereby nullifying the effect of the U.S. exertions to open up these assets to extraction.

With this as backdrop, let me ask a simple question: is it worth pinning the country's hopes on a multi-year project to drill some new holes, only to find that it doesn't solve our underlying problem? According to analysis by the U.S. Department of Energy, opening up new areas to drilling "would not have a significant impact on domestic crude oil and natural gas production or prices before 2030. Leasing would begin no sooner than 2012, and production would not be expected to start before 2017." This doesn't sound to me like any significant solution for our dilemmas.

It sounds like all I'm offering is problems, not solutions. Well, what do you expect? With a long-held conviction to pursue an energy policy of "cheap oil, at all costs", the U.S. has painted itself into a nasty corner. Everyone wants easy answers, but unfortunately there are none.

One ray of hope is offered by unconventional hydrocarbon production. The U.S. is the so-called "Saudi Arabia of coal", with hundreds of years of reserves at current demand levels (although this "runway" would be reduced dramatically by a concerted move to coal-based fuels for transportation). In addition, the U.S. holds huge amounts of oil-equivalents in the form of shale in the Rocky Mountains, estimated to be far larger in quantity than the oil in Saudi Arabia. Both of these sources can technically be extracted and converted into transportation fuels -- but possibly at significant financial and environmental costs. Hopefully, new technologies under development will eliminate (or at least significantly) reduce these costs -- but if not, are we willing to pay them?

More fundamentally, I believe that Dr. Luft is onto the central problem: unless and until we sever the link between transportation and petroleum, the U.S. is doomed to declining power and ultimate subjugation.

Right now, just about every car and truck sold in the U.S. is constructed to run only on a petroleum-based fuel. Since each vehicle has about a 16 year operating life, and since over 7 million new vehicles a year are sold in the U.S., each consuming hundreds of gallons per year, every additional year that virtually all cars sold in the U.S. are oil-dependent "locks in" tens of billion barrels of U.S. aggregate demand for oil.

Dr. Luft's solution: eliminate the strategic value of petroleum, by taking low-cost and rapid steps to make vehicles fuel-flexible. Only with competition among fuel types for the transportation market will OPEC lose its stranglehold on our economy.

As has been widely documented, it is possible to make gasoline powered vehicles able to run on a limitless variety of alcohol/petroleum blends with the addition of equipment that is about $100 per vehicle. Dr. Luft and other luminaries (e.g., James Woolsey, Robert "Bud" McFarlane) have formed the Set America Free Coalition to promote the Open Fuel Standard Act, which would require that 50% of all vehicles sold in the U.S. in 2010 must be fuel-flexible. According to Dr. Luft, the major automakers say this is doable.

(Interestingly, Dr. Luft claims that the big oil companies are discouraging their affiliated retailers from installing ethanol-capable pumps. This sounds like something worth investigating.)

In addition, Dr. Luft argues compellingly for the end of ludicrous U.S. agricultural policies that tax imported ethanol (but not, notably, imported petroleum or petroleum-based fuels) and that place quotas on sugar imports. The effect of these policies is to discourage or prevent the possibility of cost-effectively importing sugar-based ethanol from over 100 countries in the tropics around the globe where sugar (a highly efficient feedstock for ethanol production, much better than corn) can grow abundantly.

These countries tend to be poor, based on subsistence agriculture, and they are being killed by high oil prices. In Dr. Luft's view, this represents "the worst regressive tax in history", and he thinks we should send a few hundred billion dollars a year to those countries - "some of whom still like us" - instead of to OPEC countries. As an incidental benefit, this would increase economic aid to the developing world by about an order of magnitude.

(As an aside, Dr. Luft is convinced that the now-heated arguments against ethanol -- food vs. fuel, too-lucrative incentives -- are overhyped bunk, and has some interesting analyses to prove his point, but that is a subject for another day.)

So, it seems that some important answers to our energy crises may be found in skewed agricultural policies -- a non-intuitive target for critical attention. If you want to take this on, contact Dr. Luft: he is looking for fellow revolutionaries to help us claw our way out of the hole we've dug for ourselves with our oil addiction.

Richard T. Stuebi is the BP Fellow for Energy and Environmental Advancement at The Cleveland Foundation, and is also the Founder and President of NextWave Energy, Inc.

Labels: ethanol, off shore oil drilling, oil, oil shale, peak oil

Friday, June 13, 2008

Beware the Allure of Ethanol Investing

I am a fan of ethanol. The addition of corn ethanol to our US fuel supply chain has had a significant impact in keeping gasoline prices way lower than they otherwise would have been, and has paid for the subsidies many times over. But that has not translated to gains for ethanol stocks, which are down on the order of 50% over the last year according to the Camino Energy index, and it won't change anytime soon.

As the bellwether US ethanol pureplays are finally down to earth, and my predictions have come to pass. Two years ago ahead of Verasun's (NYSE:VSE) IPO, I blogged an analysis saying I thought Verasun should trade in the $3 to $8 range, depending on the margin, PE, and growth assumptions. The bankers and the market thought I was nuts, treating VSE and Aventine (NYSE:AVR) which listed near the same time as technology style growth stocks. The company listed at several times my target range, and then traded way up from there. But as I had predicted, the margin pressures from a range of commodity price movements and the relatively low barriers to entry for capacity additions came to bear. But the fall is probably not over.

I stated then and reiterate now that ethanol companies are basically small refiners with potentially worse economics. And refiners traditionally trade at single digit PEs, and single digit PE. Worse, refiners don't always do well when commodity prices rise or their markets grow fast, as the spreads they make their margin on are often affected as much by relative capacity contraints as the raw commodity prices themselves. In fact, fast moving commodity prices in either direction in either refined products or feedstocks can sometimes bode ill for refining profits, depending on what's happening in capacity.

VSE now trades under $5. Right in the middle of range I predicted it should. And the PEs for VSE and AVR are finally down in the range close to the independent refiners group I follow, Valero (VLO), Sunoco (SUN), and Tesoro (TSO). BUT. And there is a but. The TEV/EBITDA multiples for VSE and AVR, which are way down, are still 2-3x those of the refiners, and the PEG ratios are still richer as well. This likely means more room to fall, or at least languish.

The next wave of venture backed ethanol companies, mostly cellulosic, are beginning to break ground on pilot plants, and given the penchant for certain ethanol crazed venture investors to IPO deals when windows open, it is likely we will see some of these soon. And it is likely that they will be sold to the market the same way, as high growth stocks based on great technology and macro conditions justifying stratospheric PEs on unsustainable margins. Then they'll hit their first commodity cycle, the margins will compress, the bloom will come off the rose, the multiples will come down, and the investors who bought and held post IPO will get crushed.

We've seen it before and we'll see it again. Try not to get caught this time.

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

Labels: AVR, biofuels, ethanol, SUN, TSO, VLO, VSE

Thursday, May 15, 2008

Is Corn Ethanol Lowering Gas Prices at the Pump?

Despite providing the largest portion of alternative fuel in the US, corn ethanol gets a lot of flack in the circles Cleantech Blog runs in. The usual culprits go something like this: Corn ethanol is heavily subsidized (yes it is). Corn ethanol does not reduce greenhouse gas emissions (sort of, it really, really depends on your assumptions). Corn ethanol contributes to the fertilizer driven "deadzone" in the Gulf of Mexico (maybe, another complicated topic). Corn ethanol drives up the price of food (a topic for another day).

But the main argument for supporting corn ethanol production has always been about energy independence and fuel switching. Enabling a new source of supply into our gasoline supply chain should in theory, put some some downward pressure on gasoline prices at the pump, and keep those energy dollars at home rather than send them overseas.

So the real question is, does it?

A very interesting paper was published at Iowa State last month says yes, US ethanol production (almost all from corn) has reduced gasoline prices at the pump $0.29-$0.40 per gallon, depending on the region. Further, that the reduction came largely at the expense of profits the refining industry would otherwise have made (indicating perhaps that our ethanol production helped US consumers at the pump, but did not impact world oil prices).

In their paper entitled The Impact of Ethanol Production on US and Regional Gasoline Prices and on the Profitability of the US Oil Refinery Industry, authors Xiaodong Xu and Dermot Hayes analyzed the impact on price at the pump and refining profits of adding ethanol to the US gasoline fleets by separating the impact of ethanol from the major variables like gasoline imports, refining capacity, refining utilization rates, hurricanes, market concentration in refining, stocks, and seasonality, that generally affect gasoline price.

I find their $0.29 to $0.40 per gallon results a surprisingly large number, indicating that ethanol production, while providing on average well less than 5% of our gasoline supplies over their study period, could have affected prices at the pump downward to the tune of greater than 2 to 3 times that percentage level. That result is a huge win for ethanol proponents, as it suggests that adding ethanol to the US fleet has significantly benefited consumers (as one would expect), and also suggests that the ethanol subsidy program (at about $0.40 per gallon for 5% of the US gasoline production works out to around a 1 to 2 cent effective tax on gasoline at current levels) may well have paid for itself up to 20x over or more. The studies authors are careful not extrapolate too much from the results, but they are certainly interesting enough to warrant significant further research, and argue a strong case for further corn ethanol support.

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 Greentech blog.

Labels: cleantech, ethanol, gasoline prices, greentech

Tuesday, April 15, 2008

Is Ethanol's Carbon Footprint Bad? It Depends.

In the cleantech and carbon worlds, the carbon footprint of ethanol, whether from corn or sugar feedstocks and fermentation processes, or enzymatic or thermochemical cellulosic sources, is always good fodder (or perhaps, "fuel") for debate.

And depending on which process and which study you personally ascribe to, the answer on how carbon clean ethanol looks depends. In most debates centering on corn fermentation, for example, the studies cite a range from say, 20 to 30% less carbon intensive than gasoline, to 20 or 30% more. This begs one very big question in my mind, what's the difference? How does the same ethanol in my car have a possible carbon footprint range that wide?

The true answer lies in the ground we walk on. When I started to read a few of the studies and articles about them, an interesting fact emerges, the difference depends in large part on which land gets counted. Most of ethanol's carbon footprint falls into one of several categories, in roughly ascending order (depending on the source and process), the fuel used to make it, the fuel used to grow the feedstock, the carbon content of the fuel itself, and the lost carbon not sequestered in the vegetation that would have been on the land used to grow the feedstock.

The last one, land use change, is the bugaboo. For example, if you assume that all the land used to produce the ethanol feedstock is already in production, you tend to find a carbon footprint at the low end of the range, since there is little net reduction in the carbon sink, and ethanol looks pretty good. If you assume that all the land used to produce the ethanol feedstock came from forests that had been chopped down, or marginal land that produces very low yields, you tend to find a carbon footprint at the high end of the range, and ethanol looks bad. Thought about another way, ethanol made from corn or sugar that displaces human or animal food production is likely to be relatively greenhouse gas friendly comparedd to ethanol made from corn or sugar that comes from new land put into production just for ethanol. The same logic applies to cellulosic ethanol sources, though not quite to the same degree. Interesting conundrum.

As usual, the devil's in the details, and people tend to use the case that best addresses their agenda. Personally, I'm buying all my ethanol from land that is already in production, so my carbon footprint must be good. The rest of you can buy the OTHER ethanol with all the bad carbon footprint.

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 Greentech blog.

Labels: biofuels, carbon, cellulosic ethanol, cleantech, ethanol, ghg, green tech, greenhouse gas

Monday, April 07, 2008

Ethanol Under Pressure

by Richard T. Stuebi

A good friend of mine sent me a provocative email the other day:

"Last year, your government spent more than $8 billion of your tax dollars to achieve the following results:

Dramatically increase the emissions of carbon dioxide and other greenhouse gases into the atmosphere
Accelerate the destruction of the Amazon rainforest
Raise the price of milk, bread, beef and other grain-dependent products by more than 20%
Increase world hunger

How did they do this? Two words: ethanol subsidies. Did I mention that the amount of corn it takes to produce enough ethanol to fill the tank of your typical SUV one time could feed the average person for one year (350 days)?"

This is one person's "grabber" for an April 7 article by Michael Grunwald in Time magazine entitled "The Clean Energy Scam". It presents yet another negative portrait of corn-based ethanol as a flawed technology -- and flawed policies to support it.

However, to avoid throwing the baby out with the bathwater, it's important to emphasize to the phrase "corn-based". While it's increasingly clear that corn-based ethanol is of dubious merit except to the major agri-businesses like ADM (NYSE: ADM) and Cargill that benefit from the government's largesse, that's not to say that the potential future emergence of cellulosic ethanol wouldn't be a good thing all-around.

The only debate is whether the current push for corn-based ethanol is really a useful bridge to -- or even a propelling force for -- the advancement of cellulosic ethanol. Certainly, ethanol proponents like uber-VC Vinod Khosla (see some of his papers and presentations) think that corn-based ethanol is helping pave the way to a cellulosic future, by helping change the fueling infrastructure from gasoline to ethanol. Meanwhile, a growing chorus of contrary voices doesn't see the cellulosic promise at all, and focus their angst on the real and present problems generated by corn-based ethanol.

If cellulosic ethanol never makes it out of the lab and into the market, then the rush for corn-based ethanol will indeed have been an expensive dead-end -- and will provide more food for the fodder of those who claim that government policy involving preferential subsidies should not pick technology winners.

Richard T. Stuebi is the BP Fellow for Energy and Environmental Advancement at The Cleveland Foundation, and is also the Founder and President of NextWave Energy, Inc.

Labels: cellulosic ethanol, cleantech, ethanol, green tech

Tuesday, April 01, 2008

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:

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.”

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.

Fermentation
Thermochemical
Catalytic
Enzymatic
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.

Labels: biofuel, cellulosic ethanol, cleantech, ethanol, green tech, Verasun

Wednesday, December 05, 2007

California's Low Carbon Diet

By John Addison (12/5/07). When Coke and Pepsi were in the middle of their diet wars, California was an early battle ground. It is a state which tends to do much in excess, including drinking colas. In fact, only a handful of countries spend more money on beverages. Parties of happy and surprisingly fit youth were shown on TV commercials drinking their beverage of choice.

Now millions of Californians are being targeted as early adopters for a low carbon fuel diet. More miles, less carbon emission. It is the law. Executive Order S-1-07, the Low Carbon Fuel Standard (LCFS), calls for a reduction of at least 10 percent in the carbon intensity (measured in gCO2e/MJ) of California's transportation fuels by 2020. Low Carbon Fuel Standard Program

Successful implementation of the LCFS will be critical to California’s even more ambitious law, the California Global Warming Solutions Act (AB-32), which requires California’s 2020 greenhouse gas emissions to not exceed 1990 emissions. The challenge is that in 2020, California’s population will be double 1990.

Because transportation is the main source of greenhouse gases in California, it is urgent that Californians use vehicles with better miles per gallon and that less greenhouse gases be emitted from the use of each gallon of fuel.

The world will learn from the successful implementation of LCFS because gasoline and diesel are currently becoming more carbon intense. There has been a shift from oil that is easy to get, to extraction and refining that increases greenhouse gases, as we make gasoline from tar sands, coal-to-liquids, and a future nightmare of shale oil. For example, monster earth movers strip-mine northern Alberta, extracting tar sands. Elizabeth Kolbert reported in the New Yorker that 4,500 pounds of tar sand must probably be mined to produce each barrel of oil. The converting of tar sands to petroleum will require an estimated two billion cubic feet of natural gas a day by 2012. Carbon intensity includes all the emissions from the earth movers and all the natural gas emissions from refining.

“All unconventional forms of oil are worse for greenhouse-gas emissions than petroleum,” said Alex Farrell, of the University of California at Berkeley. Farrell and Adam Brandt found that the shift to unconventional oil could add between fifty and four hundred gigatons of carbon to the atmosphere by 2100. Article

So, how can California reduce the carbon emission from fuel use? As a major agricultural state, E10 ethanol will be part of the solution. E10 can be used in all gasoline vehicles including 40 mile per gallon hybrids and in the new 100 mile per gallon plug-in hybrids being driven by early adaptors. Higher percentage blends of next generation ethanol are even more promising. Biodiesel is better at reducing carbon intensity than corn ethanol. Most heavy vehicles have diesel engines, not gasoline. Exciting new European diesel cars are also starting to arrive.

There are over 25,000 electric vehicles in use in California. Heavy use of electricity for fuel would take California far beyond the minimal target of a ten percent reduction in carbon intensity. This is especially true in California where coal power is being phased-out in favor of a broad mix of renewable energy from wind, geothermal, solar PV, large-scale concentrated solar, ocean, bioenergy and more.

California Low Carbon Fuel Standard Technical Analysis documents that there is a rich diversity of sources for biofuels within the state and in the USA including the following in million gallons of gasoline equivalent per year:

In-state feedstocks for biofuel production Potential volume
California starch and sugar crops = 360 to 1,250
California cellulosic agricultural residues = 188
California forest thinnings = 660
California waste otherwise sent to landfills = 355 to 366
Cellulosic energy crops on 1.5 million acres in California = 400 to 900
California corn imports =130 to 300

Forecasted 2012 production capacity nationwide Potential volume
Nationwide low-GHG ethanol = 288
Nationwide mid-GHG ethanol = 776 to 969
Nationwide biodiesel = 1,400
Nationwide renewable diesel = 175

A variety of scenarios have been examined with detailed analysis by U.C. Berkeley, U.C. Davis, and stakeholder workgroups that include technical experts from the California Energy Commission and the California Air Resources Board. Several scenarios are promising including one that would achieve a 15% reduction in carbon intensity with the following percentage mix alternate fuels and vehicles of some 33 million light duty vehicles by 2020:

Fuels:
Low-GHG Biofuel 3.1%
CNG 1.7%
Electricity 0.6%
Hydrogen 0.4%
Low-GHG FT Diesel .9%
Sub-zero GHG Biofuel 3.9%

Vehicles:
CNG vehicles 4.6%
Plug-in hybrid vehicles 7.4%
Flex-fuel vehicles 34.7%
Diesel vehicles 25.5%
Battery electric vehicles 0.5%
Fuel cell vehicles 1.9%

The ultimate mix will be determined by everyday drivers in their choice of vehicles and fuels. Low emission choices are becoming more cost-effective with the growth of electric vehicles, waste and renewable hydrogen, fuel from biowaste and crops grown on marginal land, and even fast growing poplar trees that absorb more CO2 than is emitted from resulting biofuels. The alternatives make fascinating reading for those interested in future scenarios for fuels and vehicles:

California Low Carbon Fuel Standard Technical Analysis and Scenario Details
California Low Carbon Fuel Standard Policy Analysis

California’s ambitious goals to reduce greenhouse gas emissions will benefit by the increased motive energy per CO2e that is described in these scenarios. California will also benefit from vehicles that will go more miles with the same energy input. Vehicles are getting lighter and safer as high-strength carbon fibers and plastics replace heavy metal. The shift to hybrids and full electric-drive systems allow replacement of heavy mechanical accessories with light electric-powered components. Hybrids allow big engines to be replaced with smaller, lighter engines. Pure electric vehicles can eliminate the weight of engines and transmissions. Less fuel weight is needed. Aerodynamic vehicles are becoming more popular.

Employer programs are leading to more flexible work, less travel, and increased use of public transit. Demographics may also cause a shift to more urban car sharing, use of public transit, bicycling, walking, and less solo driving. It can all add-up to a celebration of low-carbon living.

John Addison publishes the Clean Fleet Report which includes over 50 articles about clean transportation.

Labels: cellulosic ethanol, clean fleet, cleantech, Cleantech Blog, coal-to-liquids, diesel, electric vehicles, energy, energy policy, ethanol, EV, global warming, green tech

Thursday, June 14, 2007

Micro Fuel Cell Killer - What's Next?

About 4 or 5 years ago micro fuel cells were quite a hot topic in cleantech. They were going to power our laptops, cell phones, PDAs, blackberries, hand held multimedia devices, etc.

The story ran like this:

The digital age and increasing customer demand for more power hungry features like bandwidth, multimedia, et al on mobile devices like laptops, PDAs and cellphones mean the increase in power requirements are outstripping the pace of technology of lithium ion battery - therefore the only solutions will be micro fuel cells. And since battery manufacturers are a plodding, unimaginative lot, silicon valley and smart scientists can build a company to leapfrog them.

We saw major players like Motorola, Toshiba, Intel, and others taking a look, and startups like Smart Fuel Cells, Medis and MTI Micro seeking to make their name on a fuel cell the size of a credit card (or thereabouts) .

Today, still no micro fuel cell powered devices are on the market, many of the larger players have gone quiet, and all the startups are talking up battery charger (not device power pack) products - especially for the military and first responders.

What happened? What killed the micro fuel cells? Can they come back? And is something similar lurking around the corner for solar, electric vehicles, biofuels, next generation batteries or one of today's other darlings of the cleantech sector that we can learn from?

Well . . . let's see:

The technology is actually hard - Micro fuel cell technology proved a harder nut to crack than everyone thought (at least at anywhere near the same cost point) - and the product development issues given the state of the technology proved to be a real challenge.

Rational expectations - Market reaction to the underlying drivers has been aggressive. We've got global warming and high energy prices making people like Sun, Dell, and others hell bent on designing power saving devices - which the consumer is now interested in buying as a premium product. Once the electronic product companies actually put their minds to reducing power usage - well, it turned out that you actually CAN optimize a device to save power, and still pack enough features in to sell product.

The incumbent technology - Despite high profile thermal issues, the incumbent lithium ion technology turned out not to be so bad, and has continued to keep pace (as far as us lowly consumers can tell) - Bottom line: I now carry 2 very small 4 hour battery packs for my laptop - I can last a transocean plane flight without needing to plug in.

Infrastructure, infrastructure, infrastructure - And yes, having to make infrastructure changes is very costly in anything energy-esque, whether its in fuel, entrenched distribution, or tooling. As usual, winning technologies in energy tend to be owned by businesses that find a way to work with existing infrastructure, not to try and replace it.

And in the end, the batteries (and the big battery makers) still rule the roost, for now.

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 Author for Inside Greentech, and a Contributing Editor to Alt Energy Stocks.

Labels: alternative energy, Batteries, cell phones, cleantech, Cleantech Blog, climate change, energy, ethanol, fuel cell, green tech, greentech, hydrogen, solar, vehicles

Tuesday, May 15, 2007

Gas Misers or Corn Guzzlers

By John Addison (5/15/07)

People buying new cars are asking if they should get a high mileage hybrid that runs on gasoline, or a flex-fuel vehicle that could run on E85 ethanol. The United States DOE’s and EPA’s fueleconomy.gov, made it easy for car buyers to compare choices.

When you drive, there is most likely ethanol in your fuel tank. Ethanol is a fuel from a plant source that is normally mixed with gasoline. The percentage varies widely. All current U.S. vehicles can run on a blend of up to 10% ethanol (E10).

GM launched a national campaign, "Live Green Go Yellow." GM and Ford (F) have sold millions of flex fuel vehicles (FFV) on the road. GM is prepared to make up to half its vehicles ethanol capable by 2012.

Although FFVs are hot sellers in the USA, most have never had a drop of E85 in their tank. They are only fueled with standard gasoline blends. There are over 6 million vehicles on the U.S. streets that could run E85. Most never have.

Most FFVs are fuel guzzlers; fueled with E85, they are corn guzzlers. In 2007 the best rated car running on E85 was the Chevrolet Impala, with a United States EPA mileage rating of 16 miles per gallon in the city and 23 on the highway when fueled with E85. For a typical U.S. year of driving, the annual fuel cost would be at $1,657 and 6 tons of CO2 would be emitted by this FFV when running on E85.

By contrast, the EPA rating for a Toyota (TM) Prius running on gasoline was 60 miles per gallon in the city and 51 on the highway. The Prius would have an annual fuel cost of $833 and only emit 3.4 tons of CO2, compared to 6 tons from the most fuel efficient E85 offering.

A big problem is that ethanol cuts miles per gallon by about 27%. The energy content of E85 is 83,000 BTU/gallon, instead of 114,000 BTU/gallon for gasoline. Even by 2030, the U.S. Energy Information Administration (EIA) projects that only 1.4% of ethanol use will be E85. The vast majority will be for small percentage blending with gasoline.

The EIA forecasts that ethanol use will grow from 4 billion gallons in 2005 to 14.6 billion gallons in 2030 (about 8 percent of total gasoline consumption vs. today’s 2%). Ethanol use for gasoline blending grows to 14.4 billion gallons and E85 consumption to only 0.2 billion gallons in 2030. In other words, agriculture will be a big winner without any need to spend millions of tax dollars funding E85 stations.

There is a heated debate about whether ethanol helps the environment. In the U.S., the vast majority of ethanol is processed from corn. There is no current environmental benefit if the source-to-wheels use of ethanol includes diesel farm equipment, fertilizer from fossil fuel, coal produced electricity, diesel delivery trucks hauling ethanol over 1,000 miles to refineries, and then fueling a vehicle with poor mileage.

The amount of U.S. corn that became ethanol exceeds 20 percent. The Corn Growers Association says that by 2015 a third of all the corn grown - or 5.5 billion bushels - likely will be for ethanol. Food prices have increased.

World Watch Institute warns “Conventional biofuels will be limited by their land requirements: producing half of U.S. automotive fuel from corn-based ethanol, for example, would require 80 percent of the country’s cropland.” Thus, large-scale reliance on ethanol fuel will require new conversion technologies and feedstock.

A broad coalition is more enthusiastic about cellulosic rather than corn ethanol. Ethanol and other biofuels can be made from a wide range of plant fiber and waste. Currently corn kernels are more easily processed into fuel than cellulosic corn stover, but new enzyme technology can change that. Future stalk for ethanol may include prairie grasses, Miscanthus, Poplar, Willow and algae. Cellulosic sources could produce ten times the yield per acre of corn.

Cellulosic ethanol could account for all 14.6 billion of forecasted consumption, and even more, without needing special E85 pumps. It could all be blended with existing gasoline and fueled into current and future gasoline vehicles. Such blended cellulosic ethanol creates major opportunities for farmers in the United States and the world. It is incremental business, rather than business that competes with existing food business.

The Natural Resources Defense Council has concluded that with “an aggressive plan to develop cellulosic biofuels between now and 2015, America could produce the equivalent of nearly 7.9 billion barrels of oil per day by 2050. That is equal to more than 50 percent of our current total oil use in the transportation sector and more than three times as much as we import from the Persian Gulf alone.”

Increasingly biofuel will not be made from food; rather it will be made from sources such as waste, grasses, fast growth trees, algae, and biotechnology.

Fueling all current high-mileage cars with E10 helps reduce global warming when the ethanol is from cellulosic sources. Putting E85 ethanol in a vehicle with poor mileage does not help. It does not even help the nation with energy independence.

Until flex-fuel vehicles offer the same high mileage as many current cars, do not buy a FFV. The FFV will not help your pocketbook, the nation’s energy security, nor will it help the environment. When you buy your next vehicle, get high miles per gallon.

John Addison is the author of the upcoming book Save Gas, Save the Planet and publishes the Clean Fleet Report http://www.cleanfleetreport.com. This article is copyright John Addison with permission to publish or excerpt with attribution.

Labels: alternative energy, cars, clean fleet, cleantech, Cleantech Blog, energy, ethanol, green tech, greentech, Hybrid

Thursday, April 26, 2007

Tuesday, March 06, 2007

Cleantech: The Problem and Solution

Two interesting cleantech reports came out in the last couple of days. One talking about the problem, the other the solution.

On the problem side, as reported in USA Today, a team of researchers working at Texas A&M found that increased pollution in Asia, primarily from the rise of industrialism in China over the last 10 years, is affecting weather patterns over the Pacific and even into the US West Coast.

I guess the last 10 years of environmentalists harping over the growth in "dirty Chinese coal plants" had some real merit.

On the solution side, the 2007 Clean Energy Trends report authored by Clean Edge, came out this week.

The highlights from my review of their document:

$2.4 Billion in clean energy (as distinct from cleantech) venture capital investment in 2006, up 2.4x from 2005.

They project $220 Billion in market for Clean Energy by 2016.

Their 5 Trends to Watch:

Carbon Finally Has a Price...and a Market - They note the major advances including California's GHG law push. We agree. But like wind and solar, we pioneered it, but Europe is leading it today.
Biorefineries Begin to Close the Loop - They are big on the advances of cellulosic ethanol. We remain cautious here.
Advanced Battery Makers Take Charge - They note the coming rise of lithium ion in the automotive sector. We agree.
Wal-Mart Becomes a Clean Energy Market Maker - They note major moves by Wal-Mart to go green. Long a shareholder of Wal-Mart myself, I definitely agree. We have been saying for a while that when it comes to cleantech, startups talk the talk, the big boys walk the walk.
Utilities Get Enlightened - They note that utilities are getting on the climate change band wagon. We would add that corporate venture is back, in a new and possibly smarter form.

You can download their report from the Clean Edge website. We have written on each of these topics before. Onwards and upwards in cleantech.

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 and a Contributing Editor to Alt Energy Stocks.

Labels: alternative energy, carbon, cleantech, Cleantech Blog, climate change, electric utilities, energy, ethanol, green tech, greentech, Hybrid, Lithium ion, solar, venture capital, wind energy

Wednesday, January 24, 2007

What has Changed in the Alternative Energy Investment Landscape

Is the time right to invest in alternative energy? We’ve seen a lot of this before in the 1970s and 1980s. Solar and biomass hot, big regulatory pushes, and then companies and investors lost a lot of money when things changed. We’re still a bit skeptical. We’re also all about not getting pulled in to each and every overpriced hype (read, the ethanol race) – but fundamentals are fundamentals. And they’re hard to ignore and pretty darn impressive. We think the real question today is not “are alternatives a good investment?”, but “which ones have legs and make a good investment bet?”

In four words – broad-based critical mass – Unlike alternative energy of yesteryear, this alternative energy explosion has been slowly building for 10 to 15 years, and is reaching critical mass in multiple markets. Take a couple of examples – the solar market is on pace for a $20 Billion per year number globally within 3 years (SolarBuzz.com), across several major jurisdictions (in the 1980s we were talking less than 5% of that). World ethanol production is on the order of $12 Billion/year. In the US wind capacity production has growing at 25%+ per year for the last 2 years wind generation capacity additions have been second only to gas-fired generation adds in the US mix.

“It’s the global economy, stupid” - Don’t forget, this is global now, and it wasn’t really like that 25 years ago. The US pioneered solar photovoltaics, but Japan and Germany (with China catching up) are the biggest markets today. The US pioneered large scale wind power (remember Altamont Pass?), but 3 of the top 4 wind turbine companies today are European. The US engineered cap and trade in carbon, but Kyoto is a European driven engine. Lots of examples of why it’s not just us anymore. For an investor worried about the legs of the industry, that’s a really big point.

In two words – cost structure – alternative energy is still more expensive than conventional energy - that’s why we call it “alternative”. But the cost curves for each and every alternative energy source have fundamentally changed for the better over the last 10 years (NREL), are moving into striking distance, and continue to improve. This trend is not going to reverse, so it’s just a matter of time.

In three words – carbon, carbon, carbon - The carbon credit trading market, driven by Kyoto protocol was $21.5 Billion in the first 3 quarters of last year (World Bank and IETA) - that’s up from virtually zero three years ago. Now we’re talking real numbers. The US has been left out of this so far, but not for long. California is committed, the Democrats are in control of Congress, and we will likely be seeing a strengthening of some sort of cap and trade system before long.

The bottom line – alternative energy is cool and the consumer cares. Of all this activity, it’s really high gas and electricity prices and climate change that have put alternative energy on the map in the consumers minds. And they care. And they vote. And they blog. And they are buying hybrids, uneconomic hybrids, lots of them. And as the battery technology continues to advance (think lithium ion overtaking nickel metal hydride), they’ll start buying HEVs and Plug-in HEVs in massive quantities. And they are buying green power. And little pieces of paper certifying their green power. In enough quantities for Toyota and Walmart and GE and Google to brand green as part of their core strategies. How’s all that for impact?

And finally, the regulations are here. Don’t kid yourself, alternative energy has ALWAYS been a regulatory driven market. But now the regulations are pretty widespread. Take electric power, for example – it’s not just the federal production tax credit anymore, or just the solar tax credit, or the state solar subsidy programs - 23 US states now have Renewable Portfolio Standards for electricity production (Pew Center) , including Texas, California, Pennsylvania, Arizona, Illinois, etc. That’s up from 1 in 1991. Put another way, if you could swing the electoral votes from just the RPS states, you’d have a landslide presidential victory.

Yes, it’s still possible that if oil and gas prices prices fall back to 1990s levels (we expect them to pull back somewhat, but are scared to make a precise prediction) and we have 5 or 6 normal, cool winters that make the climate change debate disintegrate, then a new political wave will come in (in 30 different western countries), and each and every major alternative energy regulatory program along with all the consumer demand will collapse – in a dozen major nations worldwide. But as the saying goes, that ain’t the way to bet it.

Author Neal Dikeman is a founding partner at Jane Capital Partners LLC, a boutique merchant bank advising strategic investors and startups in cleantech. He is the founding contributor of Cleantech Blog, and a Contributing Editor to AltEnergyStocks.com.

Labels: alternative energy, carbon, cleantech, Cleantech Blog, energy, ethanol, green tech, greentech, renewable energy, solar, wind