When I first began my career, a wise old-timer gave me a piece of advice that I took to heart. He said “When you are planning and executing a project, it is important for you to do what you say you are going to do. People are going to make investment decisions on the basis of the numbers you project. So don’t over-promise and under-deliver.”
As I began to become involved in projects, the wisdom of the advice I was given became clear. I learned to be conservative with my claims, because failing to deliver can have far-reaching impacts. Plus, a pattern of over-promising and under-delivering will ultimately destroy your credibility, and thus your ability to get anything done. (On the other hand, excessive “sand-bagging” is also poor practice, as too much money gets budgeted where it needn’t be).
Now imagine the following scenario. I go to the government and ask for $5 million to build a 10 million gallon per year ethanol plant. I announce that it is cutting edge technology, and I make various far-reaching claims. I issue press releases, and Congress invites me to give testimony in D.C. The government grants me the money I ask for, because I have had success in other ventures and I seem like a credible fellow.
Later, I go back to the government, and tell them I need another $5 million, and that unfortunately the project schedule is slipping. “By the way”, I tell them, “I will now only be producing 5 million gallons.”
As construction continues, I start to realize that the energy business is a bit more difficult than I had imagined, and things that I thought were new weren’t new. It becomes clear that I can’t even deliver on my downgraded promises because I hadn’t appreciated the challenges of scale-up. The government calls me up and asks me how it is going. “Well”, I explain to them, “I am out raising $10 million more in investor money. I am also going to only produce 1 million gallons, and it is going to be methanol instead of ethanol as I have been claiming. I am not really sure when I will produce ethanol. By the way, could you give me some more money?”
So I went from claiming $5 million for a 10 million gallon ethanol plant to $20 million for a 1 million gallon methanol plant. I still have not delivered. I am asking for more money. You still trust me, don’t you?
Range Fuels: Years of Broken Promises
I have for the most part held my tongue over Range Fuels for the past 3 years, but the scenario above essentially describes what has happened. The reason I have held my tongue is that I have heard various bits about their progress that was not public, and so I have held back on commenting. But I firmly believed they were making reckless claims from Day 1.
Now the EPA has just issued a report that gives some remarkable updates on Range Fuels, and I feel I have held my tongue long enough. Let’s walk through the timeline to show the remarkable evolution of their progress that has gone largely unreported.
October 2006 – In an interview with Wired Magazine called My Big Bet on Biofuels, Vinod Khosla gushed about E3 Biofuels (now bankrupt) and wrote about them as if they were a running, proven plant. He wrote about what they were achieving, despite the fact that they hadn’t started up (and would be out of business shortly after they started up). In the article, Khosla described his investment in Kergy (which later became Range Fuels).
IN THE CORNER of an unmarked warehouse tucked away in an industrial neighborhood north of Denver, a new company called Kergy has what is, to my knowledge, the first anaerobic thermal conversion machine (which explains why Khosla Ventures is a seed investor). It’s a 6- by 4-foot contraption that stands about 8 feet high. It looks vaguely like a souped-up potbellied stove. But it runs cleanly enough to operate indoors.
With those comments, everyone in the energy business knew Khosla was operating outside of his element. People have been gasifying biomass for decades, and there are numerous “anaerobic thermal conversion machines” out there. What happened was that Khosla wasn’t aware of this, so he thought this was all new and novel, and he invested – and then began to promote. He also went to the government telling them how wonderful it was, and that he would change the world if they would only fund him.
In that article, the inventor of the gasifier, Bud Klepper, is ominously quoted “We could double the ethanol output of the Mead facility.” I hope not. The output of the Mead facility (E3 Biofuels) is zero, so double that is…
February 2007 – Kergy changed its name to Range Fuels. They announced that they would build their first “cellulosic ethanol” plant in Georgia. The capacity was announced at “more than 1 billion gallons of ethanol per year” (Source.)
I had a problem with this announcement on two counts. First, this is not “cellulosic ethanol”, as I explained in Cellulosic Ethanol vs. Biomass Gasification. Further, if you are going to make an alcohol from syngas (the product of the gasifier), ethanol is a strange choice to make. Methanol is more efficient to produce, and ethanol is generally just a co-product when producing mixed alcohols (which also work well as fuel; see Standard Alcohol). It is only separated out at a great expense of energy – and then you have a lot of lower-value methanol to deal with. So this was looking like a very confused project from the start.
March 2007 – Range Fuels announced a $76 million grant from the U.S. Department of Energy.
Also during 2007, articles on Range Fuels began to appear everywhere. There were high profile pieces in The New York Times and in Forbes. In the Times’ article, the company refused to disclose how much had been invested to date.
An article in USA Today reported that the initial capacity would be 20 million gallons. The site was permitted for 100 million gallons of eventual capacity, and the cost of building a 100 million gallon per year plant was quoted at $150 million. Range said they thought they would be the first to win the “cellulosic ethanol” race (again, ignoring that the race was won a hundred years ago):
By next year , the company intends to have a facility capable of creating 20 million gallons of ethanol per year. The site in Treutlen County, Ga., has received a permit to produce 100 million gallons per year, and Range Fuels expects to eventually reach that production amount, according to company CEO Mitch Mandich.
“A lot of people are talking about 2009, or 10 or 11—even Secretary of Energy (Samuel) Bodman will say cellulosic ethanol is five years away,” Mandich said. “We think by the time we enter production, we’ll be the first, so the race is on between us and some competitors.”
Well, it is 2010, and we still aren’t seeing any ethanol from the facility. Welcome to the real world.
November 2007 – To much fanfare, Range Fuels announced the groundbreaking of their Georgia facility. They continued to maintain that the first 20 million gallon phase would be completely finished in 2008. Those of us who have been involved in plant construction wondered when they would actually face the music and admit they couldn’t deliver.
March 2008 – Range announced that they had raised another $100 million to build the plant. By April this number was announced as $130 million in venture capital funding. They were still treated as media darlings – and nobody in the press was asking them critical questions. But their story was about to begin to unravel.
April 2008 – Range announced that they have received a $6 million grant from the state of Georgia.
October 2008 – In an incredibly ironic story, Discover Magazine published Anything Into Ethanol. It was incredibly ironic because in 2003 they had written Anything Into Oil, a gushing story about a company called Changing World Technologies (CWT) and their claim that they could make oil from biomass for $8-$12 a barrel. After a lot of wasted investor and taxpayer dollars, CWT declared bankruptcy when they couldn’t deliver on their claims. I did a post-mortem on CWT here. There were many more parallels here than just two nearly identical, uncritical stories from Discover Magazine.
November 2008 – Range Fuels CEO Mitch Manditch was replaced.
January 2009 – Although the plant in Georgia was still not complete, there was no explanation regarding the delay. But Range announced another $80 million loan from the U.S. Department of Agriculture. One story announced that the company had received a total of $158 million in VC funding in 2008. This story also announced that the first phase was still under construction, and production was now not expected until 2010! (This new production time frame was probably the result of getting in a new CEO who was actually experienced in the energy business, ex-Shell executive David Aldous).
May 2009 - While Range Fuels stopped issuing so many press releases, former CEO Mitch Mandich was quoted in the New York Times admitting that “The soup’s not quite cooked yet.” This was extraordinary given previous claims from him that they would produce cellulosic ethanol at less than the price of corn ethanol.
October 2009 - In a New York Times’ story that warned that cellulosic ethanol was falling far short of expectations, it was announced that Range Fuels had applied for even more funding from the DOE! This time, the DOE said no.
For the most of 2009, Range went into silent mode. Again, I attribute this to a new CEO who came from the energy business, where you better do what you say you are going to do. One pattern that started to emerge was that they referred less to cellulosic ethanol and more to cellulosic biofuels. This was significant, because I had always maintained that it wouldn’t be cost-competitive for them to produce ethanol via gasification. I was just waiting for the other shoe to drop…
February 2010 – A rather extraordinary update was issued that the mainstream media has still not absorbed. The EPA released an update to the Renewable Fuel Standards Program (RFS2). In that update, they had the following report on Range Fuels (see this document). From Pages 175 and 178:
At the time of our assessment, we were also anticipating cellulosic biofuel production from Range Fuels’ first commercial-scale plant in Soperton, GA. The company received a $76 million grant from DOE to help build a 40 MGY wood-based ethanol plant and they broke ground in November 2007. In January 2009, Range was awarded an $80 million loan guarantee from USDA. With the addition of this latest capital, the company seemed well on its way to completing construction of its first 10 MGY phase by the end of 2009 and beginning production in 2010.
As for the Range Fuels plant, construction of phase one in Soperton, GA, is about 85% complete, with start-up planned for mid-2010. However, there have been some changes to the scope of the project that will limit the amount of cellulosic biofuel that can be produced in 2010. The initial capacity has been reduced from 10 to 4 million gallons per year. In addition, since they plan to start up the plant using a methanol catalyst they are not expected to produce qualifying renewable fuel in 2010. During phase two of their project, currently slated for mid- 2012, Range plans to expand production at the Soperton plant and transition from a methanol to a mixed alcohol catalyst. This will allow for a greater alcohol production potential as well as a greater cellulosic biofuel production potential.
Did you catch that? Initial capacity is now slated at 4 million gallons per year and will be methanol. There will still be no qualifying “cellulosic ethanol” produced in 2010. The amount of money that we know has been poured into this – beyond Khosla and company’s initial investment – is $158 million in VC money, $76 million of DOE money, $80 million from the USDA, and $6 million from the state of Georgia. Further, they asked for more DOE money and were turned down.
So we have Khosla’s initial investment of unknown amount plus $320 million for 4 million gallons of methanol. Wow. At this point, I don’t know why anyone would care about what they say they are going to do during Phase 2, I am more interested in seeing some accountability for what has happened to date.
Let’s recap the highlights:
February 2007 – Range Fuels announced that they would build their first “cellulosic ethanol” plant in Georgia. In a story at Green Car Congress, the capacity was announced at “more than 1 billion gallons of ethanol per year.”
March 2007 – Range Fuels announced a $76 million grant from the Department of Energy.
July 2007 – In a story in USA Today, the Phase 1 capacity was announced at 20 million gallons. The full scale would be 100 million gallons at a cost of $150 million.
November 2007 – Range broke ground on the plant; announced they would be finished with Phase 1 (still 20 million gallons) by the end of 2008.
April 2008 – Range announced a $6 million grant from the state of Georgia.
January 2009 – Range received another $80 million, this time from the USDA, and announced receipt of $158 million in venture capital funding for 2008.
October 2009 – Range asked for more money. This time they were told no.
February 2010 – After investments that have been publicly announced at $320 million, the EPA announced that Range would initially produce 4 million gallons, and it would be methanol. Further, there would be no ethanol produced in 2010.
February 2010 – I write an article wondering why the mainstream media has completely missed this story.
In summary, we were given numbers of $150 million to build 100 million gallons of cellulosic ethanol capacity. What we are being told now is > $320 million to build 4 million gallons of methanol capacity. Of course they intend to do so much more, but I have a very big problem giving more taxpayer money to an organization with this history.
I don’t blame current CEO David Aldous for this. I think Range’s tendency to talk to the press every chance they got ceased once reality started to take hold and they got an experienced energy veteran in. I think Aldous inherited a ship in which people had been in the habit of promising the moon to secure ever more funding. But I do blame a number of the original promoters of the company.
I have criticized Vinod Khosla in the past for what I said were unrealistic claims. I felt like he came into the energy industry without a very good comprehension of if, but felt that he would apply his golden touch from Silicon Valley to show the dinosaurs how Silicon Valley innovates. I also felt like he was attracted to people who made grandiose claims, but didn’t have the proper historical perspective to determine when something was truly novel (and really worked).
The thing is, the energy industry is full of very smart people who went to the same schools the people in Silicon Valley attended. There isn’t much that hasn’t been tried, and most of what is being announced to great fanfare by newcomers is being worked on in silence in numerous places around the globe.
When you step out there and make the sorts of claims that were made, you have some responsibility for your words. Failure tars an entire renewable industry as being hopelessly unrealistic. This is the reason I go after claims that I believe are unrealistic. If you promise and fail repeatedly, funding will dry up for everyone as the government and the public all become cynical. So your actions impact lots of people – and can impact the energy policy of the entire country – thus you need to be accountable for the things you say.
This has played out exactly like I thought it would. Claims that most industry insiders laughed at in private have now come to naught at great cost to taxpayers. Methanol from syngas? Oh, that technology has only been with us since 1923. Congratulations on reinventing the wheel and burning through taxpayer money in the process.
In summary, I will point out that the two primary sources of cellulosic production being counted on by the EPA for 2010 were Range Fuels and Cello Energy. Both are Vinod Khosla ventures, and neither has come remotely close to delivering despite lots of funding and taxpayer assistance. I don’t think these are isolated cases. I think they are a symptom of things to come. We have gotten a lot of overpromises, because face it, that has worked to secure funding. But what this leads to are completely unrealistic expectations regarding our energy policy, and numerous bad decisions regarding where tax dollars should be spent.
Finally, I want to make one thing crystal clear. I am not criticizing failure here. That is normal and expected. Failure is a part of what it takes to learn and move forward. What I am criticizing is the nature of the failure; that it was primarily because inexperienced people were making claims they shouldn’t have made, and taxpayers are going to get stuck with the bills. Personally, I have a problem with my tax dollars being squandered away by smooth-talking salesmen.
I started to notice a trend in the comments following my latest Forbes essay about the redundant nature of ethanol subsidies now that mandates via the Renewable Fuel Standard (RFS) are in place. Several comments in a row seemed to be regurgitated talking points that were just red herrings with respect to the point I was making. I knew that meant that somewhere a call had gone out to ethanol supporters to speak out against me. I now know the source, and at the end of this essay, I offer a debate challenge to the organization that issued the talking points.
To review, my point is simple. Someone said that it would be great if I could reduce it to a talking point, so here it is: Mandating ethanol while also subsidizing it is like paying people to obey speed limits.
If that isn’t self-explanatory, here is the logic behind the analogy. We have laws that govern the speed limits on our roadways. You can be penalized if you violate these limits, thus there is an enforcement mechanism in place that compels people to obey the law.
This is the same as the ethanol mandate. We have a law in place that directs refiners to blend a certain percentage of ethanol into their fuel. There are penalties for failing to meet those mandates, thus there is an enforcement mechanism in place.
Now would anyone think it was a good idea if we started using tax dollars to pull people over and pay them for complying with speed limits? I think most people would agree that this would qualify as a stupid idea and a waste of taxpayer money – especially when you consider that some government agency would have to run and audit the program for compliance. It would certainly be redundant given that there are already penalties in place for failure to obey.
With the ethanol subsidies, we are paying people to obey the speed limit. And the ethanol lobby was a little concerned that I had called attention to that fact. Turns out that Growth Energy, the ethanol lobbying organization whose co-chairman is General Wesley Clark, issued the following talking points to their members and asked them to rise up in a groundswell of opposition.
An excerpt from the e-mail they sent out (courtesy of this link):
Here are some points to consider, and remember to use these in your own words:
* What Rapier is suggesting boils down to a tax increase on an innovative, domestic energy industry. Does Forbes really endorse raising taxes in this tough economic climate? Does Rapier really think raising taxes on an emerging industry is smart?
* With domestic, green energy the likely source of hundreds of thousands of new jobs in the United States, why would Forbes and Rapier force a job-killing tax increase on ethanol?
* If Rapier is so eager to tax American energy companies, why not end the massive tax subsidies and tax breaks that Big Oil and gas companies get? By some estimates, the oil and gas industry will get around $29 billion in tax breaks from 2008 to 2013. That’s an enormous handout to an industry that sends a billion dollars a day overseas – often to countries that are hostile to the United States.
* If the choice were to give a tax credit that helps an American farmer and an American engineer in an American ethanol plant, or giving a tax break to an oil man who is doing business in the Middle East, I’d rather the tax credit stay here on American shores..
* The VEETC has reduced farm payments and increased tax revenue that completely offsets whatever the cost of that tax credit is – and in fact generates additional revenue for the federal treasury. In 2007, the $3.3 billion VEETC costs saw farm payments reduced by $8 billion, and generated $8 billion in tax revenue, according to an Iowa State University study.
That is absolutely priceless. None of those talking points actually address my argument. But apparently they were counting on some of their members not being able to think for themselves and just go out and repeat the talking points. So, a few showed up at Forbes and did just that. I answered each one of them – pointing out the obvious flaws in their thinking - and of course none of them responded because they didn’t have anyone telling them what to say.
But hey, I am a big boy. I can take the heat. Let’s take their talking points and address them, just to show how silly they are.
Point 1: What Rapier is suggesting boils down to a tax increase on an innovative, domestic energy industry.
Response: Right. Taking a tax credit away that is collected by the oil companies – which last year amounted to about $5 billion – and giving it back to taxpayers is a tax increase. That’s straight out of Lobbying 101, where up is down and green is red if that’s what your client wants.
I would love for someone to walk me through just how this amounts to a tax increase on this “innovative, domestic energy industry.” Anyone? Remember, the oil companies are still mandated to blend the same amount of fuel, whether they collect a subsidy or not. Point 1 – as silly as it was – refuted.
Point 2: With domestic, green energy the likely source of hundreds of thousands of new jobs in the United States, why would Forbes and Rapier force a job-killing tax increase on ethanol?
Response: Repeat the “tax increase” canard, and hope it begins to take hold with their members (and hopefully the public). “This guy wants to raise our taxes!” Remember, at issue here is $5 billion (and rising) of taxpayer money that is being paid out in unneeded subsidies. Eliminating that is a tax increase in their world? There are no words.
Point 3: If Rapier is so eager to tax American energy companies, why not end the massive tax subsidies and tax breaks that Big Oil and gas companies get?
Response: This one is a beauty. First, the point is completely irrelevant, given that the oil companies would still be under mandate to buy the product. Whether they are being subsidized by a trillion dollars a year has no bearing at all on this argument, as it doesn’t impact how much ethanol they are mandated to buy. It is just one more red herring.
But the really funny part about this point is the oil companies are the ones receiving the subsidy in this case. The ethanol industry has told us that many times. If Growth Energy is suggesting we get rid of oil company subsidies, aren’t they just making my point for me?
It wasn’t so long ago that Brian Jennings, the executive vice president of the American Coalition for Ethanol – a fellow ethanol lobbying organization (there seem to be quite a few) – said matter-of-factly that the blender’s credit does not benefit ethanol producers, that “it is actually an incentive the petroleum industry receives for blending ethanol into gasoline.” Vinod Khosla has made the same argument. Here he is on this issue:
Ethanol has a subsidy, but the farmer doesn’t get any of that. What I heard, is that well past midnight when this was being debated in the conference committee, the oil companies inserted 2 words into the language, calling this subsidy a blender’s credit. So the person who is blending it with gasoline gets it. All $2 billion of it last year  was collected by the oil companies. Like they needed more money.
So which is it, ethanol lobby? How exactly is a credit received by the oil industry for complying with a law to blend more ethanol supposed to benefit the ethanol industry? Are you afraid the oil company wouldn’t blend the ethanol if the subsidy wasn’t there? I know I am repeating myself, but you don’t seem to get it: They are compelled to do so by law regardless. Finally, why do you wish to protect the subsidy when members of the ethanol lobby have pointed out that it is really an oil company subsidy?
Point 4: If the choice were to give a tax credit that helps an American farmer and an American engineer in an American ethanol plant, or giving a tax break to an oil man who is doing business in the Middle East, I’d rather the tax credit stay here on American shores.
Response: But doesn’t the “oil man” get this tax credit? You guys are talking out of both sides of your mouth, and it isn’t a pretty picture. I think you have set a record for red herrings in a response.
Point 5: The VEETC has reduced farm payments and increased tax revenue that completely offsets whatever the cost of that tax credit is…
Response: Irrelevant even if true, because once more I remind you that the blender still has to buy the ethanol. So if it really had the offsets you claim, that won’t change by eliminating the subsidy.
If that’s the best you have, then I can safely conclude that the emperor has no clothes. You didn’t address my arguments at all, because you know you can’t. Of course people might be curious as to why you have responded in such a way, but I know why you did. The last thing you want is for people to confront the costs of ethanol at the pump, where they might start to think that our ethanol policy isn’t such a good idea after all. That is what you truly fear.
In conclusion, I would like to issue a debate challenge to Growth Energy. Instead of hiding behind e-mail messages to their members, I challenge them to take up a three-round written debate on the matter. I propose the following:
Resolved: Implementation of the RFS negates the need for the tax credit.
If you are up to it, pick the best person from your organization. Better bring your “A-Game”, though. Or, if that e-mail represents your “A-Game”, you might as well forfeit now.
My latest is up at Forbes right now. It is about the redundant nature of our current ethanol subsidy:
As many ethanol producers have argued – the gasoline blender and not the ethanol producer receives the subsidy anyway. The gasoline blender – ExxonMobil for instance – buys ethanol for $1.70 per gallon (currently), receives a tax credit worth $0.45 per gallon (the credit was reduced to that level in 2009), and then blends it into gasoline that is presently wholesaling at approximately $1.90 per gallon. With the tax credit, the current price of ethanol on an energy equivalent basis to gasoline is just about equal to the $1.90 wholesale price of gasoline. So the tax credit compensates the gasoline blender for blending in a higher cost feedstock.
But what if the tax credit was not there? Would ExxonMobil blend less ethanol? No, they are mandated to blend a certain amount, and if they fail to do so they are penalized. So in the event that they did not get the tax credit, then the energy equivalent price they would pay for ethanol would be about $2.50 per gallon (based on ethanol’s current spot price). At a 10% blend, this would mean that at current prices the price charged for a gallon of ethanol-blended-gasoline would need to rise about six cents to keep the gasoline blender’s costs equivalent to the cost they currently have with the tax credit in place. The only difference would be that the cost would then be borne directly by drivers in proportion to the number of miles they drive.
I also walk through the history of U.S. ethanol subsidies. If they haven’t served their purpose by now, they never will.
I am freshly arrived back on the U.S. mainland, with a couple of stops before I head back to Hawaii. I have been reading about energy developments during my travels, and finally wrote something on the flight from Europe yesterday. What has prompted me to write was a report that was recently issued by The President’s Biofuels Interagency Working Group:
As I read through this report on the status of advanced biofuels, I couldn’t help but think that this appeared to have been written by an optimistic cheerleader rather than by someone conducting a sober assessment of the situation. It contains very little of “Here is why we have fallen more than 90% short of our targets.”
Bear in mind that the advanced biofuel mandate for 2010 was 100 million gallons. The report admits that the shortfall will almost certain exceed 90% (as I have been saying it would for at least a couple of years).
Where the report does get into specifics, it makes excuses, suggesting that the technologies themselves aren’t the problem, lack of funding is. To that I say that I can make all sorts of things work “commercially” if I am willing to throw enough money at them. But they will only continue to remain “commercial” so long as I am supplementing them with outside funding.
This report would seem to have been written by people who believe that technological progress is inevitable. All barriers can be broken down by throwing enough money at them. While I am definitely a technology buff, I have a different view on technology. Generally, technological successes are built upon a great many resolved technical problems. Yet it may require only a single unresolved problem to lead to technological stagnation, or failure.
For example, consider the scale-up of a process from the laboratory. I have run laboratory reactors and distillation columns – and scaled those up – so I am familiar with some of the things that can go wrong. The scale of a laboratory process may be on the order of a few pounds a day. At that scale, things behave differently for a number of reasons. When scaling up a lab process to something like demonstration scale – say a factor of 100 times greater than the lab process – many things can go wrong. In fact, I think it is safe to say that most good ideas die in the lab when practical realities intrude upon theoretical considerations.
One of the most important aspects to manage is the heat inputs and outputs. In the laboratory, the size of the equipment is such that the heat losses from surface areas is a much greater percentage of the total than when the equipment is scaled up. What does this mean? It can mean that it is difficult to replicate the temperatures achieved in the lab. It can mean that the temperatures at scale are much hotter than desired, or it can mean that there are undesirable temperature variations within the process. In my experience, this is a frequent cause of failure when scaling up from the lab.
Each successive scale-up filters out more seemingly good ideas, and in a world in which commercial success hinges on actually being able to earn money from a project, this filter works well. In a world in which technological failures are met by optimistically throwing more money at the problem, then end result will be a massive amount of spending, and later congressional inquiries into why we wasted so much taxpayer money with so little to show for it.
So success for these projects is far from assured. Even success at one level of scale-up doesn’t assure success at full commercial scale. I can rattle off a dozen things that have gone wrong and been apparent only as projects progressed to full commercial scale. Trace contaminants that can easily be disposed of in the lab can become big headaches at scale. Corrosion is often a killer once some of these projects begin to operate at bigger volumes.
But for the technological cornucopians, these are not real problems: They just require more money and they will be solved. But then why do cancer and heart disease still kill so many people each year, or why does my laptop battery only lasts a few hours instead of a week? Why don’t we commercially fly people from London to New York in an hour? The reason is that not all problems are solved by throwing more money at them, and many solutions are only advanced an incremental step at a time.
As I have pointed out, cellulosic ethanol technology is more than 100 years old. You heard it here, and you can hold me to it: There will be no breakthrough that suddenly makes it cost-competitive to produce. On the other hand, press releases that announce big breakthroughs for small incremental steps? No end to those I am afraid, nor any retraction when they can’t replicate this outside the lab. The impression this leaves is a steady upward march in the commercialization of cellulosic ethanol – and no setbacks that weren’t simply related to lack of funding.
Cellulosic ethanol will never be produced in large volumes for less money than corn ethanol can be produced for – and keep in mind that we are still subsidizing that after 30 years. What may happen is that it eventually can be mildly successful in certain very specific instances. But to think that a billion tons of U.S. biomass will contribute a major portion of the U.S. fuel supply via cellulosic ethanol? Hogwash from many people who have never scaled up anything. The reasons are not from lack of funding, they are fundamental based on physics, chemistry, and the nature of biomass.
Had I written the report, you can bet that I would have written it differently. It would have been a sober technical assessment, and while the conclusion would have probably been to continue funding, there would also have been a lot of planning for scenarios in which things didn’t pan out as expected. I like to have a Plan B that wasn’t cobbled together only after Plan A fell apart.
First off, a couple of announcements. After being able to stay at home for the past two months, I have a very heavy travel schedule over the next two weeks. My participation here will probably be limited. I am off to Seattle tomorrow, on to the Netherlands from there, will visit Switzerland and Germany, back to the U.S. mainland, on to Canada, and then back to Hawaii. I have essentially piled up eight visits I need to make into one big, exhausting trip. My ability to post and respond to comments and e-mails will be spotty at best.
Second, my first essay went up yesterday at Forbes: The Price of Energy. My intention is to put something up there every week or two, and my primary goal is to be educational with the essays. I don’t plan to do any major debunking of company claims there, although I will still do that here occasionally. I will generally first post the stories targeted for Forbes on my blog, modify as appropriate based on the comments (in the case that something is incorrect or unclear), and then post it at Forbes.
Now, on to today’s story. Yesterday I saw a story on what is one of the silliest ideas I have ever heard from a politician. It isn’t the first time I have heard it mentioned, but I believe it is the first time one of our legislators actually announced they were going to take action on it:
Braley Announces Legislation to Require Country of Origin Labeling for Fuels
Washington, DC – In an address to the Iowa Renewable Fuels Association today, Rep. Bruce Braley (D-Iowa) announced he will introduce legislation to require country of origin labeling for fuels. Braley will introduce the bill, Country of Origin Labeling (COOL) for Fuels, tomorrow when he returns to Washington, DC.
The bill will require the Department of Energy to conduct a study and implement its recommendations to ensure American consumers have the ability to decide at the gas pump whether they want to purchase domestic fuel products, such as biofuels produced in Iowa, or gasoline produced in hostile nations that many terrorists call home.
“When we fill up our vehicles, there’s no existing method for us to know where the fuel we’re purchasing comes from and which nations are deriving the economic benefit from that purchase,” Braley said. “When we put food in our bodies or clothes on our backs, we know exactly where those products come from. Americans should have the same opportunity to vote with their wallets at the gas pump.
The intent of the bill is not the reason this is a dumb idea. I think most people would appreciate a choice of the country of origin for their fuel. We would ideally prefer that fuel to be sourced domestically (unless of course we have to pay a premium for it), and beyond that many would prefer to buy fuel from Mexico over Venezuela. So to be clear, I understand the spirit of the bill.
The silly part comes about in the attempted execution. The petroleum supply chain does not segregate products by country. Sure, a supertanker may leave Saudi Arabia with 100% Saudi crude, but once it arrives it gets mixed with whatever else may be left in the pipelines and crude tanks. Then, as it goes through the refinery, there are streams from many different sources. Finally, when it goes into the pipeline and on to the retailer it gets mixed with products from many different locations. In fact, in many places the fuel you put in your car has portions from many locations.
There are exceptions; the Billings Refinery I used to work at only got crude domestically or from Canada because no supertankers have access to the refinery. But then once product ships to Denver or toward the West Coast, it will inevitably mix with product derived from elsewhere (e.g., product coming up from Texas to Denver will probably contain some Venezuelan crude).
I wonder if one of our government leaders will figure out that essentially all of the corn ethanol produced in the U.S. today is enabled by petroleum, and that petroleum is inevitably sourced from imports. So I suppose the corn ethanol should be labeled as well: “This ethanol was enabled by Saudi/Venezuelan/Russian crude.” No, I suppose we will keep that skeleton in the closet.
The purpose of this bill from the Congressman from Iowa is of course to try to tilt the playing field in the direction of corn ethanol. That’s understandable, as that is his job. But the idea is either very poorly thought out, or it is just an example of him posturing for his constituents.
I don’t believe this bill has any chance of passing, but presuming for a moment that it did, the labels would all have to look like those food labels that say something like “This food was processed in a facility that also processed peanuts. It may have in fact touched peanuts at some point.”
Our product label would read like “This crude may have been sourced from the U.S. and/or one or more of the following 30 countries…” This would appear on every gasoline and diesel pump in the U.S., and would therefore be ignored by everyone. In other words, trying to pass such a bill is simply a waste of time and taxpayer money.
Note: This story was also characterized very well at Bnet by Kirsten Korosec:
In that essay, Kirsten pointed out the impracticality of implementing such a plan, and also linked back to my essay on the Top 10 suppliers of crude to the U.S. to show readers where U.S. crude imports actually do come from.
I know it has been a week since I put up something new. Some readers have also noticed that I haven’t been commenting much lately, and my e-mails are piling up. Things have just been really busy. I have a few guest posts that should be ready to go within a week or so, but I saw a topical story this morning that was worth commenting on:
The unintended ripples from the biomass subsidy program
The issue of incentives for biofuels increasing the demand for grains and thus helping drive up food prices is often called “Food versus Fuel.” There is also an incentive program (Biomass Crop Assistance Program) designed to encourage the use of biomass for heat, power, or biofuels. As is almost always the case, there were unintended consequences:
While it remains unclear whether Congress or the Obama administration will push to revamp the program, even some businesses that should benefit from the subsidy are beginning to question its value.
“It’s not right. It’s not serving any purpose,” said Bob Jordan, president of Jordan Lumber & Supply in North Carolina, even while noting that he might be able to get twice as much money for his mill’s sawdust and shavings under the program.
“The best thing they could do is forget about it. All it’s doing is driving the price of wood up.”
Sounds like “Food versus Fuel” except in this case it is the cost of wood – not food – that is being driven higher. The thing is that there are always trade-offs and always unintended consequences. We have to be wise enough to change policies in cases where the unintended consequences outweigh the benefits. But you have to look at the big picture as well. Were there also unintended benefits? Things like that must be considered.
In this case, I don’t know whether the unintended consequences outweigh the benefits. I think it is too early to know for sure. But in any case, higher cost biomass is something I expect in the future. I made this point in my presentation at the Pacific Rim Summit. If your business model is based on either tipping fees, or just free or very cheap biomass – then I doubt that model is sustainable. I think as more companies attempt to turn biomass into fuel, competition will heat up and free or negative-valued biomass will be a thing of the past.
Therefore, I think the safe bet is to plan for 1). Escalating biomass prices; 2). No government assistance. I have no objections to getting started with government assistance, but if you don’t have a clear plan for operating in a subsidy-free environment, then you may just be wasting taxpayer money up until the point that your business fails because conditions changed (in a way that you should have anticipated).
Domestic Biodiesel Production Plummets
One of my Top 10 Energy Stories of 2009 involved the actions taken by the EU against U.S. biodiesel producers. U.S. tax dollars had been generously subsidizing biodiesel that was being exported out of the U.S. European producers couldn’t compete against the subsidized imports, so the EU effectively cut off the imports by imposing five-year tariffs on U.S. biodiesel.
This was a big blow to U.S. biodiesel producers, and was one of the factors leading to a disastrous 2009 for U.S. biodiesel production. How disastrous was 2009? Per the National Biodiesel Board (NBB), here are the statistics from the past 6 years of biodiesel production:
2004: 25 million gallons
2005: 75 million gallons
2006: 250 million gallons
2007: 450 million gallons
2008: 700 million gallons
2009: 300-350 million gallons (estimate)
The NBB also reports that domestic biodiesel capacity is now operating at only 15%. There have been a number of stories in the past few days covering these developments:
A federal tax credit that provided makers of biodiesel $1 for every gallon expired Friday. As a result, some U.S. producers say they will shut down without the government subsidy.
A one-year extension of the biodiesel tax credit was included in a bill that was approved by the U.S. House recently, but it never made it through the Senate.
Politics and Energy Policy
I have often complained about the chaos that political leaders cause with inconsistency on energy policy. I will get into the wisdom of this biodiesel tax credit in a moment, but government policy makers need to send clear, long-term signals so energy producers can plan. This has long been a problem for planning energy projects. Wind and solar developers have lived with this uncertainty for years. It seemed like at the end of every year, there was a tax credit that may or may not be extended. The uncertainty often froze project developers, and created unnecessary delays.
The same has long been true in the oil and gas industry. One of the reasons that it has been difficult to get a gas pipeline built in Alaska was government refusal to commit to long-term tax rates. Imagine that you are contemplating spending $26 billion on a gas pipeline, but the government can’t tell you what your tax rate is going to be. If my state income tax doubles, I can move to another state. But it isn’t like you can pick that pipeline up and move it, so it is important that you know that the government can’t double the tax rate in the event of a budget shortfall.
A different kind of government interference – a tendency to attempt to pick technology winners – resulted in cancellation of what I believe was a promising 2nd generation renewable diesel process. I documented the saga in several posts, but the gist was that because an oil company was involved – my former employer ConocoPhillips – Congress voted to specifically deny the biodiesel tax credit for a process that was both more efficient and more cost-effective than conventional biodiesel production.
By killing the credit, COP was placed at a $42/bbl disadvantage relative to biodiesel producers who received the credit, and thus COP decided to cancel the project. I documented that sorry saga here. I also explained the differences between ‘green diesel’ and biodiesel here.
Where to Now?
So where to go from here? We now have a classic dilemma created by the government. Through government fiat, an industry was created. Investments were made and infrastructure was put in place. The problem is that the particular industry that sprang up had little hope of ever really competing without the subsidy. The reasons are alluded to in the link above:
“By the time you buy the feedstock and the chemicals to produce the fuel, you have more money in it than you get for the fuel without the tax credit,” Francis said. “We won’t be producing any without the tax credit.”
I have long believed that there is no future for 1st generation biodiesel. I wrote in an August 2007 essay: “I have said it before, and I reiterate: Biodiesel’s days are numbered.” Note that the year after I wrote that the U.S. biodiesel industry had their best year ever. But the handwriting was on the wall for very fundamental reasons, and the prediction I made in 2007 is playing out now.
There are multiple problems that will make it difficult for biodiesel to ever compete without subsidies. In a nutshell the key problem is that the feedstock costs are linked to fossil fuel prices. The feedstock is generally a vegetable oil and methanol – an alcohol typically produced from natural gas. A second big problem is that biodiesel is an inferior fuel to hydrocarbon diesel (especially in cold weather). Further, the by-product of the biodiesel process is glycerin, which has limited value (especially at the volumes produced when biodiesel production is ramped up).
But this story is worse than simply a fuel that can’t compete. As evidenced by the opposition of the NBB to the extension of the tax credit for COP’s 2nd generation process, 1st generation biodiesel isn’t even a bridge to 2nd generation biodiesel – it is a barrier. Not only is biodiesel chemically different, but 1st generation producers have pulled out the stops to protect themselves against 2nd generation competition. So now we have a 1st generation industry that was already in trouble even with the subsidies that it was receiving, and a 2nd generation industry that could have been much further along were it not for 1st generation interference (which was aided by Congress).
If instead of picking technology winners, Congress had simply raised fossil fuel taxes, we wouldn’t be in this dilemma. With the high level of embedded fossil fuels, biodiesel would have been unable to compete and an industry with no future would not have been created by the government. Green diesel, on the other hand, would start to look a lot better because of the lower level of fossil fuel inputs (particularly for gasification), and we might find plants starting up to produce green diesel from both hydrocracking vegetable oils (the COP process I described) and gasification of biomass (e.g., the Choren process).
What I expect to happen is that Congress will eventually extend the credit, and it will be applied retroactively. But there are no guarantees, so producers are once again left with uncertainty. What should happen – in my opinion – is announcement of a phaseout schedule. I wouldn’t simply eliminate the tax credit cold turkey. That would be a blow to producers who invested on good faith that government support would be continued. But they also need to receive a message that this tax credit will be phased out over the next 3-5 years. At that point, prospective investors will be fairly warned that projects whose economics hinge on continued government subsidies are to be avoided.
This, by the way, is the sort of metric I try to apply to projects. I am looking for projects that can be viable without government support and can operate with low/no fossil fuel inputs. The first item means that governments have much less ability to wreck my project by withholding support, and the latter means that the project should become more attractive in the higher oil price environment that I expect.
That doesn’t mean that initial government support isn’t often helpful, but unless the underlying economics are sound then government support is a crutch I will never be able to throw away. In my opinion this is the case for most U.S. biodiesel producers, which helps explain why industry capacity is presently at 15%.
I want to make two very clear disclosures. First is that as noted, I worked for ConocoPhillips, and I was very pleased at the efforts we were making to commercialize green diesel. The fact that the government caused the project to be aborted by favoring one technology over another was a bitter pill to swallow. Again, I favor projects that are viable without government subsidies, but in this particular case the competing projects did get the subsidies.
Second, as I announced previously I now work for the company that owns the majority of Choren. I came to work for this company because I believe gasification has a long-term future, and I had written favorable articles long before this job opportunity arose. I have, however, had some suggest potential bias toward green diesel because of my link to Choren. What I say to those who might feel that way is the bias toward green diesel was because of my assessment of the technology. That is what led to my link to Choren, not vice-versa.
I have been asked to submit a video question on ethanol policy that will be potentially answered in a video blog by someone who is very well-known in the energy business. I will keep the details quiet for now, including the question I did submit. (I thought I would be able to record my question with stunning Hawaiian scenery in the background, but alas it has been raining for two days).
I really had to brainstorm on exactly which question I would ask. I made a short list, and finally honed it down to one that I think is fair, but tough. But I had a number that I decided not to ask, either because I already knew how it would be answered (even if I disgreed with the expected answer) or the questions/answer to the question was so complex that it couldn’t be answered in a short video clip.
Here I discuss what I didn’t ask, but it really gets to the heart of the issues I have with U.S. ethanol policy. First, a bit of framework. I believe that I am, and have always been objective, and a realist. I don’t believe that we are ever going to have a moment where government leaders say “Let’s abandon this ethanol pathway.” We had an example of that with MTBE, but there was clear evidence that MTBE was getting into groundwater and lingering.
The issues around ethanol are more complex. Corn ethanol has been U.S. policy for the past 30 years, and it will be policy for the next 30 years. It is too embedded in agriculture policy, and I think it would be devastating for Midwestern economies if we changed direction on corn ethanol. Thus, I think we continue down that path, for better or worse.
I am not pro-ethanol nor am I anti-ethanol. In one of my earliest essays in this blog, over 3.5 years ago, I talked about some of the things I would like to see happen in the grain ethanol industry, mostly aimed at improving the energy balance. I came out in favor of the approach of E3 Biofuels, who were trying to build a highly integrated ethanol complex that minimized fossil fuel inputs. I have endorsed such approaches on multiple occasions.
My concerns are, and have always been: What are the long-term consequences? I don’t limit this to ethanol; this is a question that I ask of all energy options. Dependence on oil has some significant long-term consequences. The most serious of which, for me, is the potential for building a world that is only sustainable as long as oil production continues to expand. I see significant risk there, so it has always been my position that we need to reduce our dependence on fossil fuels in general.
With respect to ethanol, consider this thought experiment that I posed following one of my previous essays: Would you consume 2 BTUs of natural gas to produce 1 BTU of ethanol? I think most people would conclude that this would be foolish; that your natural gas supplies would stretch much further if instead you simply use the natural gas in CNG vehicles (acknowledging of course that there are lots of things you have to evaluate in that scenario). For those who would answer “Yes” to that question, I would argue that your view of ethanol is entirely one-dimensional. You probably only care that it is homegrown, and you don’t worry much about the long-term consequences.
Of course the truth is more complicated than the example above. It doesn’t take 2 BTUs of natural gas to produce 1 BTU of ethanol. Estimates vary, but it is still safe to say that most ethanol operations in the U.S. continue to have substantial fossil fuel inputs. That is the way they were built, and that is the way they will continue to operate. Over the long-term, there is potential to change that equation by using biomass boilers, but those are more expensive to operate than a standard natural gas boiler.
So on average the ethanol industry does still have a heavy fossil fuel dependence, albeit largely domestic coal (for electricity) and domestic natural gas – with some petroleum inputs for trucks, tractors, etc. (One thing to note is that more than 50% of our fertilizer supplies – derived from natural gas – are in fact imported). So what if the question was “Would you spend 1 BTU of natural gas to make 2 BTUs of ethanol?” If you are doing a holistic analysis, the answer should be “It depends. What are the other impacts?”
There are those who wrap U.S. ethanol policy in patriotism and the American flag, and who would rather not get into those questions. These questions are hand-waved away with clichés like “I would rather support American farmers than Saudi sheiks.” I try to look at it from the perspective of an engineer, a scientist, and an environmentalist. I want to stack the columns up and figure out what is really happening as a result of our ethanol policy and subsequent rapid expansion of corn production. I want to look at it from the perspective of “What is going to be the impact on the world my children will inherit?”
Just a few of the key questions for me are the following:
In a nutshell, I want to know if we are compromising the future relative to other options, and/or relative to the status quo. These sorts of issues are generally ignored by most advocates. They believe our ethanol policy is the right thing to do, and then nothing else matters. I have debated people like this before, and they are simply not interested in the holistic picture. Often, it is because they are vested interests.
Chief ethanol lobbyist Bob Dineen isn’t going to be at the forefront, trying to determine the answers to these questions. His job is to promote ethanol, period. He will get involved when one of these questions becomes persistent enough and loud enough, and his position will typically be that of defense attorney: Deflect the question if you can, and try to raise doubts that the question even matters.
But I am not a vested interest dug into a bunker. If our ethanol policy is better than the status quo, then I am all for it. But you can’t know that unless you take a really comprehensive look. I would like to see an independent analysis of all of these issues, now that we are some 11 billion gallons per year into this experiment.
The problem is finding an independent agency to do such an analysis. The ethanol lobby hires their consultants, who conclude, “It’s all good.” Big surprise there. (By the way that is the same guy who wrote a paper stating that ethanol with the energy value of 64 million barrels of oil displaced 206 million barrels of oil).
Energy policy in general is a complicated issue, and it is wrapped up deeply in politics. I doubt we will ever get the independent review I would like to see – and even if we did the lobbyists would immediately go to work trying to discredit the study. But I hope you can see why I decided not to ask that question. It might take 10 minutes to ask it, and then an hour to answer it – and I don’t think the answer would really get into the fine details that I am interested in.
You will have to stay tuned to see the question I did ask.
The slides from all of the presenters at the recent Orlando Energy Conference are now all available online:
Here is the link directly to my presentation:
Here are several of my slides, which give a flavor of my presentation:
The primary thrust of my message is that we are looking at a potentially serious energy crisis in the not too distant future as oil begins to deplete faster than renewables can fill the void. Globally, India and China will have a huge influence over the oil markets, driving prices eventually higher than where they were last summer. Times will continue to be very difficult for U.S. refiners as more refineries are built close to the source of the oil, but there will be occasional bursts of profitability. The last two slides talk about the platform that my new company is building.
The conference was heavily oriented toward agriculture, and there was a lot of discussion about the role for biofuels in agriculture. There were a number of high profile speakers, including Harry Baumes, an Associate Director at the USDA. I had the opportunity to speak with Harry one on one at dinner one night, where we primarily discussed U.S. ethanol policies.
In a move that wasn’t really a surprise, today the EPA announced that they are not yet ready to approve ethanol blends above E10 for automobiles:
WASHINGTON – The U.S. Environmental Protection Agency (EPA) today announced that it expects to make a final determination in mid-2010 regarding whether to increase the allowable ethanol content in fuel.
In a letter sent today to Growth Energy – a bio fuels industry association that had asked EPA to grant a waiver that would allow for the use of up to 15 percent of ethanol in gasoline – the agency said that while not all tests have been completed, the results of two tests indicate that engines in newer cars likely can handle an ethanol blend higher than the current 10-percent limit. The agency will decide whether to raise the blending limit when more testing data is available. EPA also announced that it has begun the process to craft the labeling requirements that will be necessary if the blending limit is raised.
In March 2009, Growth Energy requested a waiver to allow for the use of up to 15 percent ethanol in gasoline, an increase of five percent points. Under the Clean Air Act, EPA was required to respond to the waiver request by December 1, 2009. EPA has been evaluating the group’s request and has received a broad range of public comments as part of the administrative rulemaking process. EPA and the Department of Energy also undertook a number of studies to determine whether cars could handle higher ethanol blends. Testing has been proceeding as quickly as possible given the available testing facilities.
In a letter to Growth Energy, a pro-ethanol organization headed up by POET CEO Jeff Broin and General Wesley Clark, the EPA indicated that testing had only been completed on two vehicles, but testing on an additional 12 vehicles was expected to be completed by May 2010. On the basis of the two completed tests, the EPA said they would “be in a position to approve E15 for 2001 and newer vehicles in the mid-year timeframe.”
That begs the question of whether there is expected to be a potential problem in vehicles older than 2001 models. If so, and E15 is approved for 2001 and newer models, I can imagine a logistical nightmare and a class action lawsuit waiting to happen. Instead of having three grades of gasoline, there would likely need to be five or six grades depending on the age of your car. For gasoline blenders and for station owners, it will be a bit of a headache. For lawyers, a potential windfall as pre-2001 car owners have their engines ruined because they put the wrong fuel in, or someone else messed up in the supply chain.
Instead of going down this path, why don’t we do more to incentivize E85? We aren’t close to saturating the market for E85; the problem is just that the E85 price isn’t low enough relative to gasoline. There are supposedly several million E85 vehicles on the roads today, with automakers ramping up production even more in future years.
Consider for a moment the potential E85 market in the Midwest, where most of the corn is grown and most of the ethanol is produced. Per the EIA, the demand for gasoline in the Midwest in 2008 was 2.5 million barrels per day. Imagine for a moment that this demand was for E85. In that case, because of the lower energy content, demand would rise to around 3.3 million barrels per day. Of that, 85%, or 2.8 million barrels per day, would come from ethanol.
How much is 2.8 million barrels per day? It would be 43 billion gallons per year of ethanol, far greater than the 10 billion or so gallons of ethanol produced in the U.S. in 2010. In fact, even if you could convince only half the people in the Midwest to use E85, there would be absolutely no need to even think about increasing the amount of ethanol in the general gasoline pool. And that’s just in the Midwest!
So why isn’t this strategy being heavily pursued? Primarily I think it comes down to cost. If you can get 15% ethanol into the gasoline pool, any cost penalty is spread out over many consumers and it is further masked because the bulk of the fuel is gasoline. With E85, ethanol is carry the brunt of the costs and the penalty is far more obvious.
As I write this, per this site that promotes E85 fuel, right now the savings from burning E85 instead of regular gasoline is only 11.88% (a national average price of $2.53 for gasoline versus $2.23 for E85). The problem is that the mileage penalty is going to be over 20% in most cases (the energy content of E85 is almost 30% less than gasoline on a per gallon basis), and therefore people are not going to voluntarily buy it.
How to get around that? Well, if you could instead make everyone buy E15, you don’t really have to worry about that cost problem. Consumers will be forced to take the hit, but it will be spread out across all consumers. But if they could make the cost of ethanol more competitive such that the savings from E85 is consistently around 25-30% relative to gasoline, E85 demand would be great enough to consume all of the ethanol we will make for the foreseeable future.
- Accsys Technologies
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