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Broken Promises from Range Fuels

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 2007Kergy 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 [2008], 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.

February 23, 2010 Posted by | Cello, energy policy, EPA, politics, range fuels, Vinod Khosla | 1 Comment