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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

What Happened to a Buck a Gallon?

Coskata will produce ethanol for under US $1.00 a gallon anywhere in the world, from almost any input material.Coskata Vision Statement

A bit more than a year ago, I read a number of claims from ethanol start-up Coskata stating that they would be able to produce ethanol from cellulose for less than $1.00 a gallon. One thing that is very important to me as an engineer is that you deliver what you say you will deliver – or more. If you deliver less, you lose credibility. If it becomes a habit, you lose all credibility.

I am not a fan of hype, and I don’t like my tax dollars funding hype. So when I think someone is overly guilty, I will often report on it. I did:

Coskata: Dead Man Walking

A couple of comments I made in that essay:

The fact that they don’t even have an operating pilot plant should tell even the most optimistic supporter that they have little basis for their claims of producing ethanol for less than $1/gal.

My prediction? I predict that Coskata’s suggestions that they will produce ethanol for less than $1/gal will look ridiculous in hindsight.

There were two reasons that I took exception to their claim of “under $1/gal.” First, they had no pilot facility upon which to base that claim. Making such a claim on the basis of lab tests is pretty reckless, as you are staking credibility on the line with little to back it up.

Second, the claim was incredibly misleading because there was no capital recovery in the number. If you don’t understand what that means, consider this. Let’s say I claim to be able to make gasoline for a nickel a gallon. But to do that, I have to build a plant that costs a trillion dollars. Do you really think then that I can make ethanol for a nickel a gallon? If I specified that my operating expenses amounted to a nickel a gallon, then that may be a true statement – which would then lead to questions about capital costs. In the case of Coskata, these capital costs are not trivial, and thus “$1/gal” immediately goes way up because capital isn’t free.

Well, that was a bit over a year ago, and two things have happened. First, they now reportedly have an operating pilot plant:

Coskata leaks word that demo plant is up and running

Ethanol developer’s CEO tells the Cleantech Group at the Boston Forum that its pilot facility, capable of producing 50,000 gallons a year, has been operating for nine weeks.

Warrenville, Ill.-based ethanol developer Coskata has been planning to announce the opening of its demonstration plant in October. But CEO William Roe leaked the news a little early.

Let me congratulate them on that accomplishment, and sincerely wish them the best. They will gain important operating knowledge from this plant – and I believe they will learn that their earlier cost claims weren’t credible.

The second thing happened at this week’s gasification conference. Coskata’s gasification provider – AlterNRG – made a presentation. Apparently they did not get the memo from Coskata, because they had on their slide that “Coskata expects overall operating costs to be less than $1.25/gallon.” That may not seem like much, but that’s a potential upward creep of 25%, and their pilot plant is barely warm. Further, they specified that this was just for operating costs; something Coskata’s early claims did not specify.

Another thing that AlterNRG said specific to their gasifier is that it really needs tipping fees for the economics to work. I expect long term, there will be more competition for biomass, and tipping fees will start to decline. So a company that is dependent on tipping fees is making a pretty risky bet in my opinion. In my first ever essay on Coskata almost two years ago – Coskata Hype – I wrote about the potential need for tipping fees:

My guess is that unless they found someone to pay a steep tipping fee to get them to take biomass, there is nowhere in the world that they will be able to make ethanol via gasification for under $1/gal.

Coskata would not be the only company back-pedaling on their cost claims. Last year Mascoma claimed “The cost of fuel from the process is similar to Coskata’s at about $1-1.50 a gallon.” (Like Coskata, Mascoma is a Vinod Khosla-backed venture).

Now they have changed their tune:

“Governments need to help with the financing for the first plants, once you have those the private sector will start to come in,” said Jim Flatt from research and development at U.S. biofuels firm Mascoma, speaking at a conference in Amsterdam.

“Oil needs to trade at a sustainable level of $100 or above to make this competitive,” said Flatt.

Both of these companies have quietly increased their projected costs (although Coskata still has the <$1/gal claim on their website). Bear in mind that neither company has anything that would be considered much of a demonstration plant. Coskata's recently completely pilot plant has a nameplate capacity of 3 barrels a day. So reality about cellulosic ethanol appears to be setting in for everyone. Everyone except for General Wesley Clark, who just went on record with this whopper: U.S. seen unlikely to meet ethanol fuel-content goal

Retired U.S. General Wesley Clark, co-chairman of the Growth Energy group, said the 100 million gallon level could be reached in time if the cap on the permitted level of ethanol in regular gasoline is increased to 15 percent from 10 percent.

“There is cellulosic capacity standing by … but the later than policy decision is (taken), the less likely we are to meet that 2010 mandate of 100 million gallons,” he told reporters during a trip to Ottawa.

The auto industry says gasoline containing 15 percent ethanol could damage engines and fuel lines in some older cars, and has urged regulators not to approve the higher blend.

“There are a lot of people who see it our way — namely, that this is good for the environment, it’s good for jobs, it’s good for national security. It doesn’t hurt automobiles,” said Clark.

That’s right, just lift the 10% cap, and the cellulosic ethanol will start to flow. Plus, it will be under a buck a gallon, it will create jobs, and it will bring us one step closer to energy independence.

I don’t meant to downplay the issue of the 10% cap, but there is room to put a lot more ethanol out there in the form of E85 even with the 10% cap – if it could be made in a cost-competitive manner. But that won’t open up the cellulosic taps. We actually had a pair of those until about 1920, at which time they were shut down because they weren’t economical.

October 8, 2009 Posted by | cellulosic ethanol, Coskata, Mascoma, Vinod Khosla | 14 Comments

Cellulosic Ethanol Falling Short

The reason I spend time debunking wild claims is that I think they damage the entire bioenergy sector in the long run. People who issue press releases claiming they can produce fuel for $1/gallon – and by the way we can do it next year if you give us the money – may attract some funding, but in the long run if they can’t deliver, investors will shy away from the entire sector.

One of the things I have spent time debunking is the notion that we are going to rapidly scale up and produce massive quantities of cellulosic ethanol. I believe – for fundamental reasons of chemistry and physics – that it isn’t going to happen. I have said that I think the people who are getting money to build cellulosic ethanol plants will start coming up with a litany of excuses for the cash they burned through, and their failure to deliver. A year ago, I wrote:

The next few years will see a record amount of back-pedaling from most of the companies trying to establish a foothold in this space – and overpromising on their technology to do so. There will be the normal litany of excuses – such as ‘the oil companies are suppressing the technology’ – but in the end the chemistry, physics, and most importantly the capital costs and logistical challenges will catch up with them. Yes, excuses will be made, but those who know a little about the technology will know what really happened. It’s going to be TDP all over again.

Today a new article in Nature says that cellulosic ethanol schedules are slipping and prospects are dimming – partially because investors have gotten burned by rosy biofuel promises (which is exactly my fear). The article is:

Cellulosic ethanol hits roadblocks

The article is behind a pay wall, but I have access. So I can provide some excerpts:

In February 2007, the US Department of Energy selected BlueFire and five other companies to negotiate for up to US$385 million in funding for commercial-scale plants. And later that year, Congress issued a federal mandate to produce 61 billion litres of cellulosic biofuels annually for transportation by 2022.

As I have said on repeated occasions, I don’t believe the advanced biofuel mandates will be met, and I think you will start to see targets slipping next year (the first year the advanced mandate really phases in). I predicted quite explicitly a year ago that we wouldn’t come close to meeting the targets. The Nature article agrees:

According to ThinkEquity, an investment bank based in San Francisco, California, the United States will have the capacity to produce less than 13 million litres of cellulosic ethanol this year, and it will almost certainly fail to meet the US Environmental Protection Agency’s (EPA) projection of 381 million litres of cellulosic biofuels in 2010. Two of the six companies selected by the Department of Energy to negotiate for commercial plant funding have dropped out of the programme, and several plants belonging to other companies have been delayed.

They also casually note more delays in Vinod Khosla’s Range Fuels project:

Range Fuels, based in Broomfield, Colorado, originally planned to complete the final phase of construction on a Georgia commercial plant in 2011 but has delayed that until late 2012, says chief executive David Aldous.

The reason I have criticized Vinod Khosla is that I believe he is out there making promises that he can’t deliver upon. But he is Vinod Khosla, so people (private equity and taxpayers) give him money to invest, potentially diverting it from ventures that make less noise, but have more real potential to deliver. And a lot has been invested into his Range Fuels venture. However, it is no surprise to me at all that the schedule has been slipping since the project was first announced.

I first covered the Range Fuels ground-breaking as one of my Top Energy Stories of 2007 (See #6). A year later, I covered the first announced delay in my Top Energy Stories of 2008 (again #6). The initial announcements from Range were that the first 20 MM gy phase is expected to be fully complete in 2008. Then that was delayed until 2009. Next it was scheduled to be completed by the first quarter of 2010, with the production of ethanol and methanol at a run rate of less than 10 million gallons per year to follow in the second quarter of 2010.” So now we see delays pushing into 2012. As some readers noted, this is the “final phase” they are talking about, but they need to start producing from the first phase before they have to worry about any final phases.

The article also discusses Iogen, and the fact that they “suspended operations on an Idaho plant to focus its resources on a possible plant in Saskatchewan.” Iogen has been producing for long enough at their pilot plant that they should have a good idea of what the economics really look like. That’s why I don’t expect them to build a plant, but instead to keep announcing that they are studying the issue.

The article also noted that researchers at Sandia National Laboratories had predicted that “cellulosic ethanol could compete with petrol in 2030 only if oil was $90 a barrel or higher.” Left unsaid is that this hinges upon technical improvements.

I find the entire issue very frustrating, because I have felt for years that our energy policy is being pushed by people with influence, but not necessarily people who are knowledgeable about energy. So what happens is that we waste years chasing dead ends and losing precious time as oil depletion marches on – and we spend our tax dollars because someone made a lot of empty promises.

These delays should also serve as a message to those who think the market will fix the problem of oil depletion by driving prices higher and making alternatives more affordable. The problem is that it takes years to bring these projects online, so you have to have a long-range plan for pursuing the right strategies. If oil prices are back to $150 next year, we will either pay up or do without. The energy business isn’t like a widget maker that can easily set up shop and compete for market share. It takes years and lots of money.

Note: I originally put this up in a hurry, and in reading it later I felt it came across as unnecessarily abrasive. In my haste I had also chopped off a quote that made it appear out of context. That was not my intention, but after viewing some of the comments I reread the story and I saw that this was the case. So I have corrected it.

October 2, 2009 Posted by | cellulosic ethanol, range fuels, Vinod Khosla | 77 Comments

Gas Taxes and Long Range Energy Planning

I consider the level of dependence of the U.S. on imported petroleum to be a very large financial risk endangering the country’s future. There are certainly other import-related risks as well, but here I want to talk about the financial risk.

I consider it similar to having a mortgage upon which you pay interest each month – but in which the interest rate can fluctuate wildly. If you typically pay 7% interest on your mortgage, but your rates quickly climb to 12%, a lot of people would find themselves in a deep financial hole. Come to think of it, a lot of people did when they found themselves in a similar situation. They gambled on the future and lost.

With respect to oil prices, we are also gambling on the future. We import a bit over 9 million barrels per day of crude oil (we also import gasoline, diesel, etc.) Each $10/bbl increase in the price of oil means that consumers pay $33 billion more each year for oil. We are now paying $100 billion more each year for oil than we were just a few short years ago, and that money comes out of all of our pockets. This acts as a tax upon the U.S. economy, albeit one that doesn’t primarily benefit U.S. citizens.

The drain on the U.S. economy is one thing, but the risk is quite another. Why do we tolerate that sort of price risk? In my opinion, it is because tolerating the status quo is viewed by politicians as the cheapest, most politically safe option. And even if they are concerned about the risks, when economists say that oil might be going back down to $30, politicians are paralyzed from taking action. The uncertainty is a killer.

A story I read this morning highlights that uncertainty, and points to some of the consequences:

Low Gas Prices Threaten Green Car Revolution

The single biggest factor determining the success or failure of high-tech fuel-efficient cars is not battery technology, legislation, tax incentives, new model introductions, or infrastructure. It’s gas prices. The price at the pumps is the elephant in the room when it comes to green cars.

I would imagine that there is general agreement on that. When gas prices raced ahead, the Toyota Prius began to outsell the Ford Explorer. When gas prices fell back to $2/gal, SUV sales surged and Prius sales plunged.

The fundamental problem is that many people don’t make long-range plans with energy prices in mind. When gasoline goes to $2/gal, some expect it to stay there and so that SUV purchase doesn’t look bad – until gasoline is back to $4/gal. And the inability to plan is compounded by analysts who give mixed messages on which way oil prices are going:

Japanese broker Ryoma Furumi said oil prices will stay rangebound at $70-$75 a barrel; analysts at Mirae Asset Securities said prices are likely to consolidate between $65 and $75; and Jim Ritterbusch, president of Ritterbusch & Associates, said crude could be pushed toward the $75 mark.

Verleger, the energy consulting firm, predicts a drop in oil this year—all the way down into the $30s. The firm bases this prediction on crude stockpiles in the US being 14 percent higher than a year ago, and gasoline supplies up by 2.2 percent. Also, OPEC is currently pumping 600,000 barrels a day more than the world needs.

Meanwhile, Christophe de Margerie, chief executive of French oil giant Total, this week said he sees a risk of oil rebounding to $100 a barrel unless there’s greater investment in exploration. He warned of a possible oil shortage between now and 2015 if immediate action is not taken to invest in exploration. “The reserves of oil are there but if you don’t invest they don’t come on the market,” de Margeries said.

Would we plan differently if we knew that oil prices were going to be $100/bbl? Of course we would. We have already seen consumers respond as oil prices went over $100/bbl. But while consumers were responding, a lot of damage was done to the U.S. economy. The airline industry and the auto industry took a beating, as did many personal budgets that suddenly had to cope with much higher weekly fuel outlays.

Enough gambling on oil prices! Let’s raise the price of petroleum via taxes so that people can make energy plans that incentivize them to become more fuel efficient. As I have argued before, you can direct that back at people in the form of a tax credit. The idea would be to trade energy taxes for income taxes.

The benefit would be that we would start moving toward a higher level of fuel efficiency without having to legislate CAFE mandates that end up being gamed. With increased fuel prices, people will demand more efficient vehicles. Automakers will know which cars they need to build. Renewable energy – particularly those varieties that aren’t heavily reliant on fossil fuels – would also see a boost. Not only would they be competing against higher priced fossil fuels, but project developers could have more assurance that oil prices aren’t going to fall to $30 and destroy their project economics.

The benefits would be substantial. Most importantly, our consumption would fall. I consider it very important to stretch our remaining fossil fuel endowment as far as we can, and we can do a better job of that if we manage it. We need to buy time, because renewables are not ready to fill the supply gap that will result if we burn through our remaining oil too quickly.

I don’t think there is any question our oil imports would fall as people started to change their transportation arrangements. Following the high prices of mid-2008, total petroleum imports over the following 12 months fell by 700,000 barrels/day over the previous 12 months (although it is hard to say how much of that was recession-induced).

I have long complained that government energy policies that vacillate every time a different political party comes into power have long been an impediment for companies trying to do long-range project planning, both for fossil fuel and renewable energy projects. Volatile prices have much the same impact. I have had my disagreements with Vinod Khosla in the past, but his call to put a floor underneath oil prices has merit (see Point 14 here).

Having a price floor would would allow companies – especially energy companies and auto makers – to do a better job of long range planning. I don’t fault automakers for getting caught with an oversupply of SUVs as oil prices skyrocketed. They were just making cars that people in a low-oil-price scenario had long demanded. With the certainty of higher prices, the auto companies needn’t gamble that SUV sales are going to come back strong. They would know that they need to shift to the more efficient vehicles that consumers will demand.

I have no problem with taking calculated risks, but I do not gamble. Living on the Gulf Coast of Texas without hurricane insurance is gambling, because the hurricane probability is too high. I don’t see that as much different than the risk we place on the economy by not taking more proactive steps to insulate the economy against price spikes. But we didn’t learn that lesson in 1973, nor in the 1974-75 recession that followed. I don’t expect we are much wiser today.

September 24, 2009 Posted by | carbon tax, gas tax, Vinod Khosla | 32 Comments

Another "New" Thermochemical Approach

Thanks to a reader for bringing this story to my attention:

Segetis: Making a Brand New Biochemical

The Minnesota-based startup turns cellulosic biomass into something called levulinic ketal, a brand-new molecule that can be made into a host of industrial chemicals.

Segetis wants to make mixed biomass into a hitherto unknown chemical, and turn it into a variety of industrial chemicals. That could give it an entrée to the trillion-dollar global chemical market, if it can scale up to the task.

Thanks to a $15 million investment from Khosla Ventures, doled out in $5 million per year increments starting in 2007, the two-year-old startup has started making its new chemical – levulinic ketal – at a 300,000 pound-per-year test plant that opened in January, CEO Jim Stoppert said Wednesday.

Just to clarify, “brand new” ignores a lot of history. I have seen this many times before. A few years ago “ethanol from cellulose” was all the rage. This “brand new” process was going to end our dependence from foreign oil. In fact, cellulosic ethanol was commercialized in the U.S. a hundred years ago. Today’s efforts are mostly variations on that 100-year-old theme.

I can’t trace the history of levulinic ketal back 100 years, but there are substantial commercial efforts that precede the work of Segetis. A company called Biofine Renewables, LLC, of Waltham, Massachusetts started up a 1 ton per day pilot plant in 1998 to produce levulinic acid from biomass – and then built a commercial scale facility in Italy. Biofine had partnered with several branches of the U.S. government on this effort, including NREL and PNNL. You can read a bit more about their technology here.

The story above discusses levulinic “ketal”, which is produced from levulinic acid. That isn’t new either; here is a patent from 1991 that mentions the synthesis of levulinic ketal. In fact, it is very rare that something “completely novel” is invented. Almost all inventions build upon a rich body of previous work. When one reads about a “brand new biochemical”, the historical context is often lost. (If you really want to dig into the details, see the Segetis patent here, which indicates that the ketal is in fact being produced from the acid in a separate step).

Not to say that the Segetis work isn’t quite interesting. I am very interested in thermochemical processing of biomass. I think there is a brighter future there than for biochemical processing of biomass. There are also lots of interesting specialty chemicals that one can make from various thermochemical processes (like pyrolysis). Cellulose, hemicellulose, and lignin are very interesting starting materials for a chemical process, and due to their complexity you might expect that some pretty novel chemicals could be built from them.

I will be interested to see what else is co-produced in the Segetis process. When you are working with biomass, because it is composed of a variety of different materials, reactions often lead to a variety of end products. I am trying to work my way through their patent, and they are laying claim to a wide variety of molecules, which I suspect are some of the co-products from the process. Their patent, by the way, has 141 claims, which is an awful lot compared to most patents I have looked at. Claims 1-22 have been canceled, however, which I suspect was because they discovered there was some history preceding the claims,

September 17, 2009 Posted by | Segetis, Vinod Khosla | 5 Comments

Answering Reader Questions 2009: Part 2

In this installment, I continue to work my way through the list of questions recently submitted by readers. This post picks up where Part 1 left off, and covers coal-to-liquids, technology hype, green gasoline, refining improvements, allocation of money toward renewables, electricity consumption, the Automotive X Prize, Big Oil, cellulosic ethanol, and Exxon’s recent algae announcement.

The Questions

Benny wrote: Arlington researchers’ work could lead to $35-a-barrel oil. Any chance of making oil from lignite? At these prices? Or are they just some guys who want research money? Answer

takchess wrote (and Doug also asked about): Thought this was interesting. If cost and technically feasible this would be cool.

Rive Technology Working to Increase Oil Refining Efficiency 7-9% by 2011 Answer

DDHv wrote: The new ionic liquid technique allows easier extraction of cellulose. Do you know if we have enough information yet to do energy and/or economic balances? If so, what are the present results? Improvements are likely, given the novelty of the technique. Answer

John asked: What do you think of pyloric conversion to make “green gasoline”? What are it’s peak lite and environmental ramifications? Specifically referring to an article in the Boston Globe RE: Anellotech and UMAss on July 13th: The greening of gasoline Answer

PeteS asked: How likely is money spent today on renewables to be wasted in retrospect because of “grey swans”? Obviously nobody can predict the future, but I’m thinking more in terms of, say, a plan to completely power a country from wind turbines, versus low-to-medium-probability dramatic improvements in wind-power within a decade or two. Answer

SamG wrote: I hear many theories about electricity consumption and the utility business model (sell more make more). Do you see any mechanism that puts suppliers in the loop for the reduction of consumption (not just demand reduction via passing through higher prices)? Answer

takchess asked: Any comments on this Urea fueled entry into the XPrize auto race?

Alternative Fuel Sciences Answer

John wrote: Americans are being “taxed” at a rate of 200 billion bucks a year to fund the U.S. Military to “baby-sit” the Strait of Hormuz and other oil company interests in the mid-east, etc.

Factor that in and the bio-fuels look good, as do CNG, electric vehicles or bio-fuel-electric hybrids. Imagine that…. a bio-fuel-electric hybrid. That completely shuts out the oil companies and their little “gasoline forever” game. The fact that bio-fuels, CNG and electricity are already cheaper than gasoline must be giving the traditional oil companies nightmares already. Answer

LovesoiL wrote: 1) What is a reasonable pace towards commercialization of ‘1st generation’ alternative fuels, e.g., cellulosic. Many ethanol advocates (DoE, USDA, EPA, US Congress) assume that while only 1 commercial scale facility is currently in construction (Range), somehow 1 billon gallons of annual capacity will get built during the next 3-5 years, and then we’ll build that much (30-40 plants) every year for the next decade?

2) How long is needed to operate a 1st gen facility to optimize its processing and demonstrate profitability before investors will agree to pay another ~$300 million build the 2nd facility?

3) Both Choren and Range fuels have gasification of woody biomass as the first step for their transformation process. Choren finished construction a year ago and has been in the commissioning process ever since. Range says they will finish construction 1Q 2010, and begin ethanol production in 2Q 2010. Can Range really begin production that soon?

4) Ask POET what they think of cellulosic from corn stover. They seem to say that stover has too many collection and handling problems (dirty, low density, etc), and that is one reason they are concentrating on cobs only. Many others assume corn stover will be the primary source of cellulosic feedstock. Answer

Anonymous wrote: While you’re in Alberta, ask about Iogen and when they’ll finally get their cellulosic plant started in Sask. Also, Enerkem has been making news lately, both with a 10 mgy MSW plant and their just-released plans to construct a $100 million R&D facility in Edmonton. EnerkemR&D EnerkemMSWPlant Answer

bts asked: Comments on this partnership between Venter and Exxon?

Exxon to Invest Millions to Make Fuel From Algae Answer

The Answers

Answer

You always have to read between the lines. Sometimes people talk about where costs might be “in a few years” or “with technical breakthroughs” – as is often the case with algal biodiesel (and has been the case with oil shale for 100 years). Not that this is necessarily the case here, but those are the kinds of things I look for as I read these press releases. Is it possible to make oil from coal? Sure, it just traditionally takes a lot of energy. Coal into oil is essentially what you are doing with CTL, and there are several variations of the process (including non-gasification options). South Africa has been doing it for a while now.

So what the UTA researchers are describing is a chemical process for turning coal into oil. Such processes do exist, so the question is whether this is novel, cheaper, more efficient, etc. That will require peeling a few more layers of the onion than what one finds in a press release – where the best you may get is caveats. Generally speaking, press releases tend to over-simplify things a lot. If even a tenth of the press releases on “the next big thing” had turned out to be true, we would be living in a very different world. My favorite pasttime might be loading the family up in my cold fusion-powered hovercraft for a family outing. Or knocking out essays on my DNA-based computer (I remember in 1995 or so when this was going to put Intel out of business).

People have all sorts of motives for these press releases. Some are to announce something truly revolutionary. Those are a tiny fraction. More often, it is as you say; someone is trying to catch the eye of someone who might fund them. I have been in a position many times to issue just such a press release, and sometimes I think about that when I see one of these.

For instance, in 1994 at Texas A&M I had an idea to create a cellulose reactor based on the contents of termites’ stomachs. To my knowledge, I was the first person to attempt such a thing. The experiment didn’t turn out very well. My analysis detected only a small amount of butanol in the product. Had my imagination been big enough, here was the press release: “A&M Researcher Turns Trash into Fuel.” For the story, I could project increases in yields, renewable butanol bringing Arab sheiks to their knees, and an actual use for those pesky termites. Of course as my yield projections go up, my cost projections go down, and I could predict that this “may soon lead to sub-$1/gal fuel.” In reality, I considered it a failed experiment, stopped work, and wrote up my dissertation. But that is the sort of experience that always has me looking at these press releases in a pretty skeptical light.

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Answer

Jim, this is along the lines of my last answer. People are working on these catalysts all the time. I have spent time in the lab working on gasification catalysts, and sometimes you come across something that looks pretty interesting. Then you try to scale it up and find that it isn’t stable in a larger reactor because the temperatures are hotter than they were in the lab.

Again, without peeling the onion and having a look at what everyone else is doing, it is impossible to tell whether this really amounts to something special. It could be that their competitors have already achieved these milestones and just didn’t issue press releases. Most organizations don’t. I was awarded several patents from my days at ConocoPhillips, but we never issued a press release even though the potential implications of some of them were pretty interesting.

One thing I will say is that from my time in a refinery, there wasn’t 7-9% efficiency gain to be had. We were already pushing the maximum possible conversion efficiency of oil into liquid products, and while you might have squeezed out another 2-3%, no way could you get up into the 8% range. There may be some really inefficient refineries out there that could benefit from this, but we will have to wait a couple of years and see if they actually start penetrating the market. Then you will know that they indeed invented something with a distinct advantage over the competitors.

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Answer

There are a couple of developments in cellulose chemistry that I have been watching pretty closely: The ionic liquid techniques that you mentioned, and supercritical cellulose chemistry with either CO2 or ethanol.

Both of these techniques are energy intensive, so a lot of work needs to be done around the economics of these processes relative to competing technologies. A number of questions arise, such as “What other components are extracted along with the cellulose?” Or “What does it take to separate the cellulose from the component used to extract it?” That isn’t to say that these technologies aren’t well-worth further exploration. From an academic standpoint, they are very interesting. In the end, I think they will be hard pressed to compete with gasification if the intent is production of fuels. However, specialty chemicals might turn out to be a good niche application for these techniques.

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Answer

Building on the previous answer, I think the more interesting developments in lignocellulosic chemistry are in chemical processing, as opposed to biochemical processing. I discussed this in an essay a couple of years ago, which was about Vinod Khosla’s investment into KiOR. This is their approach as well; to use catalytic processes to produce fuel.

The challenge is that biomass isn’t very energy dense, and these processes require elevated temperatures and pressures. So a key question is how much energy (and in what form) it takes to transport one BTU of biomass and process it into one BTU of fuel. Presently I think the processing energy is a pretty high fraction of the contained energy. Those energy inputs are going to have to come down before these sorts of technologies make much of an impact. The research is certainly promising, and I favor continued government funding. Would I invest in a company based on this concept? Not at this stage of development.

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Generally speaking, I think we are going to look back and see that we wasted tremendous money, time, and resources chasing dead ends. As you say, nobody knows what developments are in front of us. But many are betting that there are revolutionary developments that will transform the energy sector. As a result, they are throwing a lot of money in a lot of different directions. I don’t have a big problem with this if the proper due diligence is done, especially if private money is being used to fund these various ventures. I do agree with Vinod Khosla’s philosophy of spreading his bets across many different technologies. What I find annoying is that often the proper due diligence is not done, and often taxpayer money ends up funding these dead ends. That is money that is truly wasted.

However, one thing to keep in mind with respect to your “grey swans” is that they also have entrenched lobbies to contend with. It may turn out that the grey swan finds itself in a difficult fight to penetrate the market. One particular example I am thinking of is the decision of Congress to kill support for more efficient 2nd generation green diesel production because the inefficient 1st generation producers argued that it would put them out of business. Add in the fact that it was an oil company involved in the 2nd generation technology, and we find that grey swan struggling to survive.

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Sam, I don’t see an easy answer to that. Utilities are in the business of making money. When people reduce consumption it costs them money. Is there a way that they can benefit from that? I suppose in a world in which we are taxing carbon emissions, the savings from lower emissions would partially offset the loss of the sale of the electricity. But truthfully, that will be a small fraction at best. I always had the same issue when I was in the oil business. I wanted to see lower consumption, and I couldn’t see any way the oil companies could benefit directly from that. I think an effective mechanism for enabling suppliers to benefit from lower consumption would really be a game changer. If you think of something, let me know.

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Answer

When I first saw this, I thought “That’s one of the strangest energy-related stories I have ever seen.” It reminded me of my reaction to a recent story: Greenland shark may become new source of biofuel. I like the wild and wacky, and both of these fall into that category. But can it make an impact? The problem with the urea idea is that the fuel is actually ammonia and hydrogen. Where do those come from? Mostly from natural gas. If you look at the efficiencies of the processes involved, you would be far better off just to burn the natural gas. So I don’t see it going far in its current form, but I applaud the creativity. Who knows, maybe this will evolve into something more promising.

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John, while I agree that we are spending dollars in the Middle East because of oil, I disagree with several of your points. First, we aren’t spending that money to guard oil company interests. It is being done with the intent to keep cheap oil flowing to the American consumer. So the key interest here is that of the U.S. government, so the voting public is kept happy. Not that there is no benefit to the oil companies, but the government views a military presence there as an important issue of national security – not one of oil company security. If the oil did get cut off, the average person is going to bear the consequences.

I also disagree with your comment that biofuels are cheaper than gasoline. There are some exceptions – like sugarcane ethanol from Brazil – but for the most part gasoline is cheaper based on energy content. For instance, at today’s close ethanol on the CBOT for September delivery was trading for $1.65 a gallon. Gasoline on the NYMEX today was trading for $2.07/gal. However, because of the difference in energy content, the cost of this ethanol was $21.71/MMBTU and the gasoline was $18/MMBTU. With rare exceptions over the years, this has always been the case – and at times the differences have been quite large.

Further, you are kidding yourself if you think the oil companies are running scared. As I have pointed out before, it is a matter of scale. If corn ethanol started to look like a viable, long-term business model for them, the oil companies would just buy their way in as Valero recently did. Oil companies won’t sit around and go extinct because some fancy new biofuel put them out of business. They have big R&D budgets, and their efforts likely cover every biofuel you ever heard of (and many options you probably haven’t).

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1. Put me down as someone who believes that the one currently under construction – Range Fuels – is going to see their schedule continue to slip, and I believe they are going to have a difficult time meeting production goals. Multiple sources are telling me that they have some issues.

Further, the national projected ramp-up in cellulosic ethanol – if it happens at all – will be a fraction of what has been projected. Right now there isn’t even a clear pathway. It’s like marking out the road map for curing various cancers over the next few years. It is great to have such a road map, but you are assuming technological breakthroughs that may not happen. Right now cellulosic ethanol still looks to me like a niche, and not a scalable, mainstream fuel.

2. That’s a good question, because I am aware of just such a situation now. Investors are dragging their feet on Plant #2 because Plant #1 is still not producing per the plan. In general, I think if a 1st gen facility comes online and starts to deliver per expectations, money will start to flow pretty quickly. I would think within 6 months of delivering, investors will be ready to jump in. But it is going to take more than 6 months to optimize production to optimize one of these next generation plants once it starts up. There isn’t a blueprint for success, and novel problems are going to be encountered and have to be solved.

3. No, the schedule for Range will slip because they still have kinks to work out. Write it down and hold me to it.

4. Here is what POET said about stover: “The yield of cobs is 0.65 tons/acre, and we can collect them commingled with grain with a modified combine. Or we can collect them with stover coming out of the back of the combine. The bulk density for cobs is higher than for stover, and that makes them easier to separate. We make sure sufficient stover is left on the field for erosion control and nutrition. We are focused on cobs because the bulk density for cobs is better than for stover, and cobs have 16% more carbohydrates than the stover. We don’t have to leave all stover in the field necessarily over soil depletion issues; we have just chosen to focus on cobs. How much one can remove depends on soil type, location, and tillage practice. Cobs take those variables away.”

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Answer

I did ask about both Iogen and Enerkem while I was in Alberta. My hosts were quite skeptical that Iogen will ever build a commercial plant. I will say that they have enough demonstration level experience that it is suspicious that they don’t have plants sprouting up everywhere. After all, they have been producing cellulosic ethanol at small scale for 5 years. There are people that have been producing it for 0 years who are in the process of building plants. Given that governments are throwing money at anything looking like cellulosic ethanol, I think this puts a big question mark over their true commercial viability (at least at the present state of their technology).

There was less talk about Enerkem, and frankly before the trip I didn’t know much about them. The talk I did hear was that Enerkem is really only focused on the front end of a GTL plant (the gasification step). Enerkem’s view is that their post-gasification steps are flexible, and they can produce a variety of chemicals. They have announced that one site will produce ethanol (this is not the most efficient usage of syngas, by the way). Enerkem’s Press Release page certainly implies that they are busy with projects.

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Answer

I think there are two approaches to algal fuel that might work. One is if algae can be made to naturally excrete oil. If so, then it may be possible to let the oil layer build up and then skim it. This avoids the materials handling nightmare of separating the algae from the water, and then the oil from the algae. This is apparently the focus of the research. Still, it is a long shot. Exxon’s VP for R&D was quoted as saying “I am not going to sugarcoat this — this is not going to be easy. Any large-scale commercial plants to produce algae-based fuels are at least 5 to 10 years away.” I think that is a realistic assessment. If the breakthrough came tomorrow then you are still looking at piloting and finally commercialization. I don’t think that is likely to happen in 5 years. So first you have to have some technical breakthroughs – and those aren’t a given – and if you pass through that gate then you won’t see this on the market for 10 years. I believe that is a realistic assessment.

The second approach that might work is if a valuable product – such as a pharmaceutical – is being produced as the primary product, and oil is being produced as a co-product. The expense of collecting and processing algae is just too great for oil to be the primary purpose of the operation.

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August 4, 2009 Posted by | algal biodiesel, biodiesel, biogasoline, Choren, coal, ExxonMobil, green diesel, Iogen, range fuels, refining, Vinod Khosla | 39 Comments

Cello: A Lesson in Due Diligence

People sometimes ask me how – if they don’t have any particular technical expertise – one determines whether companies are making fraudulent claims. I tell them that the simple test of “If it looks too good to be true…” will work in the vast majority of cases. In the case of Cello Energy, that sniff test could have saved investors some money. Here’s what happened.

I haven’t written publicly about Cello Energy, but I have exchanged several e-mails with people about their claims. I have long been on the record stating that I do not think the prospects for commercialization of conventional cellulosic ethanol are very good. Any time I hear people promising to produce renewable fuel for $1/gallon (or less!), I generally think that those people making those promises are either severely deluded or committing fraud. Cello made these sorts of promises. Cello said they could make $16 a barrel renewable fuel from cellulose – which works out to be 38 cents per gallon.

About six months ago I received an e-mail from someone within the U.S. government asking for comments on the Cello technology (which they described as cellulose to diesel, not ethanol). We ended up exchanging 17 e-mails discussing the technology. I got some general information (publicly available) on what they were doing, and while the person inquiring was skeptical, he took a tour of their plant and told me “it does seem that his plant does do what he says it does, and that he [inventor Jack Boykin] did indeed invent the invention of the century (it is difficult to verify a technology with a simple plant walk through). And there is this nagging thought – could this really be true (it seems too good to be true)?

In my first response, I noted that it had elements of two technologies I was familiar with, but “seems very similar to CWT’s thermal depolymerization technology.” That technology of course resulted in bankruptcy because it simply could not do what the inventors claimed it could do. I also added “It works, it is just a lot more expensive than advertised.”

In the next exchange, I noted that I would take a very hard look at their energy balance: “Grinding to an extremely fine state can be pretty energy intensive, and then they are adding heat to the process. Have they made it clear how the energy inputs compare to the energy in the final product?

In additional follow-ups, I noted that they appeared to have a problem with their energy balance. They claimed that they could produce a certain number of gallons of fuel from a ton of biomass, but the feedstock didn’t have as many BTUs as did the final fuel. So I noted that unless there were other energy inputs “that claimed number does not seem possible.

I was asked if it was reasonable that they would have spent $12 million on a plant that didn’t actually work, and I responded: “I have seen people throw away more than $12 million on an idea that doesn’t work. It just depends on whether it appears to work, and whether the scientist/engineer who is the inventor is a good salesman.”

Now despite all of these e-mails, I couldn’t say with 100% certainty that their technology did not work. I just saw a lot of warning flags, and wanted to point out some things that he should probably look into. I didn’t hear back from him for a long time, but then I saw a story that said that Vinod Khosla had invested in the company. I wrote and asked for an update, and here was part of his reply:

I have assessed a couple different aspects of the technology such as the energy required for grinding. My analyses suggest that they cannot do what they say that they can do because the energy demand is too great. While my analysis shows that grinding down to the fine size that the process requires would require several times more energy than what the entire process consumes, the inventor reassures me that because most of the grinding occurs in the liquid phase using hot product as the liquid, the energy demand from grinding is vastly reduced. While what the inventor says is possible, I cannot verify it.

So he validated my concerns about the energy balance, but the inventor assured him that he had found a way around that sticky problem. (If it were only that easy; to do the grinding in hot liquid!) So far, this one still isn’t passing the sniff test, but once again I don’t have enough information to conclude that fraud is taking place. But I have enough information that I would be hard-pressed to give them any money.

But now a jury has ruled that they have indeed committed fraud. Two really good stories on this from earth2tech:

Lessons from the Cello Energy Biofuel Fraud Case: Do Your Homework

Cello Energy Leaves 50M-Gallon Gap in Feds’ Ethanol Targets

From the first story:

As far as speed bumps for cellulosic ethanol ventures go, this one’s a doozy: Jurors in a federal court have ordered Cello Energy, a biofuel startup run by Alabama’s former ethics chairman, Jack Boykin, and backed by both Silicon Valley cleantech investors Khosla Ventures and pulp maker Parsons & Whittemore Enterprises, to pay more than $10.4 million in a fraud case.

Cello reportedly accepted a $2.5 million investment from P&W in 2007 to help finance its first plant. Several months later it received a $12.5 million investment and a pledge for up to $25 million for construction and operation of additional plants from Khosla. Cello agreed to use discounted wood waste from the company as feedstock, but “a string of witnesses testified that samples of the fuel allegedly produced at Cello’s facility…were derived entirely from fossil and not renewable sources,” the Alabama Press-Register reports. This week a jury in Mobile, Ala., decided that Boykin’s original claims (made with his partner and son Allen Boykin) were fraudulent.

The second story sees a silver lining here. If the targets fall short of projections, there will be even more money available for cellulosic ethanol (but I still think there is confusion here over whether this is an ethanol or diesel process; I think the claimed process is actually cellulosic diesel):

As the research firm ThinkEquity notes in a new report, if cellulosic ethanol production falls short of the U.S. EPA’s estimate of more than 100 million gallons next year, new incentives are supposed to kick in to support production the fuel as part of the proposed Renewable Fuel Standard update, or RFS2, which is slated to increase the amount of renewable fuels that must be blended into gasoline.

In the event of a shortfall (not enough renewable fuels to meet minimum blend requirements), ThinkEquity wrote in its report late last month that the EPA can sell credits that would increase the value of cellulosic ethanol to a minimum price of about $3 per gallon (up from ethanol futures’ current $1.77 per gallon).

The story notes that the reason for the EPA’s 100 million gallon estimate was that they were counting on 70 million gallons from Cello! I have said it before, and I will say it again loudly: CELLULOSIC ETHANOL IS NEVER GOING TO MEET THE PROPOSED RAMPED UP PRODUCTION LEVELS. Too many uninformed boosters have done too little due diligence, and we get all sorts of ridiculous expectations. Back to the first story above, they noted how careless investors were in throwing down money on the project:

…P&W and Khosla Ventures weren’t exactly diligent. The excuse? P&W CEO George Landegger said he trusted Boykin after he promised to invest his own money in the $25 million project. For Khosla Ventures, whose founder Vinod Khosla has called cellulosic biofuel his “real love” and invested in more than a dozen biofuel companies, due diligence was not necessarily a deal breaker, and according to emails revealed in court between Khosla and partner Saul Kaul, Boykin refused to give the investors enough time for due diligence. That made the deal “nerve-wracking” for Kaul, but Khosla wrote, “Great job on this one. Herculean effort. But my bet is it will pay off.”

My bet is that it won’t. I think Khosla and the others have simply been scammed. While I appreciate Khosla’s desires to “to use his wealth to fight the war on foreign oil and for energy independence”, sometimes it feels like he is just scattering a lot of money around in the hopes that something – anything – will work. In this case, it looks like he was betting on a miracle, another in a long line of companies claiming “game-changing technology.” Maybe things will turn out OK. But this entire story has all the earmarks of so many biofuel pranksters who came, promised, fleeced investors, and failed. I can promise you one thing: Whether they make fuel or not, it won’t be for $16/bbl.

As I noted in my previous entry, one of my jobs going forward with my new company is to make sure we don’t get tangled up in situations like this. But based on the limited information I had, I would have steered us clear of Cello. On the other hand, I will continue to look for companies that can actually deliver on their biofuel promises. So feel free to send me your $25 million. It will be in good hands. 🙂

July 7, 2009 Posted by | Cello, cellulosic ethanol, Vinod Khosla | 40 Comments

Geothermal’s Earthquake Problem

In a recent post – It’s Always Something – I argued that for seemingly every renewable option, there is a trade-off. In that particular essay I was discussing a recent report that suggested that jatropha curcas – which I have written about as an intriguing option for renewable, liquid fuels – has very large water requirements. It is also poisonous, and was banned as an invasive species by the Western Australian State government. So as the title suggested, there always seems to be a catch with any of these options.

Geothermal energy is one of the most promising renewable energy technologies. There are a number of commercial geothermal plants already in operation (the U.S. is the world leader in geothermal energy), and the economics are much more favorable than some of the other choices. Geothermal electricity makes a much larger contribution to the electricity mix than does solar power, and does not suffer from the intermittency issue. A 2006 report from NREL (PDF warning) concluded that the potential for domestic geothermal energy at a depth of 2 miles (3 kilometers) is 30,000 times all current annual U.S. energy usage.

But while the current plants in operation utilize geothermal energy that is close to the surface, tapping deeper into the earth would hugely increase the geothermal potential. The only problem is that this sort of deep drilling can cause earthquakes. From the New York Times:

Deep in Bedrock, Clean Energy and Quake Fears

BASEL, Switzerland — Markus O. Häring, a former oilman, was a hero in this city of medieval cathedrals and intense environmental passion three years ago, all because he had drilled a hole three miles deep near the corner of Neuhaus Street and Shafer Lane. He was prospecting for a vast source of clean, renewable energy that seemed straight out of a Jules Verne novel: the heat simmering within the earth’s bedrock.

All seemed to be going well — until Dec. 8, 2006, when the project set off an earthquake, shaking and damaging buildings and terrifying many in a city that, as every schoolchild here learns, had been devastated exactly 650 years before by a quake that sent two steeples of the Münster Cathedral tumbling into the Rhine.

Hastily shut down, Mr. Häring’s project was soon forgotten by nearly everyone outside Switzerland. As early as this week, though, an American start-up company, AltaRock Energy*, will begin using nearly the same method to drill deep into ground laced with fault lines in an area two hours’ drive north of San Francisco.

The New York Times article goes into a lot of detail about why the deeper geothermal techniques cause earthquakes, but it also gives a good overview of the geothermal potential. I think the solution to this – if they can’t come up with techniques that don’t spawn earthquakes – is to only tap geothermal in relatively uninhabited locations. There are lots of places in the Western United States that have very low population densities, but very high geothermal potential.

Regardless, geothermal is one of those options that I think is around for the long haul, and won’t require endless subsidies in order to be competitive.

* As a footnote, AltaRock Energy is a company that Vinod Khosla has invested in. AltaRock also has some information at their site about how geothermal works.

June 27, 2009 Posted by | AltaRock, electricity, geothermal, Vinod Khosla | 50 Comments

Vinod Khosla at Milken Institute: Part III

This will be the conclusion of Vinod Khosla’s (VK) recent lengthy interview at the Milken Institute 2009 Global Conference. The interview was conducted by Elizabeth Corcoran (EC) of Forbes and can be viewed here.

In Part I, VK discussed the role of government money, capital intensity of renewable projects, and some of his solar investments. In Part II, VK discussed butanol, cellulosic ethanol, nuclear power, and cap and trade. Here in Part III, VK discusses his beef with electric cars, has lots to say about Black Swans, discusses his problems with nuclear in more detail, talks about green jobs, sugarcane ethanol, and weighs in on indirect land use issues for biofuels.

EC (39:00): Let’s get to those electric cars. You don’t like the Prius.

VK: Let me be clear, and I am going to sneak in my Black Swan. I do drive a hybrid, but not a Prius. I drive a Lexus hybrid. Hybrids are an uneconomic way to reduce carbon dioxide. If you go to hybrids or electric cars, your cost of carbon reduction is about $100/ton. If you have 10 ways of reducing carbon at $50/ton, why would you spend $100? My beef is not with hybrids; we are investing in hybrid batteries; there is a good market and we can make money at it. But do I believe it’s going to solve the climate change problem? No. (RR: None of the things that have been discussed are going to significantly rein in carbon emissions.) Save yourself the five grand, and instead paint your roof white. You will save more carbon that way.

(RR: He cited this paper by Art Rosenfeld at Lawrence Berkeley Lab: “White Roofs Cool the World, Directly Offset CO2 and Delay Global Warming“).

EC (41:10): Shai Agassi – a long time entrepreneur in Silicon Valley – has a very different approach to batteries. Are you involved in the work he is doing? Does that only work in small countries?

VK: You know, Shai has a very intriguing start-up. (RR: EC interrupts to explain that Shai is developing stations where you can go and exchange batteries for electric cars; he owns the battery and you own the car. See more explanation here.) I mentioned earlier about diversity of opinion; I am glad he is trying it and I am cheering him on. If I can help him I will. It is important to try some of these experiments. He has a particularly clever way to do something that does have a shot at working.

I want to add my Black Swan theory here. Most of you have probably read the Black Swan, or heard about it. The financial crisis is a negative Black Swan. I am a true believer that technology provides positive Black Swans. (RR: VK explains the concept of the Black Swan. Here is a link to the book at Amazon, which I have read and found to be very good). We will redefine energy because of the Black Swans of technology.

(RR: VK then explains his problem with electric cars, and says lithium ion batteries are too expensive, are limited by electrochemistry, and will be for a long time. I would say that while VK seems to have a clear picture in his head on the issues with batteries, he suffers from a blind spot about similar limitations of cellulosic biomass. He then cites all of his investments into different areas, and concludes that sheer numbers mean something is going to work.)

VK: The chance that each approach will succeed is small. The chance that all of them will cumulatively fail is vanishingly small. Mark my words: Vanishingly small, and that’s why we will have unsubsidized market competitiveness with fossil fuels. And the fossil fuel guys won’t know what hit them. I don’t see how by 2030 oil can compete. That’s why I think by 2030 oil will go to $30, because it will be the alternative cost of marginal technologies.

(RR: I think he truly believes this. Yet it shows a failure to grasp issues of scale, biomass density, logistical challenges, and much more. If it were merely a numbers game, we could solve any technology problem by just throwing enough money at it. But there are fundamental issues here regarding biomass that will never – mark my words – never allow it to be produced for $30/bbl. Sugarcane ethanol, yes, can be produced for that in Brazil. But you will never turn cellulosic biomass into a liquid fuel, at scale, for $30/bbl – for the same kinds of fundamental limitations VK mentions for batteries.)

EC (47:40): So by 2030, what will be the primary fuel?

VK: I have a paper on my website that postulates about a technology race between biofuels and batteries. Whichever one makes the most rapid progress will get the larger percentage of the total passenger miles driven in the world.

EC (48:30): Does government risk factor in? There has been a cautionary tale in biodiesel, where there has been great interest, lots of money pumped in, and yet due in part to vagaries of how the environmentalists and government regulations have crashed into each other, you have got more than 100 biodiesel fuels (RR: Biodiesel plants, I presume?) around the country, none of which are producing fuel.

VK: You know, that’s true, but you also have bankrupt financial companies. Look, failure is the natural mechanism of capitalism. But you are right. There is government risk. But we fixed a lot of that last week when the Low-Carbon Fuel Standard passed. It will force the right decisions looking back.

EC (50:18): There have been many technologies – and Kleiner invested in many early on – where the technology, the marketplace, and the government were not in sync. And the technology dies.

VK: I think that’s the wrong way to look at it. Any start-up has risks. It has technology risks, market risks, it has financial risks. It has other risks; it has people risks and management risks. What you are doing as an active investor is balancing those risks. What we are tending to do is increase technology risk so we can reduce market risk. We will generally take on more market risks, have a bigger jump, and a larger probability of failing at the technology such that when we enter the market we have a larger competitive advantage.

EC (51:30): What are you hearing from the limited partners, the people who invest with you? Is there a tolerance for that sort of risk?

VK: Absolutely. My impression is venture capital has gone too far away from real technology risk. The limited partners are thirsting for more technology risk. The limited partners tell me that the earlier stage they can get in on the technology risk, the better they like it.

EC (53:25): I am going to open it up to questions in a minute, but one more question from me. Let’s go back to nuclear for a minute. Aren’t there Black Swans in the nuclear industry? (RR: I was thinking the same thing earlier; Black Swans only appear to have been considered by VK in very specific situations. A positive Black Swan is going to make some of his technologies successful, but he seems to discount any positive Black Swans from other sectors).

VK: There probably are. In fact, Bill Gates is funding one. The problem with nuclear, I think, is different. Because of the NRC it takes 20 years to build one. And I have to give them $100 million to approve every step of the process. The problem with nuclear is that the innovation cycle is very long. If I am building a nuclear plant, I think of something, 20 years later I build something and see how it performs. If I am building a solar thermal plant, six months later I change my manufacturing line. I can even do it half way through building a power plant.

EC (54:40): And if you are building an ethanol plant, two or three years later it’s ready.

VK: Yeah, though every six months people plan on changing the bug in their plant. Every six months you change the bug. Keep evolving it, improve the efficiency. The cycle of innovation – how long it takes – is a really important metric for judging how effective a technology will be in getting to market.

EC (55:20): OK, good. First question.

Q1 from audience (55:30): My question is on nuclear. You said you weren’t interested in building, but how about the services component, i.e., servicing the waste and so forth?

VK: I think it’s a limited investment opportunity. I don’t think it’s an explosive opportunity. (RR: I suppose that depends on whether critical mass is reached.)

Q2 (56:10): What about superconductivity?

VK: It’s an interesting area, I just haven’t seen the pace of innovation. Sometimes it’s self-fulfilling. If you are not interested, nobody funds it, then nothing happens. I would love to see a breakthrough in room temperature superconductivity. (RR: He then said Kleiner invested in a couple of companies in the late 80’s; he mentioned American Superconductor).

Q3 (57:20): With respect to cellulosic ethanol, this question of indirect land use that has ended up in the standards; do you think that will continue?

VK: It’s a fairly complex issue; the science is very uncertain. I think it is figured into the California Low Carbon Fuel Standard. The end result is a reasonable compromise. It’s also something that is fairly uncertain right now. I think the California Air Resources Board (CARB) came up with something that’s a reasonable answer on indirect land use impacts. The corn ethanol guys wanted to have zero. They didn’t get that, so they are now complaining in Washington. I think CARB could have phased it in more slowly because the numbers are so uncertain, so I would not agree 100% with CARB. But I would agree 90% with them.

Q4 (59:10): That’s corn. How about cellulosic?

VK: I think cellulosic should be measured the same way, but I think the impact will be fairly small, and over time it has the potential to be the biggest opportunity to sequester carbon in the soil. I don’t want to get into the details – there are papers on my website about this – but it is possible to change agronomy practices to raise biomass and sequester carbon at the same time. It is the annual crops, where you till up the soil ever year, that you have a problem. Perennial crops, and sugarcane is such a crop, you have a much better chance. Also, a lot of cellulosic crops can be grown without a lot of water and on marginal lands.

EC (60:20): So the amount of land we would need, if we were to truly replace gasoline, how much land would we need?

VK: Under optimistic scenarios we need zero land in this country to replace all of the gasoline in this country. (RR: He referred to this paper – Where Will Biomass Come From? – on his website for a detailed explanation). Look, this is really important. We can’t do linear extrapolation of the past. (RR: Because it doesn’t give the desired answer). If we do, we are sure to fail. We have to do things a new way. The best way to predict the future is to invent it, not extrapolate the past. (RR: Audience starts to applaud). And this is a fundamental difference.

Q5 (61:22): Is the lack of seed capital – especially in Europe – a bottleneck, and how do we reengineer this so that funds are available?

VK: Lack of seed investment in Europe may be a problem for the Europeans, but it’s an opportunity for us. Let me give you an example. I ran into a guy who was a senior director of research at Exxon, who had moved to Europe – Amsterdam – and was struggling with a new idea to make fuel from biomass. He wasn’t producing ethanol. He called me, and said “Nobody in Europe understands me. I have been looking for money for two years.” He had been begging and borrowing space at various labs and universities to do his research. He said that he thought we had it all wrong, that instead of turning biomass into ethanol you should turn it into crude oil. This is exactly the same thing nature does; all crude oil comes from biomass. He said the only problem with nature is that it takes millions of years. He said he could do it in minutes. Now that’s a seed idea. I would have guessed that there was less than a 10% chance that he was going to be able to pull this off. It didn’t take very much for me to write him a check, because if he is right it’s transformative. He moved to Houston and went to work.

I like to joke that I am the only Indian in-sourcing jobs. We have in-sourced three technology companies: One from New Zealand, one from Amsterdam, and one from Australia. The same thing happened with the solar thermal technology in Australia. We funded it and they moved to Palo Alto. Every news channel in Australia carried that story. What was the story? “Why isn’t Australia funding this?”

EC (64:40): Are you seeing more competition at the seed level from other venture capitalists?

VK: It’s starting to increase, but not that much. That’s why we love the seed opportunities. They are the most promising opportunities anywhere. (RR: He then mentioned that the company in Houston is KiOR, which I mentioned previously in Vinod Khosla Scoops Me. Incidentally, VK e-mailed me after I posted that essay and we exchanged several e-mails over KiOR and some of his other ventures.) Nobody wanted to invest in the Internet until the Netscape idea. After Netscape, everybody was interested.

EC (65:40): You have said that you like being a seed investor. Do you think there are enough investors at the 2nd and 3rd tier? These companies are going to need more than just you at that point.

VK: You don’t know for sure, but we see increasing interest. If you see one or two successful IPOs, the amount of money will increase dramatically. Wall Street bounces between fear and greed; we are in a fear cycle.

Q6 (66:40): What are those Ph.D. students looking into right now? In 2005, I did an informal survey at UC Berkeley. Nobody in the engineering department – graduate students or professors – were interested in energy. We did an informal survey in 2006 and suddenly more than 50% were interested in working in energy. That’s why I am very bullish with respect to the new crops of Ph.D. students coming out. It’s the number one choice. Number one used to be nanotechnology, genetics, computer science; it’s now material science, it’s chemical engineering, it’s all kinds of fundamental processes. What I have noticed is physics, chemistry, biology are becoming a lot more important, and that will drive transformation in energy over the next 20-25 years. (RR: I guess I was way ahead of my time since I studied biomass to energy in graduate school at Texas A&M in the early 90’s).

Q7 (68:00): I agree with your urgency about climate change, but it’s interesting to think about other countries, who already realize that we have already baked in about two degrees C in terms of the thermal momentum of the earth. Is there a technology opportunity in adaptation to climate change?

VK: I haven’t spent enough time on adaptation. It’s unfortunate that the people who have the least are the most impacted, like Bangladesh. But there is an interesting area that I have avoided, called geoengineering. I have just been asked to speak at a geoengineering conference, and I haven’t decided. It is a touchy subject; to engineer the climate of this planet. Some people think we have to do it, others think there will be too many unintended consequences. I subscribe to that view.

EC: We will take two more questions.

Q8 (70:22): Could you talk about job creation?

VK: Most of the studies say that job creation per dollar invested is higher for renewable technologies; higher than dollars invested in fossil fuel technologies. I don’t know why that is, but all of the data seem to indicate that this is in fact true.

Q9 (71:52): Do you think Brazil has a chance with sugar ethanol?

VK: Sugarcane ethanol, under the Low Carbon Fuel Standard, comes out looking reasonably good. But, having said that, I think sugar is too valuable a commodity to use. We will get to things other than sugarcane as our source of fuel. I suspect sugarcane will be more lasting than corn ethanol, but even that will be a passing phase. In the end, non-food technologies are likely to be the source of our fuels. Partly because the politics are right; more importantly because the science is right. I evaluate biofuels on one metric: How many miles can you drive per acre? With most food crops, you can get to 10,000 miles driven per acre. Cellulosic technology offers the opportunity to go 100,000 miles on an acre, and then land becomes a non-issue. (RR: Two words: Net energy). Now we promised to take one last question.

Q10 (73:30): A lot of these new technologies are going require someone to install all of this. Are there plans to look at human capital opportunties?

VK: There are clearly opportunities in services. We are not funding them because, partly because I am a techie nerd; I like the technology and everyone should do something they have fun at. But there are clearly opportunities, and others are doing it. Thank you all very much.

May 4, 2009 Posted by | batteries, biomass, Black Swan, cellulosic ethanol, electric cars, Nassim Nicholas Taleb, nuclear energy, Prius, Vinod Khosla | 28 Comments

Vinod Khosla at Milken Institute: Part III

This will be the conclusion of Vinod Khosla’s (VK) recent lengthy interview at the Milken Institute 2009 Global Conference. The interview was conducted by Elizabeth Corcoran (EC) of Forbes and can be viewed here.

In Part I, VK discussed the role of government money, capital intensity of renewable projects, and some of his solar investments. In Part II, VK discussed butanol, cellulosic ethanol, nuclear power, and cap and trade. Here in Part III, VK discusses his beef with electric cars, has lots to say about Black Swans, discusses his problems with nuclear in more detail, talks about green jobs, sugarcane ethanol, and weighs in on indirect land use issues for biofuels.

EC (39:00): Let’s get to those electric cars. You don’t like the Prius.

VK: Let me be clear, and I am going to sneak in my Black Swan. I do drive a hybrid, but not a Prius. I drive a Lexus hybrid. Hybrids are an uneconomic way to reduce carbon dioxide. If you go to hybrids or electric cars, your cost of carbon reduction is about $100/ton. If you have 10 ways of reducing carbon at $50/ton, why would you spend $100? My beef is not with hybrids; we are investing in hybrid batteries; there is a good market and we can make money at it. But do I believe it’s going to solve the climate change problem? No. (RR: None of the things that have been discussed are going to significantly rein in carbon emissions.) Save yourself the five grand, and instead paint your roof white. You will save more carbon that way.

(RR: He cited this paper by Art Rosenfeld at Lawrence Berkeley Lab: “White Roofs Cool the World, Directly Offset CO2 and Delay Global Warming“).

EC (41:10): Shai Agassi – a long time entrepreneur in Silicon Valley – has a very different approach to batteries. Are you involved in the work he is doing? Does that only work in small countries?

VK: You know, Shai has a very intriguing start-up. (RR: EC interrupts to explain that Shai is developing stations where you can go and exchange batteries for electric cars; he owns the battery and you own the car. See more explanation here.) I mentioned earlier about diversity of opinion; I am glad he is trying it and I am cheering him on. If I can help him I will. It is important to try some of these experiments. He has a particularly clever way to do something that does have a shot at working.

I want to add my Black Swan theory here. Most of you have probably read the Black Swan, or heard about it. The financial crisis is a negative Black Swan. I am a true believer that technology provides positive Black Swans. (RR: VK explains the concept of the Black Swan. Here is a link to the book at Amazon, which I have read and found to be very good). We will redefine energy because of the Black Swans of technology.

(RR: VK then explains his problem with electric cars, and says lithium ion batteries are too expensive, are limited by electrochemistry, and will be for a long time. I would say that while VK seems to have a clear picture in his head on the issues with batteries, he suffers from a blind spot about similar limitations of cellulosic biomass. He then cites all of his investments into different areas, and concludes that sheer numbers mean something is going to work.)

VK: The chance that each approach will succeed is small. The chance that all of them will cumulatively fail is vanishingly small. Mark my words: Vanishingly small, and that’s why we will have unsubsidized market competitiveness with fossil fuels. And the fossil fuel guys won’t know what hit them. I don’t see how by 2030 oil can compete. That’s why I think by 2030 oil will go to $30, because it will be the alternative cost of marginal technologies.

(RR: I think he truly believes this. Yet it shows a failure to grasp issues of scale, biomass density, logistical challenges, and much more. If it were merely a numbers game, we could solve any technology problem by just throwing enough money at it. But there are fundamental issues here regarding biomass that will never – mark my words – never allow it to be produced for $30/bbl. Sugarcane ethanol, yes, can be produced for that in Brazil. But you will never turn cellulosic biomass into a liquid fuel, at scale, for $30/bbl – for the same kinds of fundamental limitations VK mentions for batteries.)

EC (47:40): So by 2030, what will be the primary fuel?

VK: I have a paper on my website that postulates about a technology race between biofuels and batteries. Whichever one makes the most rapid progress will get the larger percentage of the total passenger miles driven in the world.

EC (48:30): Does government risk factor in? There has been a cautionary tale in biodiesel, where there has been great interest, lots of money pumped in, and yet due in part to vagaries of how the environmentalists and government regulations have crashed into each other, you have got more than 100 biodiesel fuels (RR: Biodiesel plants, I presume?) around the country, none of which are producing fuel.

VK: You know, that’s true, but you also have bankrupt financial companies. Look, failure is the natural mechanism of capitalism. But you are right. There is government risk. But we fixed a lot of that last week when the Low-Carbon Fuel Standard passed. It will force the right decisions looking back.

EC (50:18): There have been many technologies – and Kleiner invested in many early on – where the technology, the marketplace, and the government were not in sync. And the technology dies.

VK: I think that’s the wrong way to look at it. Any start-up has risks. It has technology risks, market risks, it has financial risks. It has other risks; it has people risks and management risks. What you are doing as an active investor is balancing those risks. What we are tending to do is increase technology risk so we can reduce market risk. We will generally take on more market risks, have a bigger jump, and a larger probability of failing at the technology such that when we enter the market we have a larger competitive advantage.

EC (51:30): What are you hearing from the limited partners, the people who invest with you? Is there a tolerance for that sort of risk?

VK: Absolutely. My impression is venture capital has gone too far away from real technology risk. The limited partners are thirsting for more technology risk. The limited partners tell me that the earlier stage they can get in on the technology risk, the better they like it.

EC (53:25): I am going to open it up to questions in a minute, but one more question from me. Let’s go back to nuclear for a minute. Aren’t there Black Swans in the nuclear industry? (RR: I was thinking the same thing earlier; Black Swans only appear to have been considered by VK in very specific situations. A positive Black Swan is going to make some of his technologies successful, but he seems to discount any positive Black Swans from other sectors).

VK: There probably are. In fact, Bill Gates is funding one. The problem with nuclear, I think, is different. Because of the NRC it takes 20 years to build one. And I have to give them $100 million to approve every step of the process. The problem with nuclear is that the innovation cycle is very long. If I am building a nuclear plant, I think of something, 20 years later I build something and see how it performs. If I am building a solar thermal plant, six months later I change my manufacturing line. I can even do it half way through building a power plant.

EC (54:40): And if you are building an ethanol plant, two or three years later it’s ready.

VK: Yeah, though every six months people plan on changing the bug in their plant. Every six months you change the bug. Keep evolving it, improve the efficiency. The cycle of innovation – how long it takes – is a really important metric for judging how effective a technology will be in getting to market.

EC (55:20): OK, good. First question.

Q1 from audience (55:30): My question is on nuclear. You said you weren’t interested in building, but how about the services component, i.e., servicing the waste and so forth?

VK: I think it’s a limited investment opportunity. I don’t think it’s an explosive opportunity. (RR: I suppose that depends on whether critical mass is reached.)

Q2 (56:10): What about superconductivity?

VK: It’s an interesting area, I just haven’t seen the pace of innovation. Sometimes it’s self-fulfilling. If you are not interested, nobody funds it, then nothing happens. I would love to see a breakthrough in room temperature superconductivity. (RR: He then said Kleiner invested in a couple of companies in the late 80’s; he mentioned American Superconductor).

Q3 (57:20): With respect to cellulosic ethanol, this question of indirect land use that has ended up in the standards; do you think that will continue?

VK: It’s a fairly complex issue; the science is very uncertain. I think it is figured into the California Low Carbon Fuel Standard. The end result is a reasonable compromise. It’s also something that is fairly uncertain right now. I think the California Air Resources Board (CARB) came up with something that’s a reasonable answer on indirect land use impacts. The corn ethanol guys wanted to have zero. They didn’t get that, so they are now complaining in Washington. I think CARB could have phased it in more slowly because the numbers are so uncertain, so I would not agree 100% with CARB. But I would agree 90% with them.

Q4 (59:10): That’s corn. How about cellulosic?

VK: I think cellulosic should be measured the same way, but I think the impact will be fairly small, and over time it has the potential to be the biggest opportunity to sequester carbon in the soil. I don’t want to get into the details – there are papers on my website about this – but it is possible to change agronomy practices to raise biomass and sequester carbon at the same time. It is the annual crops, where you till up the soil ever year, that you have a problem. Perennial crops, and sugarcane is such a crop, you have a much better chance. Also, a lot of cellulosic crops can be grown without a lot of water and on marginal lands.

EC (60:20): So the amount of land we would need, if we were to truly replace gasoline, how much land would we need?

VK: Under optimistic scenarios we need zero land in this country to replace all of the gasoline in this country. (RR: He referred to this paper – Where Will Biomass Come From? – on his website for a detailed explanation). Look, this is really important. We can’t do linear extrapolation of the past. (RR: Because it doesn’t give the desired answer). If we do, we are sure to fail. We have to do things a new way. The best way to predict the future is to invent it, not extrapolate the past. (RR: Audience starts to applaud). And this is a fundamental difference.

Q5 (61:22): Is the lack of seed capital – especially in Europe – a bottleneck, and how do we reengineer this so that funds are available?

VK: Lack of seed investment in Europe may be a problem for the Europeans, but it’s an opportunity for us. Let me give you an example. I ran into a guy who was a senior director of research at Exxon, who had moved to Europe – Amsterdam – and was struggling with a new idea to make fuel from biomass. He wasn’t producing ethanol. He called me, and said “Nobody in Europe understands me. I have been looking for money for two years.” He had been begging and borrowing space at various labs and universities to do his research. He said that he thought we had it all wrong, that instead of turning biomass into ethanol you should turn it into crude oil. This is exactly the same thing nature does; all crude oil comes from biomass. He said the only problem with nature is that it takes millions of years. He said he could do it in minutes. Now that’s a seed idea. I would have guessed that there was less than a 10% chance that he was going to be able to pull this off. It didn’t take very much for me to write him a check, because if he is right it’s transformative. He moved to Houston and went to work.

I like to joke that I am the only Indian in-sourcing jobs. We have in-sourced three technology companies: One from New Zealand, one from Amsterdam, and one from Australia. The same thing happened with the solar thermal technology in Australia. We funded it and they moved to Palo Alto. Every news channel in Australia carried that story. What was the story? “Why isn’t Australia funding this?”

EC (64:40): Are you seeing more competition at the seed level from other venture capitalists?

VK: It’s starting to increase, but not that much. That’s why we love the seed opportunities. They are the most promising opportunities anywhere. (RR: He then mentioned that the company in Houston is KiOR, which I mentioned previously in Vinod Khosla Scoops Me. Incidentally, VK e-mailed me after I posted that essay and we exchanged several e-mails over KiOR and some of his other ventures.) Nobody wanted to invest in the Internet until the Netscape idea. After Netscape, everybody was interested.

EC (65:40): You have said that you like being a seed investor. Do you think there are enough investors at the 2nd and 3rd tier? These companies are going to need more than just you at that point.

VK: You don’t know for sure, but we see increasing interest. If you see one or two successful IPOs, the amount of money will increase dramatically. Wall Street bounces between fear and greed; we are in a fear cycle.

Q6 (66:40): What are those Ph.D. students looking into right now? In 2005, I did an informal survey at UC Berkeley. Nobody in the engineering department – graduate students or professors – were interested in energy. We did an informal survey in 2006 and suddenly more than 50% were interested in working in energy. That’s why I am very bullish with respect to the new crops of Ph.D. students coming out. It’s the number one choice. Number one used to be nanotechnology, genetics, computer science; it’s now material science, it’s chemical engineering, it’s all kinds of fundamental processes. What I have noticed is physics, chemistry, biology are becoming a lot more important, and that will drive transformation in energy over the next 20-25 years. (RR: I guess I was way ahead of my time since I studied biomass to energy in graduate school at Texas A&M in the early 90’s).

Q7 (68:00): I agree with your urgency about climate change, but it’s interesting to think about other countries, who already realize that we have already baked in about two degrees C in terms of the thermal momentum of the earth. Is there a technology opportunity in adaptation to climate change?

VK: I haven’t spent enough time on adaptation. It’s unfortunate that the people who have the least are the most impacted, like Bangladesh. But there is an interesting area that I have avoided, called geoengineering. I have just been asked to speak at a geoengineering conference, and I haven’t decided. It is a touchy subject; to engineer the climate of this planet. Some people think we have to do it, others think there will be too many unintended consequences. I subscribe to that view.

EC: We will take two more questions.

Q8 (70:22): Could you talk about job creation?

VK: Most of the studies say that job creation per dollar invested is higher for renewable technologies; higher than dollars invested in fossil fuel technologies. I don’t know why that is, but all of the data seem to indicate that this is in fact true.

Q9 (71:52): Do you think Brazil has a chance with sugar ethanol?

VK: Sugarcane ethanol, under the Low Carbon Fuel Standard, comes out looking reasonably good. But, having said that, I think sugar is too valuable a commodity to use. We will get to things other than sugarcane as our source of fuel. I suspect sugarcane will be more lasting than corn ethanol, but even that will be a passing phase. In the end, non-food technologies are likely to be the source of our fuels. Partly because the politics are right; more importantly because the science is right. I evaluate biofuels on one metric: How many miles can you drive per acre? With most food crops, you can get to 10,000 miles driven per acre. Cellulosic technology offers the opportunity to go 100,000 miles on an acre, and then land becomes a non-issue. (RR: Two words: Net energy). Now we promised to take one last question.

Q10 (73:30): A lot of these new technologies are going require someone to install all of this. Are there plans to look at human capital opportunties?

VK: There are clearly opportunities in services. We are not funding them because, partly because I am a techie nerd; I like the technology and everyone should do something they have fun at. But there are clearly opportunities, and others are doing it. Thank you all very much.

May 4, 2009 Posted by | batteries, biomass, Black Swan, cellulosic ethanol, electric cars, Nassim Nicholas Taleb, nuclear energy, Prius, Vinod Khosla | 48 Comments