Monday, August 17, 2009

Business Model Conept and Thoughts

Recently with the new Renewable Fuel Standard being promulgated by the EPA and Obama administration (commonly referred to as the "RFS2") a change has taken place. Specifically the creation of carve outs for certain biofuel technologies. Next generation biofuels such as cellulosic ethanol, gas to liquids, and other type technologies are being given set aside market share.

The RFS2 proposes to that the existing Renewable Industry Numbers ("RINs") system and set aside requirements for petroleum refiners and importers to buy a specific amount of cellulosic ethanol and waste to ethanol in their biofuel requirements. With this there is new value attached to cellulosic ethanol. This is coupled with a renewed funding effort by the US DOE, USDA and others to get cellulosic ethanol plants off the ground.

Close to home Trillium Fiber Fuels just pulled a $750,000 grant to build a cellulosic ethanol plant (this after a sizable grant to experiment with various feedstocks about a year ago). But as I look at it I'm seeing some serious bring to market issues with smaller cellulosic plants. Namely that it doesn't make sense to build a host of small commercial scale ethanol plants in regions where there are already idle corn ethanol plants.

The issue I see is the cost of capital, the need to return an investment to this capital, and the fact that if the cellulosic technology is proven it will likely be licensed and integrated right back into the already existing corn ethanol plant. These corn ethanol plants also already have two really important things for a cellulosic ethanol plant. Namely expertise making ethanol to ASTM specification and the ability to place this product in the stream of commerce (no small feat for a sub-5 million gallon plant with no experience).

So here is my thought (and a regulatory question as well). Being on the west coast we need to import our corn and will continue to do so for the foreseeable future. Why not focus on making cellulosic carbohydrate instead of ethanol, Then run the carbohydrate through the already existing corn based ethanol process. Qualify this product as a next generation fuel by carbohydrate volume placed in the process with the corn.

It makes logical sense. This being the method preferred for counting electron when generating green power from solar or wind projects. The real issue is does the EPA trust ethanol producers enough to do so given that there might be a full $1 a gallon additional value in a cellulosic gallon of ethanol.

This raises two questions to be feasible. One is the cost of freight and creation of the cellulosic sugar something that I believe can be managed. Second, will the RFS2 allow a measurement of this product placed in a batch with corn ethanol. Essentially we would create the same debate that exists with ConocoPhillips and their Renewable Diesel process where they add fats into the crude oil pre-distillation at the refinery.

Just some thoughts.

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