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Tuesday, April 21, 2009

The biofuel bubble

biofuelwatch - BusinessWeek feature: The Biofuel Bubble


Featured Video

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Inside Verenium's Ethanol Plant

Verenium is turning sugarcane into ethanol at this plant in Louisiana. Learn about the process and the challenges of trying to produce large quantities of biofuel



slideshow thumbnail imageThe Best Biofuels

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The Biofuel Bubble


A horde of startups have smart ideas. But the challenges are many, and the winners likely will be Shell, BP, DuPont, and other majors



It's a bold vision: Replace billions of gallons of gasoline not with ethanol from corn or other food crops but with biofuels made from plants, such as prairie grass in Tennessee pastures or algae percolating in Florida. Such a move would slash dependence on oil, create thousands of jobs, and reduce emissions that contribute to global warming. In the U.S., the idea has powerful political support. Congress has decreed that the country must be using 21 billion gallons of "advanced" biofuels a year by 2022. Washington is backing that goal with tax breaks, loan guarantees, and scores of millions of dollars in grants, with more support expected in upcoming energy bills. These inducements and the vast potential market have stimulated investments of more than $3 billion and spawned a new industry.

More than 200 companies, from 12-person startups to oil giants, are developing next-generation biofuels using a bewildering array of technologies. Pilot and demonstration plants are operating or are under construction from Florida to California. "We can have it all: more fuel, more food, and fewer carbon emissions," says John B. Howe, vice-president of Verenium (VRNM), a Cambridge (Mass.) company that makes ethanol from sugarcane waste at a demonstration plant in Jennings, La.

Yet behind the very real innovations and investments, the brash claims and the breathless headlines, lies an inconvenient truth. Replacing petroleum with biofuels is a tough business. Even as the industry develops, many of the companies—probably most—will not survive. "We've seen a
venture capital-led bubble," says Alan Shaw, CEO of Codexis, a Redwood City (Calif.) manufacturer of enzymes used to make drugs, chemicals, and biofuels. "I cannot see how the small companies can build a business and still get a return to their original investors. The numbers just don't add up."

Nor will many Americans soon be filling their gas tanks with these next-generation fuels. Industry executives concede they'll fall far short of the mandated 2010 level of 100 million gallons of biofuels made from cellulosic materials such as prairie grass or cornstalks. Meeting the 2022 goal is also unlikely. It would require not only building hundreds of fuel factories—at a cost of $500 million or more each—but also surrounding each one with thousands of acres of land planted with energy crops such as prairie grass. "We're talking about a fairly substantial transformation of the rural economic landscape," says Jack Huttner, vice-president of DuPont Danisco Cellulosic Ethanol, a joint venture of Danisco and DuPont (DD) that is building a demonstration plant in Tennessee.

These difficulties don't mean advanced biofuels aren't coming, or that they won't play a crucial role in fighting climate change. But everything will happen more slowly than many venture capitalists say. And the probable winners will be those with deep pockets and patience, such as Royal Dutch Shell (RDS), BP (BP), DuPont, agriculture giant Archer Daniels Midland (ADM), or the rare startup with revenues from another business, such as making drugs. For the rest, the demonstration biorefineries now being built are more like high-stakes auditions than a step in the process of becoming commercial biofuels producers. "The business model that makes sense for most of us is demonstrating the technology and getting it into the hands of those who have balance sheets," says Bill Roe, CEO of biofuel producer Coskata in Warrenville, Ill.

Yet even with this strategy, there's a problem for individual companies: There could be a glut of innovative biofuel technologies, from clever microbes to processes using heat and chemicals. As startups stumble, big companies should be able to snap up technologies on the cheap, when and where they need them.

For the companies that do succeed in building a business, the irony is that their success will only increase the challenges. Right now the feedstocks of plant or waste materials needed for biofuels are cheap. BlueFire Ethanol Fuels (BFRE) hopes soon to break ground on a facility in Lancaster, Calif., that will use paper trash and other municipal waste. CEO Arnold R. Klann figures he'll make ethanol for $1 per gallon by getting the waste he needs for free—or better. "If communities are paying Waste Management (WMI) to take their waste away, they can pay me to take it, too," he says. Trouble is, the economics will change. Rising biofuel production, or the burning of biomass to generate electricity, will drive up demand and prices for the raw material, just as production of corn ethanol helped raise the price of that crop. "Biomass is cheap right now because no one wants it. As people want it, it will become more expensive," says Robert Chess, chairman of OPX Biotechnologies in Boulder, Colo., which is engineering microbes to make chemicals and fuels.

More important, the laws of supply and demand mean that replacing a significant amount of gasoline with biofuels would drastically lower the demand for gas. That, in turn, would cause the price of gas to plunge, making biofuels less competitive. The 5% drop in gasoline use in the second half of 2008 (compared with the previous year) helped push down the average price at the pump from $4.14 per gallon to $1.74, dampening enthusiasm for biofuels. "Low oil prices have a numbing effect on consumers and their interest in this area," says David C. Aldous, CEO of Colorado's Range Fuels, which is building a plant in Soperton, Ga. Imagine what would happen if tens of billions of gallons of biofuel were to become available. The world could be awash in cheap oil and gas.

It has happened before. In the early 1980s, higher-mileage cars and an economic downturn sent petroleum prices swooning, killing off many renewable-energy efforts, including those supported by Big Oil. Avoiding that scenario today requires an additional policy step: raising the cost of using fossil fuels through taxes or limits on
carbon dioxide emissions. "The major thing holding us back is the lack of a price on carbon," says Jim McMillan, a biofuels expert at the National Renewal Energy Laboratory (NREL) in Golden, Colo.

The crucial need for putting a price on carbon emissions is also a reminder that the industry is still pretty much a government creation. "The reason why renewable fuels exist at all is because politicians have decided they meet policy objectives. The whole market is 100% political," says Jeff Passmore, executive vice-president of Ottawa-based Iogen, the first company to make ethanol from a cellulosic feedstock—in this case, wheat straw. Those policy objectives: reducing energy dependence, fighting climate change, helping farmers, and creating jobs. But government policy can be fickle. Philip New, head of biofuels for BP, isn't so much worried that advanced biofuel technology won't pan out as he is that "the world might lose its enthusiasm for supporting these technologies through the difficult interim years," he says.

Even if the political winds do blow steady, however, the carnage on the path to the future's billions of gallons of advanced biofuels is likely to be great, with many companies and technologies losing out in the competition or being gobbled up by a few deep-pocketed survivors. Here's why:


The first challenge is growing enough green plant material. The numbers are daunting.
Producing 30 billion gallons of fuel takes 300 million or more tons of plant material. That's more than the total weight of cars and light trucks sold in the U.S. over the past 10 years. Growing this much cellulose would take at least 30 million acres of land. "I think the biggest problem for everybody is how are we going to grow, gather, store, and treat the biomass," says Brent Erickson, lobbyist for the Biotechnology Industry Organization.

Some industry executives doubt it's possible to grow that much plant biomass. "You can't make 16 billion gallons a year from cellulose," says Paul Woods, CEO of Algenol Biofuels in Naples, Fla. Woods is opting for algae instead. His plan: put "bioreactors" containing saltwater and blue-green algae out in the sun, and add CO2 and nutrients. Out comes ethanol.

Scores of other companies are also jumping into algae. For most, though, the bubble will burst. "There's a huge amount of hype in algae," warns NREL's McMillan. Experts at BP have looked over the entire field of algae competitors and found none they deemed worth investing in. "If they can make it work, it would be fabulous," says BP's New. "But I think there are still fundamental issues with algae." Not least, it's challenging to grow it in open ponds and troughs, where it's exposed to bird droppings, fungi, bacteria, and voracious microbes that feed on algae "like a pack of jackals at a buffet," says Fred Tennant, vice-president of
business development at PetroAlgae (PALG) in Melbourne, Fla.

As a result, some biofuel
players are looking at other sources of nonfood material. One of the cheapest sources now is garbage, such as the municipal waste that BlueFire Ethanol plans to use. Corn ethanol producer POET aims to make ethanol from corncobs. Weyerhaeuser (WY) is exploring growing energy crops in its forests, along with using wood waste. Range Fuels will tap into forests in the Southeast for its Georgia facility.

The problem is that making 21 billion or more gallons, the 2022 mandate, is likely to be far beyond the capacity of the startup companies—even if the recession eases and financing becomes more available. Jack Huttner, overseeing portions of the DuPont Danisco cellulosic ethanol plant in Vonore, Tenn., argues that the task requires a vast new agricultural enterprise. Biofuels companies will have to organize farmers to grow millions of acres of a dedicated energy crop like switchgrass or "energy cane," a low-sugar cane. "I'm concerned about organizing basically a new economy," Huttner says. The big players have a better shot at this than the startups.

Large financial resources and patience will also be essential when it comes to turning these enormous amounts of cellulose into liquid fuel. It's a far more complex process than fermenting starch or sugar into alcohol, which humans figured out how to do millennia ago, and there are a number of possible technologies. Typically, the cellulose must first be broken down into sugars, which are then fermented. To do this, some companies, including Range, use what NREL's McMillan calls "a big sledgehammer"—heat. BlueFire breaks up the cellulose with acid. Others employ man-made enzymes or microbes to
convert it to sugar—or in some cases, directly into ethanol or other fuels. Still others, such as Virent Energy Systems, use mineral catalysts to turn feedstock into fuels.

The rivalry is intense. "The biological processes are the winners," argues William Frey, CEO of Qteros, which is developing a microbe to turn cellulose directly into ethanol. Heat or chemicals can't be used economically, he believes. Range CEO David Aldous disagrees. Biology is too finicky to handle the variety of feedstocks that a biorefinery might see, he says. Who's right? BlueFire's Klann asserts that so far, "no one is bright enough to know which technology will rise to the top."
That's why Big Oil is hedging its bets.

Shell is joining up with Iogen, which already has a pilot plant making cellulosic ethanol; with Codexis, a producer of man-made enzymes; with algae company HR BioPetroleum; and with Virent. "This advanced technology is risky stuff," says Graeme Sweeney, executive vice-president for future fuels and carbon dioxide at Shell. "I stay awake at night because tomorrow it could all be changed."

Processes that work well in the lab often run into problems when scaled up to commercial size. Iogen found that enzymes that effectively convert pure wheat straw to sugars fail when faced with 1,000-pound bales laced with dirt, dead mice, and stones. "We've been at this many years. We've learned that the more you know, the more you discover that you don't know," says Iogen's Passmore.

Among the major players, two of the most promising efforts are the DuPont Danisco joint venture in Tennessee and BP-backed Verenium, which plans a commercial cellulosic ethanol facility in Florida. Both of these already have expertise in every step of their complicated processes, putting them ahead of startups that only have some of the pieces. "The dilemma with all the [small] technology players is that in the end, they have to plug into someone else's system," explains BP's New.

A shift in power to Big Oil is already happening in the traditional corn ethanol business, where low prices have led to the idling of more than 20% of capacity. VeraSun Energy (VSUNQ), one of the largest U.S. ethanol companies, filed for Chapter 11 in October. Guess who bought seven VeraSun plants at bargain prices? Valero Energy (VLO), an oil refiner with a $119 billion in revenue.

But don't expect the giants always to be fans of ethanol. True, refiners need a certain amount of it to meet the federal mandates. But ethanol—whether from corn or new sources—is about to run head-on into something called the "blend wall." Right now much of the gasoline in the U.S. contains 10% ethanol, which works fine in today's cars and trucks. Automakers worry that higher levels will damage engine components. So they will void the warranties of most vehicles running on richer ethanol blends. With the U.S. now consuming 137 billion gallons of gasoline a year, the total market for any kind of ethanol—corn, algae, or cellulosic—hits a hard limit at about 13 billion gallons. Going beyond that requires a whole new infrastructure, from car fuel lines to gas pumps.

That's one reason for the growing interest in newer, non-ethanol biofuels. "Oil companies really don't want to invest a lot in ethanol infrastructure. They'd much rather develop a different molecule," says Nathanael Greene, biofuels expert at the Natural Resources Defense Council, an environmental group. Whether that molecule is a type of alcohol called butanol (which DuPont and BP are working on) or other hydrocarbons more similar to gasoline, these fuels are compatible with existing refineries, pipelines, and vehicles. So some startups are designing microbes that can turn sugar from any source into diesel, gasoline-like molecules, or jet fuel. Colorado's Gevo, for instance, has an innovative business plan to add technology to corn ethanol factories to change the end products into fuels that are closer to gasoline or diesel.

The future of biofuels, therefore, probably looks like this: Farmers will grow millions of acres of switchgrass and other energy crops on land not taken out of food production. Those crops will help fight global warming and improve soil quality by adding carbon to the soil, and they can be processed into low-carbon fuels that are seamlessly delivered to filling stations and pumped into the gas tanks of trucks and cars. In other words, over the long term, we're probably not talking about ethanol—nor about a triumph of tiny startups.

As for the rest of the companies, some of their technologies may find a role, but most are not likely to make it. For many people, this conjures up the bubbles that enveloped biotechnology and the Internet in the late 1990s, when many companies failed. Now in next-generation biofuels, predicts Codexis CEO Shaw, "the only people who are going to be able to survive this are the Big Oil companies."

Business Exchange: Read, save, and add content on BW's new Web 2.0 topic network

The Climate for Biofuels

Advanced biofuels will be important in the fight against global warming. But their economic viability hinges on whether Washington implements a climate policy that puts a price on CO2 emissions, thus raising the relative cost of gasoline compared with low-carbon biofuels. As The New York Times reported on Apr. 11, the Obama Administration is moving cautiously: "Addressing climate change appears to be slipping down the President's list of priorities." Obama is letting Congress take the lead for now, but his Environmental Protection Agency is preparing for climate regulation in case Congress doesn't act.

For this story and others on the topic, go to bx.businessweek.com/global-climate-change/reference/

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Biofuels: The Next Generation

As corn-based ethanol hits roadblocks, all eyes are turning to advanced biofuels. These, too, face difficult challenges, but that's not stopping a host of startups

THE FEEDSTOCKS (mainly cellulose-rich material, but also algae)
Pros: Cheap for now
Cons: Supply too limited to make billions of gallons
The Players: BlueFire Ethanol (trash); POET (corncobs); Verenium (sugarcane residue)
Pros: Adequate supply in Southeast and other parts of the U.S.; easy to harvest
Cons: It's harder to extract cellulose from wood than from other feedstocks
The Players: Range Fuels, Coskata
Pros: Potential for high yields per acre
Cons: Scale-up is challenging; typically requires source of CO2 to bubble through algae
The Players: Algenol, Sapphire Energy, HR BioPetroleum, Solix, PetroAlgae
Pros: Potentially vast supply; can improve soils; small carbon footprint
Cons: Challenges in establishing, harvesting, and delivering to biorefinery
The Players: DuPont Danisco (switchgrass); Verenium ("energy" cane); Iogen (wheat straw)

Pros: Can sell it into existing market
Cons: Limits on how much can be added into gasoline now
The Players: POET, Range, Mascoma, Verenium, Algenol, DuPont Danisco, Coskata, Qteros, others
Pros: Can be added to gasoline in large amounts and used in existing pipelines
Cons: Greater technological challenges; higher costs than ethanol
The Players: DuPont, BP, Gevo, Virent, Amyris
Pros: Works with existing infrastructure
Cons: May be difficult to produce economically
The Players: PetroAlgae, Solazyme (from algae); Amyris, LS9, Gevo, OPX (from any sugar)

THE PROCESSES (converting feedstock to fuel)
Pros: Potential to use wide range of feedstocks; catalysts can produce variety of fuels
Cons: May take more energy than biological processes and may require additional purification steps
The Players: Range Fuels, Coskata (heat feedstock to make gas); BlueFire Ethanol (strong acid, microbial fermentation); Virent (catalysts)
Pros: Depending on feedstock, the process is very
Cons: Has to be adjusted for each type of feedstock; enzymes are still costly
The Players: Solazyme (algae); Mascoma, Qteros (one-step microbes); Iogen, DuPont Danisco, Verenium (enzymes, microbes)

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Controversies Continue to Swirl over Corn Ethanol

Rising corn prices and slack demand have hurt producers. And biofuel makers face a limit on how much ethanol can be blended with gas

Progress is being made on next-generation biofuels, but for the traditional corn ethanol industry, times are tough. Industry's facilities are 20% idle, taking 2 billion gallons a year worth of capacity off line. Bankruptcies are up. The biggest bankrupt producer, VeraSun Energy (VSUQ), was forced to sell seven of its plants, which were bought by oil refining giant Valero Energy (VLO)at bargain prices. "It's frustrating," says Rodney M. Weinzierl, executive director of the Illinois Corn Growers Assn. "The impact on the rural economy is tremendous."

Why the stumble? After all, corn ethanol was once heralded as a savior—a way to reduce dependence on foreign oil while slowing global warming and helping farmers. And until the troubles kicked in last year, new facilities were being built at a rapid pace.

Part of the reason is the recession, which has driven down the demand for gasoline, and thus, for the ethanol blended into gasoline. "Demand has not kept pace with supply," says Bob Dineen, president of the Renewable Fuels Assn. To make matters worse, the cost of making ethanol soared in the first half of 2008 because of dramatic climbs in the prices of both corn and energy. While those prices have since dropped, some producers continue to be hurt by long-term contracts they signed, which locked in high corn prices as a hedge against even higher possible prices.

Not Much Help Fighting Climate Change

It hasn't helped that corn ethanol's image has taken a beating as well. Critics blamed it for driving up world food prices and for costing taxpayers billions in subsidies. Plus, some analyses showed that replacing gasoline with ethanol doesn't even help much in combating climate change for two reasons: It takes a lot of energy to make the stuff. And the diversion of corn to fuel means that more acres elsewhere may have to be converted to crop land, causing emissions from deforestation.

The industry has been working hard to combat what it sees as misperceptions. The fact that corn prices plunged, even as ethanol production rose to 9 billion gallons in 2008, shows that ethanol wasn't to blame for high food prices, Dineen argues. Companies have also gotten more efficient at making ethanol. "Corn ethanol factories have come a long way," says economist Steffen Mueller, assistant professor at the University of Illinois at Chicago.

In fact, newer analyses show that modern corn ethanol plants use 25% less energy than the industry average of just five years ago. As a result of this and other improvements, such as higher farm productivity, corn ethanol does reduce greenhouse gas emissions, compared to gasoline, by 50%-60%, according to a study by Kenneth G. Cassman, professor of agronomy and horticulture at the University of Nebraska-Lincoln.

But even as it improves its image and struggles to survive the recession, the ethanol industry finds itself facing another huge problem. It's called the blend wall. Right now, much of the gasoline in the U.S. contains 10% ethanol, a gasoline blend called E10. In 2008, the U.S. used 137 billion gallons of gasoline. Meanwhile the ethanol industry made 9 billion gallons of ethanol in 2008 to blend into gasoline. So, doing the simple math, about 2/3 of the gasoline sold in the U.S. is the E10 blend.

No Room to Grow

That means ethanol is about to hit a wall. It's unlikely that every drop of gasoline in the U.S. will contain even 10% ethanol. So assume that the portion of E10 in the total supply rises to 90%.
That means the maximum amount of ethanol in gasoline will be just over 12 billion gallons. Yet, the ethanol industry already has the capacity to make 11 billion gallons, and more plants are planned. Plus, ethanol from cellulosic sources is expected to hit the market in a few years.
Where will all that ethanol beyond the 12 billion gallons a year go? Nowhere, as long as gasoline is limited to E10. This blend-wall problem is already making it even harder to get financing for new ethanol facilities than it would otherwise be because of the credit crisis.

That's why corn growers and ethanol producers are lobbying fiercely for an increase in the percentage of ethanol allowed in gasoline. Even a small boost to E12 (12% ethanol) would give the industry relief and breathing room. "If we could expand the gallons going into the marketplace, lenders would notice, and credit would flow," says Weinzierl.

But it's a tough sell. The push for higher ethanol blends prompted a quick and powerful counterattack. Allowing a higher percentage of ethanol in gasoline is "an ill-considered approach…[that is] contrary to scientific integrity and potentially harmful to our environment, public health, and consumers," argued a coalition of dozens of oil and gas producers, food companies, environmental groups, and other organizations in late March.

Changes in Land Use

The outcome of this battle? Still uncertain.

And if that's not enough, the industry faces yet another challenge. In an effort to combat global warming, both California and the federal Environmental Protection Agency are developing so-called low-carbon fuel standards. The idea is to put limits in overall carbon emissions from fuels. Under these new standards, the fuel that's allowed to be sold will have to have lower carbon emissions than pure gasoline does.

The new studies of the industry's energy use show that corn ethanol does indeed cut carbon emissions compared with gasoline. But these analyses neglect one crucial detail. There's a huge controversy over whether the use of corn (or other crops) for fuel causes the conversion of land elsewhere in the world to cropland. The assumption is that new cropland is needed to make up for the loss to the food supply from the corn diverted to ethanol. And if tropical rainforest is cut down to grow soybeans, for instance, the extra emissions from deforestation swamp the reductions in emissions from using more ethanol.

The industry argues that estimates of such indirect changes in land use should not be included in calculations of the carbon contents under the low carbon fuel standards—and that the current estimates are way too high anyway.

But so far, both California and the EPA are planning to include these land use changes. If the industry loses this battle, then the long-term prospects for corn ethanol will grow even dimmer.

Carey is a senior correspondent for BusinessWeek in Washington.

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Graeme Sweeney Reveals Shell's Biofuels Strategy

The oil giant has slowed its renewable energy efforts in wind and solar power. But it is stepping up investments in next-generation biofuels made from non-crop plants

As Royal Dutch Shell (RDSA) looks to the future, it sees that drilling for oil and gas is getting more expensive, while demand is growing for forms of energy that emit less carbon than fossil fuels. Some companies have responded by investing more in wind or solar energy. At Shell, the priority going forward is in biofuels and carbon capture and storage. "We are stepping up our efforts in the area of sustainably sourced biofuels, because they fit our downstream capabilities and could make a substantial contribution to reducing CO2 emissions," Shell Chief Executive Jeroen van der Veer explained in an Apr. 2 speech.

Van der Veer predicts that biofuels will supply as much as 10% of the world's liquid fuels over the next few decades. "We think commercial volumes of next-generation biofuels could be on the market in five to 10 years," he says.

To help get there, Shell has invested in a number of biofuel companies. They include Iogen, which operates a demonstration cellulosic ethanol plant in Canada; Codexis, a subsidiary of Maxygen (MAXY) that makes enzymes used to produce drugs, chemicals, and biofuels; Virent Energy Systems, which uses catalysts to turn sugar into a variety of gasoline-like fuels; and HR BioPetroleum, which uses algae as a source. Shell also has made research agreements with several universities, including the Massachusetts Institute of Technology.

To learn more about Shell's plans, BusinessWeek's John Carey talked to Graeme Sweeney, Shell's executive vice-president for future fuels and CO2. Here are edited portions of that interview:

Why is Shell investing in biofuels?

There are lot of good reasons, which are all underpinned by the fact that there is an ever-growing global demand for energy. The biofuels market is being driven by government mandates and more than 40 countries have or are considering renewable fuels mandates. Coupled with that, sustainably sourced biofuels have the potential to address CO2 emissions from energy and are a natural fit with our downstream business in transport fuels. And as a viable transportation solution, biofuels tick off both the national security and climate change boxes.

Where is that investment going? What is your overall strategy?

We are keen to grow our biofuels business, and we are investing in partnerships targeted at technical breakthroughs and cost reducing initiatives to get there. We have actively pursued innovation through partnerships, and we have sought out the best partners in each of the areas. And since 2007 we have quadrupled our investment levels in biofuels to support this aim. Not all biofuels are the same and so our focus is on making the most of what we have got, and improving it. We are also working to ensure that the feedstocks and conversion processes for the biofuels we purchase today are as sustainable as possible. And our R&D work is looking at the future of biomass. Right now, a common biofuel is corn ethanol but it can sometimes only offer a 15-20% improvement [in carbon emissions] compared to gasoline. So when you ask what are the routes to better ethanol, you get fairly quickly to cellulosic ethanol.

Which is why you've invested in Codexis and Iogen?

Yes, Iogen is the only company actually making any cellulosic ethanol (from straw), and Codexis has a fine track record improving enzyme performance. It's still too expensive for full-commercial deployment, but showing that pretreatment, enzymatic hydrolysis and fermentation all work together to make ethanol from the wheat straw has given us the confidence to move from development to demonstration. We are working on the design now of an early small scale commercial plant, with 90 million litres capacity. It would take a couple of years to complete, and we would progressively integrate the Codexis technology.

We haven't made the final investment decision yet, but we think our combination has significant competitive advantages. What I also say is that it is entirely healthy that other folk out there are taking different routes. It's encouraging that other people are in the market, and it's particularly important when we are saying to governments that we may need help through the demonstration phase.

Why make investments in some of those competitors as well as in Iogen?

When it comes to feedstock, it matters what kind of land is used. The more marginal the land the better. So one feedstock that comes to mind is algae, although this is more suitable to biodiesel than bioethanol. We did a lot of due diligence on potential partners and made our choice. What we like about our partners in the Cellana joint venture with HR Biopetroleum is that they maintain the purity of their algal strains by preserving them in phototubes, but then they grow the algae rapidly in open ponds. It uses marginal land and seawater, and produces at least 15 times more oil per hectare than rape or palm oil.

What about moving beyond ethanol?

I think there will be a lot of ethanol. Sugar cane ethanol is more sustainable and will create a good well-to-wheels CO2 reduction. But if the sugar could one day be converted to hydrocarbons, that would make the job easier. I know that others are working on butanol, but we don't see that as a preferred route. We prefer the metal catalysis route of Virent Energy Systems.

Virent, of course, plans to use its catalysts to make renewable gasoline, diesel, and jet fuel. So are all of these technologies going to pan out?

We have to be very ruthless. Our biofuels activities are typically at the R&D stage, or in small scale pilots--a good way to think of them is that they are exploration ventures. With these ventures we take a milestone approach. If they pass the milestones, we carry on. If they don't, we stop. If we are very lucky, we will have more options that pass milestones than we can commercialize. Then we will sell some. But the pipeline has to have more in it than we can commercialize, because these advanced technologies are risky.

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The Green-Energy Mecca of Emeryville, California

One startup, Amyris, hopes to make fuels and feedstocks that are highly profitable even with $50-a-barrel oil

The drying up of venture capital for alternative-fuel projects ought to have been a death knell for Emeryville, Calif., a square-mile sliver of land near Silicon Valley that until recently advertised itself as a "green corridor" for biofuel businesses. But, while the talk of a biofuel boom to rival the tech boom across the bay now sounds outlandish, this city of 6,800 people so far seems to be weathering the recession and the drop in oil prices that are hurting other parts of the green-tech sector.

Emeryville has a history as a rollicking industrial hub, with meatpacking, steelmaking, and paint companies sharing the streets with brothels and gambling houses. The 1970s marked a low point, but the town was cleaned up and revived by the ensuing technology boom. Today, a single, 24-hour gambling house remains: the Oaks Card Club, situated across the street from Pixar Animation Studios. "The town has completely changed," says John Tibbets, who owns Oaks.

A Foundation Already in Place

The city's push to be a hub for biofuels isn't as contrived as it might appear. Biotech and pharmaceutical firms, including giants such as Roche and Novartis NVS, have had facilities in Emeryville for years, and they rely on some of the same processes used to make biofuels. Geoffrey Sears, who heads a real estate firm called Wareham Development, leases offices to many biotech labs, and his clients now include two large biofuels ventures, Amyris Biotechnologies and the federally funded Joint BioEnergy Institute (JBEI). Sears says the economic downturn has not hurt rentals in Emeryville. The biofuels labs have held firm, and "more and more money is flowing" into existing biotech and pharmaceutical companies. "Our occupancy is 97%. We are planning some new buildings," which should be ready by 2011, he says.

Kleiner Perkins Caufield & Byers and Sun Microsystems (JAVA) co-founder Vinod Khosla are among the principal investors in Amyris, a synthetic biology company that occupies a 90,000-square-foot laboratory in Emeryville. Jeri Hilleman, chief financial officer of the company, says Amyris is still pushing toward producing commercial volumes of biodiesel and chemicals in 2011 or 2012. The company is developing a way to re-engineer yeast to make biodiesel. As with all the alternative fuels, however, the biggest challenge has been competing on price in a world of relatively cheap oil. Amyris' yeast-based process, which once yielded the equivalent of liquid gold at $3,000 a barrel, can now churn out biodiesel that could go for about $100 a barrel, says Hilleman. The goal Amyris is shooting for by the end of this year is fuel and feedstock that could bring the company 30% gross profits even with oil at $50 a barrel. "We set out aggressive plans," Hilleman says.

Government Initiative

Upstairs from Amyris is JBEI, which locals call JayBay. The Energy Dept. is funding the institute, a 65,000-square-foot laboratory that hopes to produce an enzyme capable of breaking down cellulose in nonfood plants used as biofuel feedstocks. One idea is to produce butanol, a form of alcohol that could be mixed directly with gasoline. The lab employs 125 researchers, 35 of whom work directly on this "deconstruction" project. "If anything is to come out of this, we will need a lot of patience," concedes Harvey Blanch, JBEI's chief scientific and technology officer. His vice-president in charge of deconstruction, Blake Simmons, figures the lab may be "multiple decades" from its long-term goals. But Jay Keasling, the head of the lab, is a bit more optimistic. He sees a solution in as little as 15 years. "We have to deliver on the energy. The resources fortunately are in place," Keasling says.

President Barack Obama's alternative energy stimulus could yet trigger the biofuel rush that Emeryville seeks. Just next door to Emeryville, at the University of California, Berkeley, British oil giant BP BP is spending $500 million on a lab called the Energy Biosciences Institute. Emeryville residents would love to attract a few more companies of that size. And if not, there's always the Oaks Card Club. It's still the city's mainstay, says the owner, Tibbets: "I'm still Emeryville's biggest taxpayer."

LeVine is a correspondent in BusinessWeek's Washington bureau.

8. http://www.businessweek.com/blogs/personal_finance/archives/2009/04/biofuel.html?chan=magazine+channel_special+report

The Biofuel Bubble

Posted on April 15

By Joseph Weber
Investing in biofuels, as in most cutting-edge tech, can be treacherous. Ask anyone who snapped up stock in VeraSun Energy, a Sioux Falls (S.D.) company that briefly thrived as an ethanol titan. Investors paid up to 30 a share in mid-2006, only to see holdings vanish when the company filed for bankruptcy protection last fall amid plunging ethanol prices, bad bets on corn futures, and a credit crunch.

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The Biofuel Bubble
Now, with such giants as DuPont, BP, ­Weyerhaeuser, Chevron, Archer Daniels ­Midland, Deere, and Monsanto driving to develop successors to corn-based ethanol, the smartest–and safest—way to wager on alternative fuels may be to bypass startup companies in favor of old standards with a broad business base. These companies hope to churn out next-generation fuels in commercial quantities in three to five years at the earliest.

Even while its fortunes have declined with ethanol prices, ADM, the national leader in ethanol, has been working with Deere and Monsanto to turn cornfield waste (everything except the grain) into fuel. Separately, ADM plans to build mills in Brazil to process sugarcane into ethanol. A leader in biodiesel production in Europe, the Decatur (Ill.) agribusiness giant has also just teamed up with Canadian Bioenergy of North Vancouver, B.C., to investigate building a canola-based biodiesel plant in Alberta.

At about 27 a share, down from nearly 49 a year ago but up from less than 14 last fall, ADM stock may be worth a look, analysts say. Citing the company's brainpower, financial strength, and diversified grain-processing infrastructure, analyst Kenneth B. Zaslow of BMO Capital Markets suggests the market's short-term view may be discounting ADM's "unique ability not only to weather but also to thrive in a global economic slowdown."

Revenue at ADM and other companies will likely be boosted by government mandates that require an increasing percentage of biofuels be mixed into gasoline. Such rules, which let ­producers count on steadily rising ethanol sales, may have already been factored into the stocks' prices.

Like ADM, DuPont is seeking alternatives to ethanol made out of corn grains. With Danish sugarmaker Danisco, DuPont plans to open a pilot plant in Tennessee by yearend to use corncobs and switchgrass as raw materials for ethanol. Separately, DuPont, BP, and Associated British Foods are building a plant to derive ethanol from wheat, and the chemical company is working with BP to develop an alternative called biobutanol. Now under 27 a share, DuPont stock trades at around half its 52-week high. Even without biofuel breakthroughs, several analysts like DuPont's prospects. "DuPont was investing in this early and is one of the bellwethers in the industry," says Jefferies analyst Laurence Alexander.

Finally, Weyerhaeuser and Chevron are working to turn forest underbrush and switchgrass into ethanol. The forest-products company, which has access to 6.4 million acres of land in the U.S. and 15.2 million acres in Canada, wants to cultivate the fast-growing grass among its trees. Harvesting grass between trees is difficult, however—one of many hurdles that makes investing in biofuels a game only for the hardy and the patient.







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