Perspective: Ethanol isn't a magic word

The clean-technology revolution has barely begun, but there are already significant lessons to be learned--lessons that can help investors maximize their returns.

One of the biggest lessons comes from the ethanol experience. Smart venture capitalists saw the promise and potential of this corn-based fuel early, and they invested shrewdly and successfully.

But success in ethanol has become a two-edged sword. Strong valuations and the prospect of robust returns--yes, for sure; but also big demand for corn and a commodity price run-up that has made it economically difficult for more players to enter the ethanol market and more deals to get done--especially with guaranteed back-end output contracts on the horizon.

Before we do clean-technology deals, it's essential that we gain reasonable access to supply inputs and lock-in prices.

There's an important takeaway here for investors; the moral of the sustainable-energy story, if you will. Simply put, before we do clean-technology deals, it's essential that we gain reasonable access to supply inputs and lock-in prices.

Another insight from the ethanol experience is that we need to start broadening our thinking when it comes to alternative-energy inputs.

Feed stocks like corn have multiple outputs and are, therefore, price-sensitive--as we've learned. But garbage or sewage, for example, are plentiful, must be disposed of and have limited economic outputs. The bottom line is that they may prove to be less risky investments than corn-based ethanol. Algae, which can be grown quickly and more cost-effectively than corn, palm or canola, might also offer less risk.

There are several companies that already understand this.

GreenFuel Technologies, for example, is a pioneer in the development of algae bioreactor technology that converts the carbon dioxide in smokestack gases into clean, renewable biofuels.

GreenShift uses proprietary technologies--including innovative desiccation, process intensification, gasification, catalytic and carbon capture--to enable the refining of many forms of biomass into clean fuels.

A third company worth considering is XL Renewables, which is developing a $260 million biorefinery on 2,700 acres about 100 miles west of Phoenix. The biorefinery will efficiently and cost-effectively produce high-grade ethanol, biodiesel, milk and dairy products, as well as animal feed. XL Renewables has also developed proprietary technology to produce large quantities of algae biomass for use as a feedstock for ethanol and biodiesel production.

I'm convinced that when the history of the clean-technology revolution is ultimately written, the investing heroes--the players who made money and a difference--will be the ones who controlled the raw materials on a sustained basis. Let me say it another way: in real estate, the linchpin for financial success is location, location, location; in sustainable energy, it's inputs, inputs, inputs.

Biography
Michael Butler is the chief executive of Cascadia Capital. Neither Butler nor his firm have any interests in the companies mentioned in this column.

More Perspectives

[onlyauser]

Let's just turn all our food crops to fuel!

We can learn to drink fuel instead of eating food.

Something I have always hoped for.

[jscott418]

Narrow minded business practices

The Ethanol dream has been played out before. In the late 70's
they tried their hand at making Ethanol the next fuel source.
But when oil became cheap again ethanol died. Now I am pretty
sure oil prices are going to stay high, but so is corn if we
continue on this path. We already use a lot of corn for consumer
products.
Diverting some of it to produce ethanol is fine. But what
happens the years we do not have bumper yields? Are we going
to pay $8 for a box of cereal so we can drive our SUV's? Let's not
forget that corn is traded much like oil. So if demand keeps
going up. So will the corn market. Is this really a good solution?

[alflanagan]

Government Subsidies

Would corn even be able to compete with $80 oil if it weren't subsidized? What I've heard is that US corn ethanol is about 50 cents cheaper due to subsidies. Meanwhile, South American sugar ethanol has a 50 cent tariff on it. How are me supposed to make rational investments when the market is distorted like that? Or a rational alternative energy policy?

[MadLyb]

Ethanol is one big boondoggle...

We are not saving the planet with corn based ethanol.

Instead, Washington finally came up with a way to subsidize agriculture that didn't land them in hot water with the WTO.

Huge waste of time and money.

[Manhattan2]

We told you so! So did others for years.

When your ready for real solutions that take land use into consideration visit SolarTransfer.com . We need to capture the most amount of the suns energy for the lowest cost and lowest effect on farmable lands. We have that solution. Email us if you want to learn more. It is time science leads the way and not venture capitalists jumping on new ideas like they are at a craps table in Vegas. Sensible Engineering will be the solution. And again we told you so!

[Commander_Spock]

"ETHANOL" is indeed "a-magic-word"...

... at least it is to the American farmers who have struggled to earn their keep for years; and, it is quite apparently so for the Brazilians who have come up with their own E85 (85% ETHANOL/15% PETROLEUM. The magic in the word it provides that "safety net" with regards to energy security for the nation/s in a time of global energy crises (in cases of disruption in the Middle-Eastern supplies until the ships begin to sail in from SOUTH-OF-THE-BORDER (along with all of the other alternative energy supplies - hydro-electric, solar, hydrogen....):

http://www.cgxenergy.ca/offshore.html

http://www.cgxenergy.ca/basinPotential.html

http://www.cgxenergy.ca/News_Sep27_2007.html

The "magic-word" then, when the dark clouds appeared must certainly have been "ETHANOL" - At least for the BRAZILIANS. Think the "housing market crises" cannot be beaten - think again!

[Commander_Spock]

"Paradigm Shift: Moving America Toward Alternative Fuels"!

Commander_Spock and Crew respectfully disagree with CNET NEWS' MR. Michael Butler that "Ethanol-isn't-a-magic-word"; and, please read the below attached as to why.

"July, 2007"

"The United States has become critically dependent on oil as a transportation fuel. This situation is exacerbated by our use of 21 million barrels per day and our consumption of almost 25% of the world?s annual oil production.

This oil dependence presents strategic challenges that affect our energy security and our national security, and extends far beyond consumer frustration over skyrocketing prices at the gas pump.

We spend billions of dollars importing 65% of our total oil consumption1 from some of the most politically unstable regions of the world, making us vulnerable to events beyond our control. Any disruption to the oil supply, such as an attack on a major pipeline, could cause a swift upward spike in the price of crude and create economic turmoil on a global scale.

Our transportation sector is almost completely reliant on gasoline. America?s cars, trucks and buses spew toxic greenhouse gas emissions, soot and smog into the air we breathe and account for 27% of U.S. global warming pollution.2

What?s a global superpower to do? This issue of Perspective looks at the forces transforming our oil-dependent economy into one based on cleaner-burning, more environmentally-friendly renewable fuels, and identifies how U.S. companies can prepare and capitalize".

http://www.chase.com/ccp/index.jsp?pg_name=ccpmapp/commercial/resource_center/page/perspective_alternativefuels

If this statement is coming from a bank such as Chase logo then they have to know because they are in the "trenches" of the alternative energy battlefields!

[savagesteve13]

"Alternative Fuels" just red herrings

They are designed to keep the industry from embracing battery technology. Lets face it, we will be driving electric cars, we can't avoid it. The industry however is using delaying tactics by prodding the government into funding fuel sources that they know don't work and are too expensive. The big one now is fuel cells. Unless you have $1,000,000 for a car then don't expect one to be parked in your driveway in your lifetime. The purpose is to keep us on gasoline 100 more years, not find a clean alternative. This is a silent war between the liquid fuels industry and the coal and nuclear industries, and right now the 2nd set of guys are losing badly. They can't even get rights to speak at advocacy meetings because its all run by oil executives and their purchased senators and congressmen.

[Quemannn]

Traffic jam is an event horizon for Green Tech

It is admitted that renewable energy will take some time until it is economically viable, justifyng its net gain. VC firms have jumped on bandwagon of green tech, lobbying Federal agencies. The core of the issue is not what kind of fuel we may be using in the future, but which fuel will be most economic. So far as the economic feasibility is concerned, there is a blind spot: traffic congestion. What is causing traffic surges, snarls, and congestion? It is the collective mindset of motorists on the road. Even the eclectic mix of the best fuel-efficient vehicles won't be a solution to traffic congestion. The cheapest fuel won't be a solution to traffic congestion, which has deleterious effects on our economy and living in the decades or centuries to come. Synergizing green tech and "beat traffic jam" will be an optimal solution since traffic congestion will remain an event horizon for green tech, sucking up all the energy savings earned through renewable fuels and hybrid engines.

[Airshipp]

The article makes it seems like the corn shortage was some sort of economic hiccup. However, at the risk of sounding alarmist I believe it is time to realize that we are living in a world that may very soon run out of food.

Fossil fuels are a non-renewable resource. More than sounding scary this means that traditional structures of supply and demand do not really APPLY. Supply cannot compete with demand indefinitely, as we are beginning to see. A similar problem is the one that agriculture faces: there is only so much earth, and the population grows exponentially. Very soon, we are going to run up against the wall in that while demand will rise indefinitely, the supply is ultimately definite.

Moreover, calling any combustible "clean" or "green" is both misleading and irresponsible. These fuels still emit greenhouse gases. Simply emitting less is a halfway solution we no longer have the luxury of resorting to.

Finally, it is again irresponsible to advance the belief that any concern other than a sharp decrease in emissions, if not an outright cessation, is foremost, or even moderately important when discussing fuel economy. All other concerns are advanced to protect the comfort or greed of what ultimately constitutes a minority. Stopgap, ultimately useless short-term solutions such as ethanol or biodiesel are merely wasting time that all reputable science says we ran out of years ago