Green Tech

When it comes to next-generation biofuels, it's a competition for both technology and capital.

Range Fuels expanded its previously announced series B funding from $100 million to $166 million, according to reports. Private Equity Hub on Monday cited a regulatory filing, saying Morgan Stanley Capital Group joined the round. VentureBeat reported the expansion last week.

The money will be used to build the first phase of its ethanol plant in Soperton, Ga., which will use forestry waste as a feedstock. The plan is to complete a 20 million gallon-per-year plant next year that uses a gasification process.

There's growing awareness of the problems associated with corn-based ethanol, which research shows does not significantly reduce greenhouse gas emissions compared to gasoline. The high demand for ethanol, driven by government mandates, is also being blamed as one reason for higher food prices.

Cellulosic ethanol from wood chips, grasses, or agriculture waste is considered a better alternative than corn, but production has not yet been done on a commercial scale.

With a planned plant for 2009, Range Fuels will be one of the first providers in operation.

Other companies on the hunt to make cellulosic ethanol on a large scale include Coskata, which signed a deal with General Motors and intends to have a pilot plant running next year. Coskata uses a combination of gasification and microbe processing to convert a range of carbon sources to ethanol.

GM last week said it has also invested in Mascoma, a company using a third approach: genetic manipulation of bacteria optimized for breaking down sugars and fermentation.

Nearly every cellulosic ethanol company claims it will be able to produce fuel at $1 or less a gallon in a few years. William Roe, CEO of Coskata, in a meeting on Monday explained how his Warrenville, Ill., company will do it.

It's one of the more interesting processes out there, because it combines both biological (i.e., microbes) and thermochemical (heat and chemicals) processing. Menlo Park, Calif.-based ZeaChem is also taking a mixed approach, but it combines thermochemical and biological processes in a different manner. Most other companies are using primarily chemical or biological processes. We don't know who will win, but the mixed approach on paper does seem to have advantages.

Here are the highlights from the meeting with Roe:

• First, the company can use a wide variety of feedstocks for making fuel: wood chips, weeds and non-food crops like miscanthus, human waste, and carbon-heavy garbage (such as tires). Biomass, ideally easy-to-grow crops that don't require much water, will likely be the primary feedstock. The ability to exploit various feedstocks reduces exposure to crop failures or shortages. Coskata, which has received an investment from General Motors, also makes fuel from the lignin in biomass. Some companies making ethanol from strictly biological processes can't use lignin to make fuel.

"You can imagine biorefineries in every single state. This is an enormously efficient process," Roe said. "We don't need 'eurekas' anymore. We think it comes down to execution."

Conceivably, Coskata could even produce fuel from the carbon monoxide from steel mills. If you could capture all of the carbon monoxide that comes out of mills worldwide, you could make 50 billion gallons of fuel a year, or close to a third of the U.S. annual consumption of fuel.

• Handling all of these different feedstocks is actually a little simpler than it looks from the outside. The first stage in Coskata's process revolves around converting the feedstocks into synthetic gases. The different feedstocks can be segregated and processed differently. Waste can be converted to gas with plasma technology, for instance, while plant matter can be gasified with less energy-intensive methods. This allows the company to optimize on different gasification processes. It also reduces variability in processing.

"There's actually a lot of innovation going on in gasification," Roe said.

• Coskata has happy microbes. Once the syngas is produced, it is fed to microbes that convert it to liquid fuels. The microbes live in large colonies that collect on membranes. Fuel is produced when the gas passes through the membrane. Part of the company's intellectual property revolves around coming up with a way to let the microbes live as colonies and form slimes. Yum. Some other companies swirl their microbes in water and keep them in perpetual motion. Letting them live in colonies allows more of the gas to be converted to fuel.

The company is experimenting with five microbes and is particularly fond of two.

• Less distillation. Microbes can create a fluid that contains a small percentage of alcohol or so by volume but can't get it to 99 percent purity on their own. That's why distilled spirits are stronger than beer.

Rather than fully distill the fluid, Coskata will distill to about 50 percent and then employ a membrane from Membrane Technology Research in Menlo Park to purify it the rest of the way. This cuts processing costs and energy. Coskata actually doesn't need the membrane to get to $1 a gallon. "This is gravy," Roe said.

• Coskata doesn't want to make fuel. Unlike several other companies (such as Range Fuels and Imperium Renewables) Coskata doesn't want to build and operate megaplants. It will set up demonstration plants and some moderate-sized production plants, but it primarily wants to earn revenue and profits as time goes on from licensing the technology to big companies. The company has talked to large forestry concerns, petroleum producers, and chemical manufacturers. The interesting part about this approach is that it leaves the onerous challenge of building billion-dollar plus facilities to those who have been doing it for decades. Start-ups just aren't geared for that.

Soon, Coskata may make an announcement with another partner. Roe wouldn't give us names, but Chevron has cut a number of development deals in this area recently, including one with Solazyme, which has come up with a way to ferment algae for biodiesel.

Coskata will have a formal coming-out party for its 40,000 gallons a year demonstration facility. Construction is already under way. Roe wouldn't tell us what state it is in, but will announce it April 24 with the governor of the mystery state.

Coskata's process and fuel is relatively clean, he added. Overall, it cuts greenhouse gas emissions by 90 percent, well-to-wheel (or stump-to-pump, if you prefer) compared with gas. It also uses less water than most ethanol processes, which rely on food crops.

To clarify, the $1 a gallon figure is how much the fuel will cost to produce. It includes the cost of the feedstock, the cost of the energy required to convert raw materials into fuel, and labor. It does not include paying off the capital of the facilities, taxes, retail mark-ups, or other expenses that can be added as the fuel wends its way through distribution. On the other hand, the $1 a gallon figure does not include subsidies, which lower the cost to consumers. (Ultimately, adding in all these factors can raise the price to around $1.50 a gallon, Zeachem CEO James Imbler estimated in a recent interview.)

Still, at $1 a gallon, that's half the equivalent costs for gasoline, which is around $1.95 to $2.00 a gallon.

It's March Money Madness in clean tech these days.

Range Fuels, which says it can produce cellulosic ethanol out of wood scraps, has raised $100 million to build a 100-million-gallon-a-year plant in Georgia, according to VentureWire, which posted the news first. Investors in the round include Khosla Ventures (a previous investor) and an unnamed energy company.

Earlier, the company received grants from the U.S. Department of Energy worth up to $76 million, as well as other venture funds.

CEO Mitch Mandich, a former Apple guy, told us last year that the plant would cost around $150 million. Unlike Web 2.0 start-ups, energy companies require a lot of capital to get off the ground. The company is trying to get the plant running this year to the point where it can produce 20 million gallons a year.

Range Fuels uses thermochemical processes to convert forestry wastes into ethanol. The alcohol can be mixed into gas, or be turned into E85, which is 85 percent ethanol. There are only a few cars on the road that can run on E85 and only about 1,400 stations in the U.S. that sell it, but both numbers are expected to climb.

The process devised by the company is similar to the Fischer-Tropsch process for converting coal to liquids. First, the solid is turned into a synthetic gas, which then gets combined with other gases and converted to a liquid. Fischer-Tropsch, invented in 1920, can be somewhat expensive. Countries invested in coal-to-liquids when they couldn't get fuel otherwise. The Third Reich was a fan, and so was the Apartheid regime of South Africa. (You can also call it the Hans and Franz process after Franz Fischer and Hans Tropsch.)

But with oil prices climbing, synthetic liquid fuels are becoming more attractive. Many cellulosic companies say they can make fuel and sell it for $1 to $1.50 a gallon once it's in mass production. Efficiency, however, is paramount in this market, and companies are racing to see who can get the most fuel out of a ton of scraps. ZeaChem, a rival, says it can get 160 gallons per ton. Others have claimed more than 100 gallons.

While most of the cellulosic companies are start-ups, an influx of cash and interest is coming in from traditional fuel vendors. Chevron and Weyerhauser, for instance, have created a biofuel company. Although big companies can threaten start-ups, partnerships are inevitable: building large-scale refineries takes more time, capital, and distribution heft than most start-ups can muster.

Range Fuels isn't the only outfit getting money these days. Coskata, which wants to make cellulosic ethanol out of garbage, got $19.5 million. And in the solar world, rumors swirl that Nanosolar and Solyndra are trying to raise money for factories and telling investors they are worth $2 billion and $1 billion respectively. Neither company is in mass production.

Start-up Range Fuels on Tuesday will host a groundbreaking ceremony in Soperton, Ga., where the company will build a plant that will make the fuel ethanol from wood chips.

If successful, the company claims it will be the first to build a commercial cellulosic ethanol plant, using a feedstock that's cleaner than corn--the primary source of ethanol in the U.S. today.

Green tech venture capitalist Vinod Khosla is one the investors in Range Fuels and a high-profile advocate of ethanol and other biofuels.

The numbers behind making ethanol from wood waste, rather than corn, are compelling, he says: 75 percent less carbon emissions and 75 percent less water used, compared to existing processes.

And it's cost-competitive with gasoline today. Of course, with oil around $95 per barrel, that's an easier target to hit today than ever.

Vinod Khosla

In an interview, Khosla talked about the importance of making ethanol from the cellulose, or plant fiber, rather than corn and why he thinks the technology will be available before most people expect.

Why is this Range Fuels plant (which is receiving Department of Energy funding) significant?
Khosla: This is the first commercial cellulosic plant. There have been lots of pilots and demos--none of them cost-effective. This should be the first commercial plant that will actually be competitive in the marketplace by the time it's finished. Also, the feedstock is wood chips. That's a very scalable feedstock--you can get a few hundreds of millions of tons of that. In fact, all the paper mills that use this kind of stuff are going out of business in the U.S. and this would replace those jobs being lost and the rural income being lost.

And it's a byproduct of forestry. All the timber operations in the Southeast have lots of the stuff left on the floor as waste. So that's the first target. We could produce twice as much cellulosic ethanol from the wood waste in the Southeast as all corn ethanol produced last year on a yearly basis.

People have been saying that cellulosic ethanol is still many years away. But you're talking about having 20 million gallons a year at the end of next year and 120 million gallons in 2009--faster than what many people expected.
Khosla: Why this is important is because this will change people's assumptions about our sources of energy and whether we can compete with oil. This is the beginning of the change of our assumptions. The rest of the world has been skeptical while the entrepreneurs have been working hard at proving otherwise.

I think in the tech world we see this all the time--nobody believes this can be done until after it's done. Look, nobody believed that long-distance phone calls would be essentially free until they were free. Nobody believed VoIP (voice over Internet Protocol) would work until VoIP actually worked.

The most cost-effective technology today is wood. I hear the same argument all the time--hundreds of billions of dollars (are) invested in (oil and gas) infrastructure. Well, too bad. If it becomes not competitive, then it's not competitive. At the current price of oil, this will compete unsubsidized in the marketplace.

What kind of prices can we expect from this operation?
Khosla: Well today we are not talking about exact prices, but the fact is that with $95 per gallon of oil, it's very easy to be market-competitive with oil from a consumer's point of view.

People are very bullish on biofuels, but one aspect I don't hear addressed often is the transmission of ethanol. Since you can't use the existing pipeline infrastructure, how do you get around that?
Khosla: In Brazil, they're using pipelines (for ethanol). The oil companies like to spread the notion that we can't use pipelines but the great thing about cellulosic is that it's not tied to the Midwest. See, the transportation problem is because all the corn is in the Midwest and the ethanol is being shipped from one location. All the transportation is in the Midwest and all the usage is on the coasts. The fact is cellulosic ethanol can be produced along the coast in the Southeast, Northwest, in the Northeast. So you will not have a transportation issue. At least not anywhere anyway near the same kind of issue (as corn-based ethanol).

Is there any advantage to the thermo-chemical process that Range Fuels is using, versus the enzymatic process that Mascoma (another cellulosic ethanol company Khosla has invested in) is pursuing?
Khosla: Eventually I believe (there will be) multiple processes. If they get to $1.25 per gallon or below (cost of production), you will have essentially unlimited market available to them. Unlimited from a start-up's point of view because that's how you can compete with gasoline. So that's the key. Multiple processes will eventually get there.

So your strategy from an investor's point of view is to bet on multiple technologies--both Mascoma's and Range's processes?
Khosla: Mascoma should be able to reach similar cost points eventually. Like I like to say, not all oil wells produce oil at the same price. Saudi Arabian oil costs $5 or $10 a barrel (to extract). There are oil wells in the North Sea that cost $40 a barrel. And they both find a market because oil prices are $95. All I'm saying is that any process that can produce ethanol below $1.25 a gallon production costs should be able to compete very effectively in the marketplace and even if oil declines dramatically. Then you get into issues like water use and feedstocks.

When you hear about the Southeast United States now, you hear about the drought. How does that play into this plant? Is it a factor or a long-term concern?
Khosla: Well, I think you are going to have a lot more droughts if we don't do something about carbon emissions. The question you should be asking is why do we have those droughts. Are we going to have a lot more droughts if we don't have carbon emissions controls? Almost certainly--that's what the experts say.

My question isn't so much about the science but as a biofuels investor.
Khosla: I don't think biomass feedstock availability is going to be a big issue, if you're looking for my bottom line.

In this case, it can withstand droughts for several years and still be commercially viable?
Khosla: Yeah. Biomass feedstocks like this can grow in lots of different climates. Texas A&M has what they call a freakishly high sorghum which produces 20 feet of growth in the year on very little water...We can also move to where the feedstock is.

The other issue in the news is the glut of ethanol and the downward effect on prices. What's your view on the current situation?
Khosla: My view is that the current situation is a short-term aberration. Just in the last week and a half, prices have gone up 20 cents a gallon. So prices move up and down. Whether you take the low price or the high price in the last year, you should be able to compete as an ethanol provider.

There are a number of cellulosic ethanol plants being funded or on the drawing boards. What's going to determine which ones succeed or don't?
Khosla: The quality of the management team, quality of investors, the ability to do ongoing funding, planning, execution. There's a lot more to start-ups than technology, especially in an area as complicated as biofuels. There are lots of technology start-ups we know from Silicon Valley which have the technology that don't make it.