Lynn Grooms
Lynn Grooms is an agricultural journalist living in Mt. Horeb, Wis. She watches biofuels industry trends and contributes articles on the subject to Farm Industry News and...more
A few weeks ago, I posted “Code Green: Making Renewables a Common American Purpose,” which touched on Thomas Friedman’s book Hot, Flat, and Crowded.
Here’s another quote from the book, “If you take only one thing away from this book, please take this: We are not going to regulate our way out of the problems of the Energy-Climate Era. We can only innovate our way out and the only way to do that is to mobilize the most effective and prolific system for transformational innovation and commercialization of new products ever created on the face of the earth—the U.S. marketplace.”
Friedman continues, “. . . We need 10,000 innovators, all collaborating with, and building upon, one another to produce all sorts of breakthroughs in abundant, clean, reliable, and cheap electrons and energy efficiency. And we need to create demand, huge demand—crazy, wild-off-the-charts demand—for existing clean power technologies, like wind and solar, in order to reduce the cost of these technologies and make them competitive with conventional fossil fuels—coal, oil, and natural gas.”
Improving Biodiesel Yields
A recent announcement between Verenium Corporation and Alfa Laval is an example of innovators building upon each other’s technologies. Verenium Corporation develops specialty enzymes and next-generation cellulosic ethanol; and Alfa Laval (as dairy producers well know) is a global provider of heat transfer, separation and fluid handling technologies.
These companies will now jointly market enzymatic degumming of vegetable oils using Verenium’s Purifine PLC enzyme and Alfa Laval’s engineering services and equipment. Purifine enzymatic degumming is designed to significantly increase yields in edible oil production. Verenium reports that use of this process also enhances yields of biodiesel from crude oil.
Under the terms of the agreement, Alfa Laval will be able to market Purifine enzymatic degumming packaged with its process engineering equipment and services to customers processing vegetable oils for edible and biodiesel use. In turn, Verenium will support Alfa Laval’s marketing efforts and recommend their engineering services to target customers.
“Together, our companies offer a comprehensive solution to increase efficiencies in edible oil and biodiesel production,” said Janet Roemer, Verenium’s executive vice president, Specialty Enzymes Business.
Corn Plus, Continued Innovation
And then there is Corn Plus, Winnebago, MN (www.cornplusethanol.com), no stranger to innovation. The Free Press - McClatchy-Tribune Information Services via COMTEX recently reported on the ethanol company’s proposal to use treated municipal wastewater rather than pure water from aquifers. This plan will help substantially reduce groundwater consumption.
Corn Plus also is working with EdeniQ, Visalia, CA (www.edeniq.com), which has developed a combination of mechanical and biological processes to increase ethanol yields from corn by more than 10%. In the March 2009 issue of the ethanol producer’s newsletter the Courier, Keith Kor, Corn Plus manager, reported that Corn Plus is working with EdeniQ to help bring its ethanol yield up to 2.82 undenatured gallons or 2.88 denatured gallons per bushel of corn. Corn Plus hopes to have preliminary results by the end of April or May.
Want to learn more about what an oil company thinks about biofuels? Shell, the multinational energy and petrochemical company, is hosting a Webchat on the subject of biofuels on Tuesday, April 7. To register, visit www.shelldialogues.com/biofuels.
The Webchat will also allow you to pose questions to Graeme Sweeney, Shell’s executive vice president, Future Fuels and CO2. I plan on listening. If you listen to the Webchat, please write me with your thoughts.
The U.S. Bankruptcy Court has affirmed the sale of substantially all of VeraSun Energy Corporation’s assets. This after VeraSun selected Valero Renewable Fuels as the successful bidder for its assets at auction on Tuesday, March 17, in Wilmington, DE.
Valero Renewable Fuels is a subsidiary of Valero Energy Corporation, North America’s largest petroleum refiner and marketer based in San Antonio, TX. Valero agreed to purchase the VSE Group facilities for a base purchase price of $350 million. The VSE Group consists of production facilities in Aurora, SD; Charles City, Fort Dodge and Hartley, IA; Welcome, MN; and a development site in Reynolds, IN.
Valero also agreed to purchase the US BioEnergy facility in Albert City, IA for $72 million and the ASA facility in Albion, NE, plus working capital and other certain adjustments for $55 million. The sales are expected to close during the next two to six weeks.
Successful credit bids for VeraSun’s remaining facilities were submitted by the following secured lenders: Dougherty Funding, LLC ($93 million for the Marion, SD production facility); a group of lenders led by AgStar Financial Services ($324 million for the remaining “US BioEnergy Group,” including ethanol production facilities in Central City and Ord, NE.; Dyersville, IA; Hankinson, ND; Janesville, MN; and Woodbury, MI); and a group of lenders led by West LB AG ($99 million for the remaining “ASA Group” facilities, consisting of production facilities in Bloomingburg, OH and Linden, IN). For more information, please visit www.verasun.com.
“This is the first significant investment by the oil industry in the ethanol industry,” said Todd Alexander, partner, Chadbourne & Parke, LLP, New York, which represents developers, investors and lenders participating in U.S. and international biofuels financings. “People have been waiting to see what role the oil industry wanted to play in the ethanol complex.”
Successful Bid a Benchmark
Prior to this auction, there had been a wide discrepancy between the price at which sellers were willing to sell assets and the price at which buyers were willing to buy. The VeraSun auction has helped set a benchmark price going forward, Alexander suggested.
The purchase of VeraSun’s assets should be good for corn growers who now have a new ethanol feedstock buyer with a strong balance sheet, he added.
Turning up the action of the Glossy 15 gene could make some corn hybrids good energy crops in the future, according to a University of Illinois report.
The gene was originally described for its role in giving corn seedlings a waxy coating that acts like a sun screen for the young plant. Studies also have shown that the main function of Glossy15 is to slow down shoot maturation. “What happens is that you get bigger plants, possibly because they’re more sensitive to the longer days of summer. We put a corn gene back in the corn and increased its activity. So, it makes the plant slow down and gets much bigger at the end of the season,” says Stephen Moose, University of Illinois plant geneticist.
The ears of corn with the Glossy 15 gene have fewer seeds compared to a normal corn plant and could be a good feed for livestock. Although there is less grain, there is more sugar in the stalks. This type of corn plant may fit the grass-fed beef standard, Moose says.
The energy to make the seed goes into the stalk and leaves instead. “We had been working with this gene for awhile. We thought there would be more wax on the leaves and there was. But we also got this other benefit.”
Moose tested his hypothesis with other corn lines and found that any corn variety can be made bigger with the gene, even in one cross.
An advantage to growing sugar corn for biomass rather than switchgrass or miscanthus is that it is an annual. Moose says that if it were to attract a pest or develop a disease, farmers could rotate to a different crop the next year. He adds that sugar corn might make a good transition crop.
An Alternative Silage
“We think it might take off as a livestock feed, because it’s immediate,” the geneticist says. “This would be useful for on-farm feeding. A farmer who has 50 steers could grow this and use the corn as feed and sell the stalks and sugar. It could be an alternative silage because it has a longer harvest window than regular silage.”
The sugar corn plant would need to get government approval before it could be commercialized, but Moose says that this is about as safe a gene as you can get.
In other news at the University of Illinois, the university’s Energy Biosciences Institutes (EBI) Biofuels Law and Regulation Program will host a conference focused on the legal and regulatory challenges facing biofuels infrastructure.
“Incentivizing Second-Generation Biofuels” will be held at the University of Illinois I-Hotel in Champaign, Illinois, April 24-25.
The conference will address the Obama Administration’s plans for second-generation biofuels; federal and state efforts to establish incentive schemes (including those contained in the 2008 Farm Bill and the Energy Independence and Security Act of 2007); the Brazilian experience at building an ethanol infrastructure and lessons that the U.S. could apply in building a similar infrastructure; case studies of the legal considerations in infrastructure development; and climate initiatives that may spur commercialization of biofuels.
The second day focuses on sustainability standards for biofuels, including: The Roundtable on Sustainable Biofuels “Version Zero;” incorporating indirect land use and lifecycle analysis into the U.S. Renewable Fuels Standard; California’s Low Carbon Fuel Standard; and more.
Each session will offer question, answer and brainstorming opportunities with experts in biofuels law and regulation. Attendees will represent a wide variety of law and regulatory fields encompassing government, academia, industry and non-governmental organizations.
Biofuel Survival Strategies for a Challenging Market” was the title of a conference and Webinar hosted this week by Chadbourne & Parke, LLP, New York, which represents developers, investors and lenders participating in U.S. and international biofuels financings. The event featured perspectives from lenders and investors in the ethanol industry.
Asked what the ethanol industry will look like in the next two years, the experts agreed that consolidation will continue. One lender predicted that some oil companies will enter the industry. He added that debt and equity investors might shy away from future second generation ethanol projects because of losses incurred in the corn ethanol industry in the last several months.
However, an investment banker commented that second generation ethanol producers could potentially enjoy a $1.00 per gallon tax credit which would boost assets on both debt and equity sides.
Another panelist pointed to current political discussions about carbon reduction policies and that because cellulosic ethanol has a much lower carbon footprint than gasoline, the ethanol industry could have good market potential ahead. But, until unstable capital markets are restored to health, it would be difficult to get those plants built, he added.
Todd Alexander, partner, Chadbourne & Parke, indicated optimism about the long-term health of the ethanol industry. He estimated that there is about 13 billion gallons of annual production capacity in the U.S. and that this year, the Renewable Fuel Standard (RFS) mandates a demand of just 11.1 billion gallons. “We estimate that 20% of existing production capacity is off line either as the result of negative margins or insolvencies. That should bring the market into equilibrium,” Alexander said. “By 2012, we will have 15.2 billion gallons as a mandate, which should help create some stability in the industry.”
With the current ethanol crush spread (the difference between ethanol revenues and corn prices), however, a lot of plants are now operating in negative territory and many of the plants still operating are doing so with only slightly positive margins, Alexander said.
In 2006 when margins were good, capital was flowing easily into the market. The private equity industry looked for ways to capitalize on that high crush spread. Two years later, with rising corn prices and extensive build out of the ethanol industry, that was no longer the case.
Alexander also showed a chart illustrating the past year (March 2008-February 2009) in publicly-traded ethanol stocks. “This gives you an indication of what the investment community thinks of the equity values of the publicly-traded ethanol stocks today,” he said.
Mark Habib, associate with Standard & Poor’s (S&P) Corporate and Government Ratings, followed with a discussion of the ratings criteria used for valuing secured debt in today’s ethanol industry. S&P considers external and internal factors when rating ethanol stocks, he said. External factors are largely beyond the producer’s control. They include crush spreads which drive cash flow; and regulatory support.
In addition to low margins, the industry still relies quite a bit on regulatory support, such as the RFS and the Volumetric Ethanol Excise Tax Credit (VEETC). Therefore S&P assigns a high degree of risk to the sector, Habib said. The VEETC has been reduced to $.45 per gallon and both the VEETC and the import tariff will be subject to renewal risk within the next two years. There also have been some challenges to the RFS and it is subject to policy objectives, he noted.
Internal factors considered in ratings include fixed costs (debt service obligations and fixed operating costs); plant efficiency; liquidity; construction; hedging and commodity basis.
Liquidity can be managed, but is subject to a variety of risks, Habib said. Credit markets may tighten when greater liquidity is most needed as was the case with VeraSun Energy, which filed for Chapter 11 last fall.
Some companies may turn to borrowing base revolvers for help, but when commodity market prices are low like they are now, this may be of diminished use, Habib said.
Ethanol producers who are mitigating risk through engineering, procurement, construction (EPC) contracts with strong liquidated damages provisions, creditworthy counterparties, active management, contingency, and so on carry less construction risk.
Today, crush spread margins have compressed to historical lows and future margins remain unpredictable due to volatile commodity markets, Habib said. Liquidity will be critical until margins improve.
“Prices have moved to a production cost determination rather than substitution price correlation [correlation with corn rather than gasoline],” Habib said. “This creates a commodity dynamic where less efficient producers are likely to exit until production falls in line with demand set by the RFS mandate and discretionary blending.”
The exit of uneconomic producers could return the ethanol market to equilibrium, Habib said, noting that remaining suppliers could benefit from improved pricing. On the other hand, some companies could purchase assets out of a bankruptcy and effectively “leapfrog existing producers in financial competitiveness” if the debt burden can be removed and other financials cleaned up.
Farmers will play a key role in the future of the bio-economy. Biofuels Lines will present information to help farmers learn more about this new arena. Please pose questions and ideas by registering. Comments must be approved before they appear on the blog.
