By Jerilyn Klein Bier, Financial Advisor (FA Online):
Biofuels buzz has gotten louder in recent months.
The U.S. Departments of Agriculture, Energy and Defense (through the Navy) announced a three-year $510 million joint investment to support the development of drop-in biofuels for aviation and marine applications. The USDA pledged $136 million to support development of advanced biofuels made from non-food crops. Many idled biodiesel plants are humming again with the return of a federal tax credit, and several European airlines have fueled commercial flights with biodiesel.
A number of biofuel-related IPOs have also been launched over the past 20 months including Solazyme, KiOR, Gevo, Amyris and Codexis. A handful of others are in the IPO queue, says Jim Lane, editor and publisher of Biofuels Digest, a Web site and daily online newsletter.
“The fields to wheels universe is big,” says Lane, who estimates that in addition to large and small public players, some 1,200 private companies are also doing some sort of bio-energy work.
But do biofuels carry hope or just hype for a cleaner, greener environment? How far out are we from seeing them used on a large-scale basis? And what opportunities are available for investors in this volatile sector? (Solazyme, Gevo and Amyris were trading approximately 55% to 72% below their 52-week highs as of early November.)
First-generation biofuels, such as ethanol made from corn and sugarcane and biodiesel from palm oil, have had their share of skeptics. “The real problem is with the food-versus-fuel question. How do we feed 9 billion people by 2050?” asks Ellen Kennedy, a senior sustainability analyst with Calvert Investments.
It’s not just the socially responsible investing community that’s upset with the upward pressure corn-based ethanol production has exerted on corn prices, demand for cropland, the cost of animal feed, and, ultimately, the prices of other farm commodities. Roughly 40% of this year’s U.S. corn crop will be used to make ethanol and its byproducts, estimates the USDA.
Food concerns also extend to palm oil, which Kennedy notes is a staple in the Asian diet and is being used as a substitute for trans fats. She’s concerned, too, about the life cycle effects related to biofuels. For example, atrazine, a pesticide commonly used in corn production, has been found in Midwest drinking water supplies.
Ben Caldecott is the head of policy for London-based Climate Change Capital Ltd., an investment manager and advisory group. The firm seeks investment opportunities in companies that will emerge and thrive as the world economy accommodates lower carbon footprints. Caldecott worries about distortion in food markets and destruction of tropical forests for palm oil production. “This is the scandal of our age. How’s that going to save the planet?” he asks. (Kennedy notes that palm oil certified by the multi-stakeholder Roundtable on Sustainable Palm Oil offers greater environmental and human rights assurances.)
“Overall, [current commercial biofuels] have been a negative in terms of climate change,” says Jonathan Naimon, the founder and managing partner of Light Green Advisors (LGA), a Seattle-based asset manager focusing on environmental sustainability investing. Producing corn-based ethanol can require more fossil energy than the energy yielded by ethanol, according to studies he cited from Cornell and MIT.
A rash of industry bankruptcies, including leaders Pacific Ethanol, VeraSun Energy and Imperium Renewables, also makes Naimon cautious. The bankruptcies highlight the industry’s vulnerability to such moving targets as feedstock prices, subsidies and tariffs.
Meanwhile, investors are looking at second- and third-generation biofuels made from feedstocks that can be developed on marginal land and won’t disrupt food markets. Such fuels include cellulosic (woody) plants and algae, and they are raising curiosity and cautious enthusiasm.
Over the next two years, Lane expects biodiesel and renewable jet fuels will receive increased attention and many companies will launch waste-to-energy initiatives (particularly with municipal solid waste). Within three to five years, he anticipates the greater use of wood biomass, sugarcane and jatropha in biofuels. By the end of the decade, he expects a boom in algal feedstocks, an area that’s received a huge infusion of venture capital the last five years.
“The biofuel space has incredible developments and lots of different opportunities,” says Caldecott, whose firm has funded a number of biomass projects in India and China. In India, it’s building cogeneration plants fired by waste sugarcane biomass that will boost energy production and help community members.
Caldecott is under no illusion that biofuels will solve the world’s energy and climate change problems. There’s only so much that can be produced and not nearly enough to adequately accommodate road transportation. But he does see sustainable, advanced biofuels as a bridging technology that can make a big difference in key areas where they can be dropped into existing engines-especially aviation.
Sustainable bio-jet fuels are currently the only viable option for significantly reducing aircraft emissions without canceling flights, says Caldecott, who co-authored a research report on promoting their development and commercialization while head of the Environment & Energy Unit at Policy Exchange, a large British think tank. Unlike cars, aircraft can’t run on hydrogen or batteries. Thus, biofuels can significantly contribute to 2050 emission reduction targets, he says.
Caldecott also sees much promise in third-generation algae-based biodiesel. Exxon Mobil Corp., BP and Chevron have been developing operations, as have some start-ups in the U.S. “The holy grail would be getting algae to directly produce diesel [without having to go through the refining process],” he says.
Naimon describes algae as “more of a science project right now,” but he thinks Exxon Mobil’s algae biofuels research and development program, a joint venture with Synthetic Genomics, has potential for commercial scalability in the future. Synthetic Genomics’ CEO, Craig Venter, led the team that decoded the human genome. LGA is invested in Exxon Mobil.
Many companies large and small are testing biofuels made with jatropha and camelina, which Naimon says provide a better energy balance than corn and don’t require fertilizers. However, he’s skeptical these “weedy” plants can be cultivated to scale. “The real problem is there are no plantations of jatropha,” he says. (Lane anticipates jatropha will be grown on abandoned land in India that’s unusable for traditional crops.)
Boeing, one of LGA’s holdings, has successfully tested biofuel blends that included jatropha, camelina and algae. But the primary reason LGA is invested in Boeing is the aviation company’s successful development of the fuel-efficient Dreamliner jet, which is designed to use certain biofuel blends as they become available.
Naimon is also interested in waste-to-energy businesses that convert organic wastes from agricultural and municipal waste streams into usable gas or power. “It’s a challenging industry due to the intersection of energy and public policy issues,” he says, “but the result of not doing waste to energy is that we are using coal for baseload power in the U.S. and around the world.”
Naimon mentions a number of companies that LGA doesn’t currently invest in but which he says are very promising in waste-to-energy technology. Two of them are public companies, Covanta Energy and the ABB Group, a Switzerland-based power and automation technology company (where Naimon once worked), and two are private companies, Farm Power and Harvest Power.
“It’s very early in the biofuels game, but we expect real investment opportunities over time,” says Chat Reynders, the chairman and CEO of Reynders, McVeigh Capital Management LLC, a Boston-based firm focused on sustainable and socially progressive investing. For now, it’s investing in what he describes as backbone plays in biofuels.
This includes Novozymes, a Danish biotech company that gets most of its revenues from the development, production and distribution of enzymes. Novozymes, whose enzymes can be used with nonedible feedstocks such as switch grass and assorted wastes, can help bring second-generation ethanol closer to the industrial arena, says Reynders.
Farm equipment manufacturer John Deere is another holding. “The farm is becoming much more of a high-tech place. … This is a backbone play on rethinking what the farm is and what crops may or may not be used,” he says.
The idea of replacing food with wood crops, algae and farm waste for advanced biofuels is attractive to Reynders. Should gasoline prices rise, he thinks we’ll see relatively immediate acceptance. But if gas prices fall, he thinks subsidies will be needed to support such biofuels.
Reynders is very excited about algae. One acre can yield about 5,000 gallons of biodiesel, he says, while an acre of soybeans can only generate 40 gallons and an acre of corn yields only 400 gallons of ethanol. Seeing algae proved on an industrial scale is a must. “Maybe we’re a little conservative, but we want to see the rubber hitting the road a bit more [before investing],” he says.
He’s closely watching the algae developments of the oil and gas majors, Solazyme, Sapphire Energy and smaller private companies looking to get patents for growing algae. A pickup in the economy could bring more partnerships, a freer flow of capital and more research dollars, he says.
Trillium Asset Management, which is solely devoted to sustainable and responsible investing, hasn’t invested in ethanol. Monocropping (which degrades farm-rich soil), petrochemicals, pesticides and food security issues “decreased the benefit of biofuels right out of the gate,” says Natasha Lamb, a Trillium equity analyst in alternative energy and technology. The firm also tries to avoid genetically modified organisms (GMOs) and most corn is genetically engineered.
Lamb finds some of the new cellulosic- and algae-based technology compelling. As for investing, “it’s a bit of a wait-and-see approach,” she says. Much analysis is still needed on how much energy it can provide and how much extra carbon it can pull from the atmosphere.
She recently met with Solazyme and KiOR. Solazyme, which feeds sugar to algae, has focused on applications in soaps, perfumes and cake mixes. “It’s interesting, but they’re not really solving the energy crisis issue yet,” says Lamb. KiOR adds its proprietary catalyst to biomass to produce a crude oil substitute. Lamb has some concerns about the biomass it uses, from white pine trees, and would like to learn more about the company’s plans for replenishing them.
“Biofuels are definitely something to look at [but] they’re not a panacea, sums up Caldecott of Climate Change Capital. He hopes that interest in advanced biofuels won’t draw attention from technologies that could potentially play a bigger role in lowering carbon output, such as electric vehicles and hydrogen fuel cells. Additionally, he says, “This is a complicated space. We need visibility on sustainability criteria as soon as possible to help provide investors with comfort.”
December 2, 2011. Article on FA website can be viewed here.