INSUBCONTINENT EXCLUSIVE:
Tom Dickson
Contributor
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Tom Dickson is CEO of New Energy
Risk.
Brentan Alexander
Contributor
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Brentan Alexander is chief
science officer for New Energy Risk.
Although Silicon Valley seems to have largely forgotten about cleantech after failures in solar,
wind and batteries, there are still major strides being made across new and exciting renewable technologies
However, because these companies can take a decade or more to come to market — a timeline that is anathema to Sand Hill venture capital
— media coverage has died down significantly over the last few years
So what going on
It turns out… a lot.
In particular, there are significant developments across the waste-to-fuel and waste-to-product
industries, in the form of thermal (pyrolysis, hydrothermal, gasification) and non-thermal technologies.
The driver for this is somewhat
simple:The human population is creating more waste every year and there are fewer options for disposal
Incentives around building a &circular economy,& where renewable products are created from that waste, are growing and making more financial
sense.
Basically, companies are learning how to turn trash into cash.
Today, entrepreneurs are approaching the space head-on, and there are
dozens of cutting-edge companies coming to market and breaking through with major projects and customers.Companies in the space can be
divided between the developers likeFulcrum BioEnergy, Red Rock Biofuels, RES Polyflow and Envia, and the technology providers, such as TCG,
TRI, Velocys and many others.
These companies are targeting a variety of waste types, including household garbage (plastics and organics),
as well as agricultural waste (like wood) and livestock waste (like manure)
Waste is then converted into various products, including synthetic crude oil, natural gas, electricity, refined products (from diesel to
high-value waxes) and specialty chemicals.
In short, we&re seeing some major tailwinds for bioproduct companies as we near 2020
Here why.
The value of waste removal and disposal has increased
As population and urban density grow and environmental concerns mount, there
are fewer places to store waste
Just recently, China — which recycles nearly half of the globe waste —banned the import of certain plastics, as well as 23 other waste
products, leading to overflowing landfills in many countries, including Australia and Great Britain
Landfill permitting is becoming more stringent, while countries can no longer just ship their trash somewhere else to be dealt with
Gate or tipping fees (the cost of disposing waste at a landfill) are also increasing.
So, with more pressure on these systems around the
world, waste disposal has increased in value, making waste-to-product facilities and technologies more economically attractive to
developers.
The human population is creating more waste every year and there are fewer options for disposal.
These projects
have become even more financially sound when paired with government incentives for cleaner fuels and lower emissions
These often come in the form of renewable credits and fuel standards, such as the EPA Renewable Identification Numbers (RINs) and the
California Low Carbon Fuel Standard Program (LCFS)
In many cases, these credits are a significant portion of revenues, and similar government-market support can be seen in Europe and
Asia.
RINs, in particular, were enacted about 10 years ago, initially for corn ethanol projects
In the last few years, however, the advanced biofuels RINs requirements have started to come in to force and generate a new market
For companies that can sell their product in California and take advantage of the LCFS, these policies, in tandem, can support more than 50
percent of the revenues of some plants, making them economically possible
The effects of these mechanisms are hard to overstate.
Old science, new goals
What most surprising, though, is that the science behind many
of these companies and technologies is not actually new
In fact, some of the science was developed in the early 20th century in Germany, primarily used to convert coal into oil during World War II
to overcome small domestic oil reserves
Later, in the 1970s, the idea of peak oil and price shocks around OPEC formation pushed major oil producers, like Exxon, to look for
alternatives, refining and advancing these processes and creating fuels and products (once again primarily from coal).
However, oil
producers focused on massive-scale projects because the goal was to supplant a portion of oil production
So they were looking at $5-10 billionfacilities, which were not feasible for waste-to-fuel and waste-to-product processes
Trying to feed such huge facilities with sufficient waste day in, day out would be a logistical impossibility
Moreover, once cheap oil returned, there was no longer an economic rationale for alternative fuels, and much of the technology was
shelved.
Today, rather than building $10 billionrefineries, developers like Fulcrum BioEnergy or Red Rock Biofuels are looking at$100
million to $500 million in capital expenditure projects — still large sums for a startup
They are taking these systems initially developed for coal processing and using them for all kinds of waste, from household trash to wood to
These are smaller-scale systems that fit more specific needs for specific customers and geographies
However, this shift toward smaller scale has presented a new set of engineering challenges that many companies are just now beginning to
overcome.
Luckily, developers today are using their experience building and financing similar facilities in the ethanol market and applying
it to these new waste-to-fuel projects
High oil prices and ethanol subsidies in the late 2000s led to a resurgence of interest in renewable energies, and the last decade has seen
engineering techniques applied to waste-to-fuel for the first time, such as small-scale, temperature-regulated Fischer-Tropsch, small-scale
gasification and supercritical water pyrolysis
These big investments into engineering, as well as logistics, have been instrumental in bringing together technologists, developers and
customers.
Corporate interest has improved both logistics and market opportunity
For these new projects and technologies to be successful,
developers need to secure a reliable source of waste to feed the facility, as well as &offtake partners& — customers who commit to
purchase the fuel or product before they can finance and build a large facility
Increasingly, companies are stepping up to the plate
The necessity and value of environmental and carbon credits, as well as growing concerns around sustainability, are pushing corporations to
become more involved.
Partnerships have made securing sufficient feedstock possible
This includes waste disposal companies like Waste Management that want to preserve landfill space and reduce methane emissions, forestry
companies looking for new forms of lumber byproducts and livestock companies looking to dispose of manure.
Companies are learning
how to turn trash into cash.
In addition, some companies are becoming investors or buyers of the end product
For example, airlines (United, Cathay, JetBlue, Southwest, Qantas, British Airlines, Canada Air) are investing in and buying biofuels
because of international policy requirements
Grocers (Whole Foods, Tyson) and food and beverage companies (Coca-Cola) are also looking for sustainable waste disposal, packaging and
reduction of their environmental footprint.
These projects are highly susceptible to market changes, so company commitments to longer-term
agreements for purchasing products like fuel — particularly ones that include price-floors in exchange for decreased upfront cost — can
help bridge price gaps and mitigate project risk for lenders
Luckily, we&re seeing more of this happen.
Still, major challenges remain
It not all rosy, though
The most challenging aspect of scaling up these bioproduct operationsare the significant capital requirements and funding
The process toward economic feasibility has not been an easy one, and unfortunately is littered with stories of failure — but these are
high-risk ventures, and failures, are how the market navigates new technologies and learns from mistakes.
Indeed, we&ve seen a few green
shoots over the last few years that have served as a boon for companies looking to hit scale.
Tax-exempt bonds and government funding have
served as an alternative to traditional loans from risk-averse banks
Solid-waste processing facilities are allowed under the IRS rules for tax-exempt private activity bonds that can be issued by states
This financial mechanism isn&t new, but the use of it by renewable energy developers has helped project financials by lowering the interest
rate on the debt that the project has to pay
However, the pot for tax-exempt bonds is also limited by state and federal governments, so developers have to fight to be given an
allocation with other projects, which has limited availability of this kind of financing.
In addition, guaranteed performance of these
facilities has been a significant weakness in the field
One response to this has been the creation of insurance and warranty products that guarantee reliability of new facilities, thereby reducing
the risk for lenders, leading to better financing terms from banks and bond investors, and increasing customer adoption.
Lastly, nearly all
of waste-to-product companies today rely on credits to make their projects financially sound
In many cases these are a significant portion of revenue
As mentioned above, RINs and LCFS have been key drivers for domestic projects.
However, not all sectors are treated the same way by these
One of the major drivers in wind, solar and fuel cells has been investment tax credits, which do not apply to waste facilities
Moreover, oversupply of RINs is possible, which could lead to a market price collapse
Of course, the market is also susceptible to political squabbles
So far, the RINs market has survived the EPA transition under Scott Pruitt — they are prized by the farm lobby after all — and it seems
increasingly likely the market will remain in place
In fact, the EPA just released its proposed 2019 biofuel requirements and continues to increase the number of available RINs beyond prior
levels.
Support and demand for these technologies and processes are accelerating as stakeholders from across the marketplace align to bring
Moreover, because of the local and regional nature of these projects, it is unlikely for global forces to derail progress, like China
aggressively entering the market and undercutting prices as they did with solar a decade ago.
However, a number of factors still pose a
threat, including volatility within the market for renewable credits, as well as government support structures, or risks around commercial
and technological viability that scare financiers away from backing these new projects
Only the most robust projects that address a variety of risks and shore up their commercial and technological viability will succeed over
the long-term.
Overall, though, given renewed corporate interest in biofuels, new sources of financing and new feedstock and regional
focuses, we may soon see a quiet boom in renewable biofuels and products.
