Millions For New Biofuels: Wasted?

Filed under Green Energy, by Peter Elstrom on May 7

As part of the stimulus effort, the Obama Administration is intent on investing more in green energy to reduce the use of traditional fossil fuels. Just this week, Secretary of Energy Steve Chu announced plans to spend $786.5 million for biofuels research and development, as well as biorefinery projects.

“Developing the next generation of biofuels is key to our effort to end our dependence on foreign oil and address the climate crisis — while creating millions of new jobs that can’t be outsourced,” Secretary Chu said. “With American investment and ingenuity — and resources grown right here at home — we can lead the way toward a new green energy economy.”

Sounds great, right? Well, maybe. But the news made me think of this excellent story by BW’s John Carey. It offers a more skeptical look at the prospects for biofuels ….

Carey points out that there are serious and fundmental challenges to developing biofuels, particularly for startups that are hoping to build enormous businesses on the expected boom in green energy. More than 200 companies are trying to develop next-generation biofuels, and the expectations are sky-high.

Yet behind the very real innovations and investments, the brash claims and the breathless headlines, lies an inconvenient truth. Replacing petroleum with biofuels is a tough business. Even as the industry develops, many of the companies—probably most—will not survive. "We've seen a venture capital-led bubble," says Alan Shaw, CEO of Codexis, a Redwood City (Calif.) manufacturer of enzymes used to make drugs, chemicals, and biofuels. "I cannot see how the small companies can build a business and still get a return to their original investors. The numbers just don't add up."

Carey argues, persuasively I think, that the likely beneficiaries of the mad scramble in biofuels will be giant companies with "deep pockets and patience, such as Royal Dutch Shell, BP, DuPont, agriculture giant Archer Daniels Midland, or the rare startup with revenues from another business, such as making drugs." Most of the small companies simply won't have the money to be able to stick with the ambitions projects.

"The business model that makes sense for most of us is demonstrating the technology and getting it into the hands of those who have balance sheets," says Bill Roe, CEO of biofuel producer Coskata in Warrenville, Ill.

So what does this mean for the nearly $800 million that the Energy Dept. is beginning to distribute? The cash may ultimately benefit many of the biggest companies in the field. Some $480 million will go for pilot and demonstration biorefineries; another $176.5 million will go to commercial biorefineries; the remaining $130 million will be spent on fundamental and ethanol research.