June 1, 2012 12:37 pm

Clean technology: US policy aids second generation biofuel push

algae is being cultivated©Bloomberg

Going green: algae is being cultivated to create feed stocks that can be used to fuel power plants

In the world of biofuels, all eyes are on the tiny northern Italian town of Crescentino, site of the world’s first commercial-scale cellulosic ethanol plant, which will start production this year.

The venture might be small, with output of just 60,000 tonnes of fuel a year. But it is a harbinger of a new movement in clean technology.

Producing petrol substitutes from sources such as sugar cane, corn and wheat has had a bad press. Critics say biofuels production takes up vast tracts of farmland that could better be used for growing food.

It was blamed for a surge in food prices in 2008 that triggered a backlash against the industry.

But a solution is emerging: second-generation biofuels that, unlike ethanol, are not made from food crops but use feedstocks including agricultural waste, energy grasses and algae.

The Crescentino plant, part of Beta Renewables, a €250m joint venture between Italian engineering and chemicals group Mossi & Ghisolfi and TPG, the Texas private investment firm, is an example of this trend.

It will produce bioethanol from a giant reed, arunda donax, as well as rice husks, the parts of corn left after harvesting, and wheat stalks.

Crescentino is the first of a number of commercial-scale plants due to open this year, as companies move up from pilot and demonstration projects to industrial-sized facilities. About 20 such plants should begin operating in the next 18-24 months, according to Bloomberg New Energy Finance research.

“The sense of progress is very real,” says Phil New, head of biofuels at BP, the oil group.

But there is also uncertainty. Much of the early promise was dashed on the rocks of the financial crisis and, with banks cutting lending to big infrastructure projects, analysts expect the pace of commercialisation to be slow.

“Quite a lot of the early stage companies have discovered it’s more capital intensive to build a new molecule than to create a new piece of software,” says Harry Boyle, analyst at Bloomberg New Energy Finance.

Still, there is momentum, much of it driven by government policy. In the US, biofuels are seen as a crucial way to reduce dependence on foreign oil and bolster energy security.

The Renewable Fuel Standard (RFS) mandates an expanding share of clean fuels in the transport fuel mix with a target of 21bn gallons a year of advanced biofuels by 2022, on top of 15bn gallons of corn-based ethanol.

Mr New at BP says: “The RFS is the cornerstone, the key piece of legislation that pushed everyone in the direction of second-generation biofuels. It was important in providing the certainty there will be a market for these products. It’s the reason the US has the global lead.”

Most of the plants scheduled to come on stream in the coming months are in the US. They include KiOR’s $222m facility in Columbus, Mississippi, to produce fuel from wood, principally southern yellow pine trees.

KiOR’s plant will heat wood chips till they turn into a slurry-like material similar to crude oil, which can be run through existing oil refineries to make standard gasoline or diesel fuel. With a capacity of 11m tonnes a year, it will the largest of its kind in the US.

Gevo of the US last month started up the world’s first commercial isobutanol plant in Luverne, Minnesota. Its low vapour pressure and high energy content mean iso­butanol can be added to gasoline at higher blend concentrations than ethanol, without requiring specially adapted vehicles.

BP is in a joint venture with DuPont to produce biobutanol, and will use some of it during in the London Olympics. BP is one of a number of oil companies investing heavily in a sector long dominated by venture capital. Others are Royal Dutch Shell, Chevron and Total.

“A lot of people have struggled to deal with the reality of integrating engineering and technology at scale,” says Mr New. “BP is used to large-scale engineering projects, which is a big advantage.”

After buying the cellulosic ethanol business of biofuels company Verenium in 2010, BP is planning a big plant to use energy cane and napier grass as feedstocks for renewable fuels. It is planting 2,000 acres of the crops in Florida, in what will become a 20,000-acre facility.

The majors are not the only investors. Poet, a US biofuel producer, has a joint venture with chemical company Royal DSM of the Netherlands to build a commercial-scale cellulosic ethanol plant in Emmetsburg, Iowa. The tie-up is an example of how advanced biofuels plants can be rolled out relatively quickly when they evolve from existing first generation facilities – what the industry calls “add-ons”.

Susan Hansen, a credit analyst at Rabobank, says: “If you’ve got an ethanol refinery, you can add on an extra unit to make second-generation fuel from the byproducts of your ethanol production,” .

Start-ups that are not building add-ons or lack the support of a strategic investor such as BP can find the going can be tough. Banks are wary of lending to standalone next-generation plants given the uncertainties, and prefer to invest in proven technologies with reliable cash flows, such as onshore wind farms.

The sector can be confusing for potential investors. There are an estimated 300 companies engaged in second-generation biofuels research, working with dozens of feedstocks and processes. Each will require its own supply chain, since none of the building blocks yet on offer are global commodities

“We still don’t have a winning technology and we don’t have a winning feedstock,” says Ms Hansen. “That’s why it’s so challenging.”

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