2008-2009 Review U.S. Biofuels Industry: Executive Summary 1 Current State of the Industry 13 Progress In Advanced Biofuels 22 The U.S. Government as Venture Catalyst Concentric 23 Company Profiles 38 List of Figures, Tables and Examples 39 Appendices: A. Industry Reference Model B. Venture Capital Raised C. Major Oil Company Investments ABOUT THIS REPORT This report was prepared by Brian Curtis of Concentric Energies & Resource Group, Inc. as an independent consultant to the U.S. Department of Energy. It is intended to provide an objective Concentric view of the evolving biofuels industry and many of its key participants. It is the second “Year in Review” report created for use by an intended audience of industry, investor, policy maker and regulator stakeholders. This report covers the 2-year period of 2008-2009. FUNDED BY THE OFFICE OF THE BIOMASS PROGRAM The Office of Energy Efficiency and Renewable Energy’s Biomass Program works with industry, academia and national laboratory partners on a balanced approach to advance biomass as a significant and sustainable energy source for the 21st century. Through research, development and demonstration efforts geared towards establishing the integrated biorefinery model, the Biomass Program is helping transform the nation’s renewable and abundant biomass resources into cost competitive high performance biofuels, bioproducts and biopower. The Biomass Program supports four key priorities of the EERE Strategic Plan: • Dramatically reduce dependence on foreign oil • Promote the use of diverse, domestic and sustainable energy resources • Reduce carbon emissions from energy production and consumption • Establish a domestic bioindustry PUBLISHED APRIL 2010 Available electronically at: www.ConcentricEnergies.com Design and Illustration: Casella Creative www.CasellaCreative.com Acknowledgements The author wishes to thank the following people for their contributions and support: Research Assistants Dustin Kahler and Erikka Arone; Copy Editors Loree Dowse and Kate Poindexter; New West Technologies and the many industry and government contacts too numerous to mention here that have fielded questions and provided great insight. Disclaimer This report was prepared according to high professional standards and is believed to be a fair and objective representation of the industry and companies. Industry and company data contained herein is based on primary and secondary sources believed to be reliable and noted where possible. While this report has been peer reviewed, these sources have not been independently verified and are, therefore, not guaranteed for accuracy. Statements made and opinions expressed are strictly those of the author and not necessarily those of the U.S. Department of Energy. CONCENTRIC ENERGIES & RESOURCE GROUP, INC. ii | MIND THE GAP EXECUTIVE SUMMARY CHAPTER 1 1 CURRENT STATE OF THE INDUSTRY 1 CORN ETHANOL INDUSTRY GROWING PAINS Ethanol Plant Utilization and Industry Growth Ethanol Pricing Factors 5 GETTING PRODUCT TO MARKET Pipelining Ethanol Intermediate Blends are Key Indicator 7 GREENHOUSE GAS EMISSIONS AND ENERGY BALANCE 8 FINANCIAL HEALTH OF THE INDUSTRY Revenue and Profit Distribution Stock Performance and Bankruptcies 10 BIODIESEL 12 CASE STUDY: Midwest Region CHAPTER 2 13 PROGRESS IN ADVANCED BIOFUELS 13 DIVERSE TECHNOLOGIES UNDER DEVELOPMENT Cellulosic Ethanol Conversion Technologies Next Generation Fuels Biodiesel Algae 17 CELLULOSIC FEEDSTOCKS AND LAND USE 18 INVESTMENT TRENDS IN BIOFUELS Venture and Growth Capital Oil Companies Get In the Game Public Equity Markets CHAPTER 3 22 THE U.S. GOVERNMENT AS VENTURE CATALYST DOE and ARRA Funding USDA Funding CHAPTER 4 23 COMPANY PROFILES 24 AG/BIO/CHEM 27 PRODUCER/MARKETER 29 GROWTH STAGE 33 INTEGRATED ENERGY 35 SERVICES 37 FINANCE 38 LIST OF FIGURES and TABLES 39 APPENDICES A. Industry Reference Model B. Venture Captial Raised C. Major Oil Company Investments CONCENTRIC ENERGIES & RESOURCE GROUP, INC. iii | MIND THE GAP Concentric Funded by Energy Efficiency and Renewable Energy Office of the Biomass Program CONCENTRIC ENERGIES & RESOURCE GROUP, INC. iv | MIND THE GAP 2008 and 2009 were difficult years for the U.S. Furthermore, commercialization progress was EXECUTIVE SUMMARY biofuels industry. Following a 5-year growth made by innovative start-ups. The risk for the spurt that saw more than 25% average produc- industry lies in the possible gap between the tion increases year over year, the industry was existing corn ethanol industry foundation and forced to manage growing pains in the midst of the emerging advanced biofuels industry. If a global recession, volatile commodity markets deployment of advanced fuels is delayed, pub- and a lack of project financing. The result was lic sentiment may drive legislators to back off on bankruptcies and delays in new construction the RFS. This would be a major setback for the starts. At the same time, commercial deploy- industry, possibly stifling it before it has a chance ments of advanced fuels progressed more slowly to reach technical and commercial maturity. than predicted. Misperceptions surrounding energy balance, carbon footprint and food vs. BANKRUPTCIES CLEAN HOUSE fuel have also continued to plague the industry. The majority of the bankruptcies in the industry Consequently, biofuels have gained a negative occurred in late 2008 and early 2009. In February reputation in some sectors of the U.S. public eye. of 2009, roughly 91% of ethanol companies were still financially healthy and weathering the reces- Despite turbulent times, national production sion. However, by July 2009, 23 plants were kept up with the Renewable Fuel Standard operating at a reduced capacity factor. Notably, (RFS) set forth in the 2007 Energy Independence VeraSun – previously the third largest ethanol and Security Act (EISA) that requires a signif- producer in the U.S. – filed for bankruptcy in icant yearly increase in biofuels production. November 2008 and subsequently sold many Figure 0.1 Mind the Gap Corn ethanol growth slows as Advanced Biofuels deployment finds its feet 40 35 New Technology Adoption has uncertain timing: 1. Scientific breakthroughs hard to predict 30 2. Projects have technology risk in addition to market risk 3. Blend limits must be overcome 25 Corn Ethanol Met with Challenges: 1. Caught in middle of commodity spreads RFS2 20 2. Credit market frozen for project finance 3. Poor public perception Advanced Biofuels 15 Potential Gap Billion Gallons per Year Billion Gallons per 10 Corn Ethanol 5 1998 2002 2007 2012 2017 2022 2009 CONCENTRIC ENERGIES & RESOURCE GROUP, INC. v | MIND THE GAP of its assets to oil major Valero. The causes of However, the industry remains fairly fragmented these bankruptcies are many but some common with the largest five producers making up only themes are worth discussing, including: 33% of current capacity. The remaining 67% is • Commodity swings (corn up, ethanol down) spread across 125 companies. • Corn price hedging and inexperience Financial Market Crippling Industry-specific dynamics aside, the impact of • Timing and volatility of demand the global banking crisis on ethanol producers EXECUTIVE SUMMARY • Limited pricing incentive to blend above was not trivial. Under normal circumstances, the RFS level tough commodity swings and demand uncer- tainty are difficult, but manageable. When the overall stock market is down by more than 50%, The second half of 2008 saw corn prices up and however, stock prices and balance sheets are fuel prices down. The resulting economics led the hit hard. Lack of credit availability blocked com- industry to idle the plants with the highest mar- panies from financing working capital and new ginal costs to produce. The industry reference projects. model developed for this report shows theoretical losses of more than $0.70/gal for first half of 2009. There are several components to cost structure CAUTIOUS RECOVERY that should be considered including: technol- There are some bright spots to be found. In ogy; capital structure and debt load; construction the face of recession and banking worries, cost over-runs; and poor commodity price risk the industry nonetheless received record lev- management. The industry has benefited from els of funding from government and private a favorable alignment of corn and oil prices in equity investors. Companies are also push- the second half of 2009 that has enabled many ing hard to advance production and product companies to begin to climb out of the losses of technologies in an economically feasible and the previous year and a half. Industry averages environmentally sustainable way. Towards the suggest that typical ethanol mills experienced end of the period, a large number of idle plants $0.36/gal profits in December 2009. This is still came back online due to more favorable pricing short of the $2.00 per gallon margins of mid- circumstances and/or streamlined capital struc- 2006, but significantly better than the $0.20 to tures. As of January 2010, the number of plants $0.30 losses some producers were experiencing operating below capacity was down to 18 (1.2 in May 2009 (Iowa State Extension data). bgpy of unused capacity). This is an indica- tion that the industry is on the road to recovery. Biodiesel makers, on the other hand, while showing some improvement from peak losses Growth Capital Is Flowing of $0.22 per gallon in July 2009, are struggling to break even as a revival of the $1.00 per gallon While project finance for corn ethanol production tax subsidy remains stalled in Congress. has been weak, there have been record levels of capital flowing towards biofuels. In February RFA data shows total production capacity of over 2009, the industry received nearly $800 million 13.0 bgpy and 2009 production of 10.75 billion from the American Recovery and Reinvestment gallons, compared to 10.5 billion gallons required Act to be administered by the DOE, indicating in 2009 by the RFS. Despite excess capacity, Congressional support remains. An additional new plants were still being added toward the $1.46 billion worldwide has flowed in from ven- end of 2009. ture capital funds since the beginning of 2008.