Chain, chain, chain – chain of fuels: Birth of a global supply chain for biomass

Mendel CEO Neal Gutterson talks about miscanthus, and the role of the power sector as the driver of a global supply chain for biomass.

Some background on Mendel Biotechnology

Last year, we described them in the Digest as one of the “16 overlooked gems in the 50 Hottest Companies in Bioenergy voting” for 2010-11. We wrote, “Mendel made the AlwaysOn 100, a list which covers all of cleantech and featured just 14 bioenergy companies – and the company has been highly praised in the invited selectors – but with readers, no traction. Forgetting to file for the Hot 50 this year was a PR flub, but the company does deserve a long look in any case.”

The company’s IP lies in its understanding of a large class of genes called transcription factors – that control complex valuable traits such as freezing tolerance, drought tolerance, intrinsic growth rate, photosynthetic output, plant form, disease resistance, water use efficiency, and nitrogen use efficiency. Mendel works with several partners to create plants with improved yield and yield stability.

Another area of operations – the discovery of compounds that could regulate valuable traits by direct chemical application to the plant. A collaboration with Bayer CropScience aims to identify commercially valuable chemistries that enhance stress tolerance.

A third area – BioEnergy Seeds and Feedstocks business. Through a collaboration with BP, Mendel has been developing elite, proprietary varieties of Miscanthus, an energy grass.

To understand more about Mendel and the opportunities in dedicated energy crops, we spoke with Mendel CEO Neal Gutterson.

Miscanthus – the why-likes

BD: What is the attraction with miscanthus?

NG: We looked around saw switchgrass, the yields are not as high. Miscanthus is a great product in field but is hard to establish. Now, we can do better than the clonal non-proprietary systems, where the cost of biomass is less than for seeded switchgrass. Miscanthus is spectacular once established, but establishing it through tissue culture or rhizomes is difficult and expensive. We need to change that to a seeded system.

What we like is a broad subtropical to temperate geography, a good energy balance, and a dry product that can be used in all outlets.

BD: Can you put some metrics around those advantages?

NG: To put that in a power context, its $4 per MMBTU from miscanthus, but we can get that to to down to $3MMBTU for seeded miscanthus. That will drive adoption. In places like MS and LA, we see 12-13 dry tons per acre. We are looking at torrefaction. Torrefaction is still cost prohibitive in US, but it’s good for EU – torrifying locally such as with Renewable Fuel Technologies, then pelletize and ship to EU.

BD: When can we expect commercialization?

NG: Last year was the first demonstration, on a small scale – the key component is the field establishment system. We are now on track for seed product in 2014, by 2015 as much as 100,000 acres, and 250,000 acres in 2016. We are now confident enough to go after scaling.

Miscanthus – the why-frets

BD: Well, there’s the good news. Tell us about the biggest challenge.

NG: It’s been a little disappointing, the policy environment, compared to EU and we are turning attention to EU export market.

BD: How do you get a sustainable policy regime in an international system, where you are producing in, say, the US, but producing for the EU?

NG: The troubles over BCAP reflects just that, a parochial domestic perspective.

[editor’s note: BCAP, the Biomass Crop Assistance Program, a USDA subsidy program aimed at incentivizing the commercializstion of a biomass industry. Efforts are underway in the US Congress to defund the program, which was authorized in the 2008 Farm Bill and just completed rule-making and deployment of funds in 2010-11].

BCAP was meant to benefit the US but has more benefits for EU. For now, we have herbaceous crops for which production systems have to be developed, and we need to foster the complete supply chains.

BD: So, what’s the attraction for the EU?

NG: The EU has significant renewable power directives. Ultimately, what you’ll have is a completely fungible, pelleted miscanthus, treated the same as coal, no capex adaptation required from coal-burning power plants.

BD: No adaptation. How big a factor is that for power companies?

NG: The message from power companies is don’t ask us to do anything different, but looking at 2-x 1 inch pellet of miscanthus, that’s the kind of opportunity upon which we base a whole system.

The power company platform

BD: So the power market can do the heavy lifting of creating the demand that leads to full supply chain development?

NG: The power market is going to do the heavy lift. Today, with an EU power company, you have someone to whom you can really deliver.  We say to them, lets start balancing out to a biomass basket, not a wood basket. You can start now with no risk of shortfall, a secure long term 10-15 year contract, better than the spot market for woody biomass. In 2013-15 we will see the full establishment of supply chain, producing everything from bioproducts to biofuel.

BD: Not fuels?

NG: Companies like Gevo they look at C5 C6 sugars, but right now it’s now hard for them. Feedstock is not the problem they are trying to solve. So, to use cellulosic biomass, they have to get to point  where they have confidence. That platform will be driven by EU demand for power, then those advanced companies shift over to C5, C6 sugars.

There are the integrated companies going to biomass, like HCL Cleantech, producers of a C5, C6 stream. We see miscanthus as an integral part of that supply chain – we can link up. Once a company knows its reliable, they will start investing
not doing it today – reliable source.

The geographies of the new biomass industries – US, EU, and looking towards Asia

BD: Geographies of interest – will you be producing in the EU, or just selling into that market?

NG: For now, US produced and supply into the EU for now. It is possible to produce in EU, it was studied there before here. But we are not actively pursuing that for reasons of bandwidth. It works in places like the old Western Russia, or Ukraine.

BD: So, you see a world trade in biomass developing, rather than nation-by-nation.

NG: Yes, it will be an international, interdependent, world trade in biomass. That’s the way governments should work. It always has.

BD: An example.

HG: Well, in biomass as a US industry, one of the first things was tobacco.

BD: The cash crop behind the Declaration of Independence.

NG: Yes, then in the 1800s, we grew cotton to serve mills in the UK.

BD: So it is a case of “same as it ever was.”

NG: In some ways it is amusing and ironic. We still have land, the UK still has high land cost. It’s that same model – and it should work elsewhere.

BD: What about markets beyond the EU – how will the world trade evolve?

NG: The price of some coal is rising in China. You have to start thinking about it. That is, producing in regions where you could serve the China market, with a biocoal type product. They’ll produce in Africa, Asia and elsewhere. Its the internationalization of the supply chain.

BD: To understand the opportunity with miscanthus, is there a proxy crop that we can use to help us size up the opportunity?

NG: Sugarcane is too southern, it is a little like rice. It’s a C4 grass, like corn, but its more like a cane in structure. It grows beautifully in IL, but won’t displace corn. Looking at southern corn, where the productivity drops off, through Kentucky, Tennessee and the Carolinas . Not looking at food land – but a lot of out of production – pasture, cotton. In the US, we look at land that is productive for row crops, where perennials can put down strong roots.

BD: So, sort of where maize drops off, but before the energy canes kick in.

NG: That’s about right.

Carbon, and sustainability

BD: What about the carbon story?

NG: We haven’t done a full LCA on miscanthus, top to bottom, but it will be similar to switchgrass. It sequesters a lot of carbon in its root system. Best is how it handles nitrogen, because it is harvested late, all the nitrogen is remobilized towards the root, so 80-90 percent is recycled, and there are endosymbionts that can do some nitrogen fixation.

BD: Nitrogen? Often overlooked in discussions about carbon.

NG: It’s one of the reasons to go with perennials. Sorghum still needs nitrogen, but also drying is a challenge.

BD: What about concerns over sustainability? Over a biomass-based return to colonialism?

NG: I don’t see why internationalization of the supply chain has to look like colonial times. That has to do with getting the right structure. In the Council on Sustainable Biomass Production, our goal is to set standards and certification systems for biomass – economics, soclal and environmental sustainability – there will be standards in 2013.

Mendel’s role, and evolution

BD: And for Mendel – what about your own financial evolution towards being a world player in a world system? Sounds expensive.

NG: We are finishing a capital raise soon, and turning the corner toward profitably, we are on the edge of being there.

BD: The IPO market – tempting?

NG: Not for this year. But if the window remains open in the future, low-cost equity capital such as the public markets can provide is always going to be attractive, and always present in our considerations.