Chopping the Cellulosic Ethanol Down Payment

Finding it hard to spare that $350 million for your cellulosic ethanol project? Here’s a system, available for licensing in 2012, that can bring down the upfront cost by a factor of three.

So, the obituary desk has been hard at work the last few months, writing notices on the death of cellulosic biofuels and the RFS.

Then, along comes POET’s and Abengoa’s loan guarantee, Chemtex’s demonstration, commencement of construction for INEOS Bio, ZeaChem’s demon is coming along.

And now, along comes Sud-Chemie with a system that is designed to ultimately cost less than $100 million for a 20 million gallon (60 million tonne) plant. Targeted to deliver operating costs that are the same as for first generation ethanol. Expected to be available for licensing as soon as next year.

Why, among all those pieces of news, is the news from Sud-Chemie perhaps the most game-changing?

Well, who doesn’t like the idea of solar energy? Free energy from the sun, low carbon footprint. Then the bad news comes about the $50,000 or so in upfront costs for a complete home solar rooftop system. Hmmm.

It’s not much different, at industrial scale, with cellulosic ethanol. The operating costs have come down dramatically. Numerous companies like Coskata, Mascoma, LanzaTech and the like are targeting costs in the $1-$1.50 per gallon range. That’s well under the equivalent cost, on the BTUs, for gasoline. The problem, as for solar, is in daunting upfront check.

For a full commercial-scale cellulosic ethanol plant (in the 40-50 million gallon per year range) it can be as much as $350 million. POET’s Project Liberty is rumored to cost, all in, about $8.50 a gallon at around $216 million for its 25 million gallons. The USDA talks in terms of $8 per gallon, which takes a ton of players out of the game.

So when Sud-Chemie explains that it has a path for players to get into cellulosic ethanol, at scale, for under $100 million. Well, it’s like E.F. Hutton talking, people listen.

How Sud-Chemie chops the upfront cost down: enzymes

“Our unique selling proposition?” asks Dr. Andre Koltermann, Group VP, Corporate R&D at Sud-Chemie. “We are one of the few companies worldwide that have process development and enzyme development under one roof. We are independent from enzyme supply, because we make our own during the process itself, using only a small fraction of pretreated feedstock. We have optimized enzymes for feedstock and operating conditions.”

Bottom line, no shipping of enzymes, produced offsite at its own industrial biotech production facility. Two, in one. Hence, low capex.

“We will deliver the complete technology,” said Koltermann. “The basic engineering package, also include all biotech software, microorganisms for producing enzymes, downstream processing, for producing the ethanol, and also help with the start up.”

Ready now, or later?

Where is the system, in its development?

“We think the demo plant will be in actual operation in January or February; we are in construction now,” said Koltermann. “The pilot plant has been running for 2.5 years, where we have been testing various feedstocks.  Crop straw, corn stover, bagasse.”

The yields? Around 70 gallons per ton, or 21 percent based on dry mass straw . That’s a little lower than some other systems that are not diverting biomass towards enzyme production.

The business model

It’s a licensing model. Discussions are now underway with agriculture companies, energy companies. private equity companies and existing ethanol producers. The company expects its first licenses as soon as 2013, with a focus on Brazil, US, and Europe.

Let’s be clear about the promise. It’s promise. The demonstration runs next year; process optimization towards the stated targets is still occurring.

OPEX? “Our target is clearly the same production costs as for the costs of first generation ethanol – we are pretty close now,” said Koltermann.

CAPEX? “We are in the range,” Koltermann added, “or a greenfield plant, in the very low three digit million. That’s for our 55,000 – 60,000 tonne [reference] plant (20 million gallons). That’s for the early plants – we can can achieve double-digits later on.”

It may seem astonishing to break out the bands and bunting for what will remain an eight-figure investment.

But, looking at $30 million for equity and $70 million for debt, for example, it’s a low number that can bring a heck of a lot of players into the game. (Caution, these are “in the long run” figures, keep in mind Sud-Chemie is in “low three digit millions” now and “we can can achieve double-digits later on.” In other words, you can get a license as soon as 2012, but not necessarily a license to print money.)

The restructuring of advanced biofuels costs

The opportunity is welcome for both equity and debt.  On the equity side,  a $30 million check one heck of a lot less daunting than, say, $120 million.  But consider the $70 million side. Easier for loan guarantees and other forms of technology risk insurance. But consider also the problem of $280 million in debt (on a $400 million project), which is to say, consider the very, bvery small number of banks that can write that kind of paper. Certainly that’s tough, if not impossible, for rural-based agricultural banks, without aggressive loan syndication.

In short, the aggie bankers who are long on vision are short on cash. The guys in New York who are long on cash, are shorter on vision.

Is it a complete game-changer on the economics of cellulosic ethanol? No – there are other systems that, opex and capex all rolled together, would have the same amortized expense. And some may have better bolt-on opportunities. But it does completely alter the opex-capex relationship in a way that may well foster development that would otherwise not have happened.

That’s food for through for th RFS obituary writers in DC.