ALT FUEL MARKETS or LACK THEREOF

Targeted Distribution of Ethanol, Biodiesel, Bio-methane and Other Renewable Fuels

A year ago, when I first seriously contemplated launching a journal devoted to alternative fuels, I was encouraged to believe that such a venture could easily succeed by the sheer number of vendors. Not only were there hundreds if not thousands of facilities around the globe manufacturing ethanol, methanol, hydrogen, synfuels, biomethane, etc., there were much greater numbers of companies providing hardware and engineering services to serve the industry. By then most of the giant plant engineering and industrial process companies, including Lurgi, Howe Baker, UOP, and Aker Kvaerner, had already set up alternative fuel divisions, and they were joined by countless startups, most selling intellectual property pertaining to production processes but others producing actual hardware. Further thousands of companies had committed to a single segment of the alternative fuels business, namely hydrogen, and were in the business of producing fuel cells or fuel cell components, hydrogen production equipment, and various ancillary equipment such as hydrogen sensors and storage tanks.

All those untapped advertising dollars there for the taking, I thought, for there were precious few places to advertise products and services pertaining to alternative fuels. There were and are a few specialized journals pertaining to individual segments such as hydrogen fuel cells or ethanol, but most are directed at the agricultural producers, and none reflect the entrepreneurial explosion that has been overtaking the alternative fuels business which had previously consisted largely of natural gas companies selling to commercial and government fleets. With the venture capital guys flocking to invest their megabucks into what was now an overheated industry, the aggie orientation was no longer appropriate, I thought. Something more on the lines of “Red Herring” or “Upside” was more the ticket. Eventually, this was going to be like the nineties tech boom, I assumed, or, more to the point, like first oil boom which occurred in Pennsylvania on the eve of the Civil War. This was going to be a wild, crazy, fun market, and I aimed to be its principal chronicler.

Wild, yes, crazy, probably, but the fun factor is not what it should be, at least not yet. And the reason why is that beyond the alt fuels innovation and investment frenzy are markets that are at best underdeveloped, more commonly, embryonic, and, at worst nonexistent.

And this bears examination.

Alternative Fuels Markets

The biggest markets for alternative fuels happen to be fairly moribund, and here I’m referring to natural gas and liquid petroleum gas in transportation applications. Both markets go back to the nineteen fifties and grew very rapidly in the nineties to the point where both encompass millions of vehicles on a global scale. Nevertheless, both markets are stagnant today and are apt to remain so. Most gas propelled vehicles belong to governmental or corporate fleets, and take advantage of various governmental incentives intended to reward low emissions power plants. The steeply rising cost of natural gas seems likely to discourage further adoption of that fuel for transport, however, while liquid petroleum gas, which has never been as big an industry, is stymied by lack of interest on the part of the auto makers.

Ethanol

Fuel ethanol, which is undeniably an aggressive growth industry today, has a well established market as a motor fuel rather than a motor fuel additive in only a single nation, namely Brazil. Elsewhere it is an oxygenate and an octane booster in gasoline. That could change, but the current state of production technology does not indicate that a change is in the offing. I have considered the issue at length in a report that will very soon be published by Visant Strategies www.visantstrategies.com, and interested parties can purchase that report.

A mix of 85% ethanol and 15% gasoline known as E85 is sold in the U.S. at somewhere around around 1,500 filling stations, but since filling stations, all told, number in the hundreds of thousands, that’s not much of a retail market, and, furthermore, it is concentrated in ethanol producing regions within the corn belt. Furthermore, E85 has no national brands, no retail chains, no pipeline distribution system, and, apparently, no strongly committed user base, other than fleet vehicle owners—always the usual suspects when it comes to alternative fuels.

Right now ethanol is essentially an appendage of the petroleum industry. Ethanol prices tend to track those of gasoline, and gasoline blenders are the principal customers. This, in my opinion, does not bode well for the long term future of the business. If you aim to replace an established product with something else, it doesn’t do to put your destiny in the hands of your chief competitor.

Here, I’m kind of reminded of the CLECs (competitive local exchanges), those hundreds of independent telephone companies that sprang up in the nineteen nineties and helped to fuel the tech boom. The usual tactic of the CLECs was to “collocate” in the central offices of big Bell operating companies left over from the breakup of the Ma Bell by court order in 1984. The CLECs would put their own equipment in a chain link cage under lock and key, hook up with the incumbent’s switch, and then attempt to pirate customers from the latter.

Somehow things were always going wrong with the equipment inside the cage though—almost as if Harry Houdini were working for the incumbents and mysteriously insinuating himself inside the wire. It was downright uncanny. Not surprisingly, all but a tiny handful of the CLECs went out of business, and, although a number successfully charged the “Baby Bells” with sabotage and prevailed in court, that didn’t bring them back to life. The Bells absorbed the court fines as part of the cost of doing business, and retained their local monopolies. Object lesson there? I think so.

Biodiesel

Biodiesel as an industry is quite a bit different than fuel ethanol and more nearly on track to control its own destiny. While production volumes in the U.S. are still pretty paltry, producers are less beholden to the oil companies and sell an appreciable amount of branded product at independent service stations. And, more important, the industry commands an enthusiast user base which actually consists of several segments, environmentalist consumers, farm equipment operators (who often produce the fuel for themselves out of crop surpluses), and a few green public utilities who burn biodiesel to produce electricity. There is also a significant number of do-it-yourselfers who make their own—precisely how many is anybody’s guess—and these comprise an early adopter grass roots constituency who provide valuable viral marketing for the industry.

Like ethanol, biodiesel is currently subject to an investment boom, but there is much less unique intellectual property in terms of production processes. Most of it is made pretty much the same way, though the scale of production varies enormously—from a few gallons a batch to millions of gallons per year.

Biodiesel looks a lot more like a healthy, obstreperous, scrappy upstart industry than does ethanol, the kind of upstart that can blindside an incumbent, but it also suffers from fundamental weaknesses, particularly in terms market penetration. Apart from its use in farm machinery and its adoption by very small enthusiast consumer contingent, biodiesel has tended to follow the same paths of earlier alternative fuels like methanol and liquid petroleum gas. The industry, particularly in the U.S., has mainly focused on fleet sales, and has done relatively little to cultivate market share within the innumerable industrial applications such as backup power and generator sets, heating, industrial machinery, construction and mining equipment, railways, and shipping. Instead the industry has gone for the same low hanging fruit sought by every other alternative fuel segment, a policy that virtually ensures that segment will not grow beyond the initial markets.

Worse yet, biodiesel is equally constrained on the supply side as on the demand side. Most biodiesel produced in the U.S. is derived from either soybeans or from waste fats from meat processing plants. Both are in limited supply and too expensive to conduce to a real mass market. Ultimately the industry must draw on special low cost fuel crops in order to expand, but so far no one is raising them in the U.S.

Green Gasoline, Bio-methane, Butanol, Mixed Alcohols, DME, Pyrolysis Oil, et al

As anyone who has perused this Website is aware, ethanol and biodiesel are merely two among many alternative fuels vying for acceptance in the marketplace. And, unlike American politics, the alternative fuels arena may ultimately prove more accommodating to also-rans. But the fact is that the alternative alternative fuels, with the exception of bio-methane, scarcely have a toehold in any niche market. There’s all kinds of new technology from both new and established companies for producing them, but there is little in the way of branded fuels going out to loyal customers or aggregators of low cost feedstocks that would permit truly large scale production.

Worse yet, nobody is out there telling the stories that should be told about these hidden alternatives, why they are advantageous for the end user, what types of engines can run on them, and where they might be obtained. Instead there is simply a kind of dazed gratitude that so much investment money should be flowing into the industry and the expectation that the marketing and distribution problems will somehow work themselves out.

The ultimate irony here is that there is a prior model. Natural gas was the first real alternative fuel, and, while it was largely a bust in transportation, it was spectacularly successful in home and commercial heating and cooking and later in electrical generation. Not many people remember, but prior to World War II, the gas that was in common use for fuel was syngas derived from coal, not natural gas. Coal gas wasn’t completely replaced in the U.S. until the nineteen fifties, and now, irony of ironies, it may be coming back. The natural gas industry had to build its markets one at a time, establish a vast distribution infrastructure, and persuade other industries to construct a whole ecosystem that would permit it to survive. And it did. Of course, natural gas companies enjoyed one singular advantage. At first they were able to obtain gas at incredibly low prices simply because the oil industry regarded it as a waste product and was happy to find any market for it instead of flaring it off at the wellhead. In contrast, syngas manufacturers who had to buy coal and then gasify it were at a critical disadvantage. Still the accomplishments of the natural gas firms were impressive and are worthy of study by present day insurgents. A topic to which we will return in subsequent pieces.