- $20 per Gallon
- Beginnings and Endings
- Book Update
- Carbon Nanotube Structural Composites
- Alt Fuels
- GM's Driverless Car Announcement
- Thermelectric and Thermionic Devices
- Green Auto Racing
- Of Mileage and Markets - the Politics of Fuel Efficiency
- Thought Provoking Green Vehicles
- Renewable Energy and Energy Storage
- Renewables and Finance
- Structural Nanotubes Now?
- Two Timely Books
- Advanced Biofuels USA
- Alternative Fuels Redux
- Altfuels Industry Directory
- Alt Fuels Manifesto
- Clean Energy Journal Biofuels Forum
- Fossil Fuels
Tech & Scientific Developments
- Green Infrastructure & Environmental Initiatives
- UOP's New Biofuel Tech (Strangled In The Cradle II)
- Alternative Fuel Paradigms
- Alternative Fuel Paradigms, Part II
- STRANGLED IN THE CRADLE?
- Coal and Uranium Reserves Running Out?
- Nanotechnology and Alternative Fuels
- Electricity vs. Alt Fuels
- Energy Transitions and Industrial Policy
- Industrial Policty II
- In Situ Coal Gasification
Commentary & Analysis
- Coal-to-Liquids Controversy
- STATE OF THE INDUSTRY - PART II
- The Heartland Institute's Environmental Journal
- The War of the Alcohols
- Transportation Revolutions Transposed
- Twin Peak - Coal & Uranium
- World Agricultural Forum's Biofuels Initiatve
- Alt Fuel Options
- The Next Bubble
- Finance & Markets
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- The Structure of Transportation Revolutions
- Bio Fuels
- Fossil Fuels
- Heat Engines
- Toward the Renewable Sources Power Grid Part I
- Alternative Fuels - Competitive Landscape
- The Great Illusion or Why the Hydrogen Highway Never Got Built
- The Great Illusion, Part II
- Lightweighting -Saving Fuel by Saving Weight
- Lightweighting - Part III
- Maritime Transport in an Energy Constrained Future
- Maritime Transport and Energy - Part II
- The Future of Aviation
Alt Fuels Manifesto
Submitted by Dan Sweeney on Sun, 2008-06-29 19:49.
This is another think piece, and, it is to be hoped, one that will stimulate much further thought.
We are now at what appears to be the tipping point for the alternative fuels industry, if I may be forgiven employing that quintessential nineties cliché. Record prices for petroleum, natural gas, and now coal have made alternatives more than a hypothetical, more than a line item in the Federal energy research budget. An enormous demand for low cost substitutes is clearly present in most parts of the world, in other words, every place where national governments are not subsidizing fossil fuel consumption heavily. But meeting that demand is going to be difficult, and in fact will be almost impossible if we continue to adhere to traditional market models. Just because masses of individuals have embraced the concept of alternative fuels, and are ready and eager to adopt them doesn't mean the industry is going to succeed. The fact that its successes have been so few and so qualified in the past indicates the magnitude of the tasks facing alternative fuel manufacturers and distributors now and in the future.
Here I must undertake what appears to be a digression in order to provide information which is essential to the understanding of the process of marketing alternative fuels successfully.
Alternative Fuels, a Classic Replacement Technology
Alternative fuels constitute what students of technological innovation call a replacement technology, a term that is largely self explanatory. (For a thorough consideration of this topic, read the primer entitled "The Words of the Prophet" on this Website.) Examples abound. Margarine, first appearing in the eighteen eighties, was a replacement for butter. Cordite, also introduced in the eighties was a replacement for black powder. Isoprene was a replacement for rubber. Rayon was a replacement for silk.
In most cases in the past, replacement technologies involving material substitutions have utilized materials that were structurally and chemical distinct from their predecessors, but examples of true synthetics where the substances are identical but manufactured from different feedstocks are not lacking. Industrial ethanol, for instance, was manufactured by distilling grains in the early twentieth century, then was derived from petroleum, and now is made from grains again. Same chemical, different origins. Even more apropos is the example of synfuel manufacturered from coal by the Nazis during World War II. The kerosene, diesel fuel, and gasoline derived by this means were indistinguishable from petroleum products.
In the case of alternative fuels, some, like coal-to-liquids and so-called "green gasoline", are chemically identical to the fuel they are intended to replace. Others, such as biodiesel, have no close analog in the fossil fuel realm. Alternative fuels don't follow a single model, and that has important implications, because when they are identical to their predecessors they are subject to straight price comparisons and instant commoditization. This would suggest that the provision of some distinguishing attribute in the replacement might be wise for marketing purposes.
In general, replacement fuels only succeed when they are cheaper or when they offer performance qualities that are more suitable for emerging applications. Powdered coal, for instance, was used in some early internal combustion engines, but it was hardly ideal. The fact that it was cheaper than gasoline didn't matter. Illuminating gas, another fairly low cost legacy fuel, was also tried out in internal combustion engines, and, while it outperformed coal, it proved inferior to refined petroleum products which eventually won the day. This is not to say that the race is always to the swift. Leaded gasoline from a sheer performance perspective was better than gas laced with MBTE or ethanol, but it still disappeared from the market on account of its toxicity. Similar debates now rage concerning the lifecycle carbon emissions associated with various fuels, conventional and alternative, with many in the alternative camp claiming clear superiority in this regard.
I believe that price and availability will be the principal determinants of success, however, not performance, and not impeccable Green credentials either. Appeals to the Green sensibilities of customers may succeed in some niche markets, but they can't overcome significant price disadvantages in the major markets for fuel.
Clearly, alternative fuels have to establish price advantages at least in certain spot markets. But, perhaps equally important, their manufacturers and distributors have to be able to offer price guarantees. Oil and natural gas prices are both high and volatile. Any substitutes need to offer predictably low prices.
Cost and Prices
The most established fossil fuels, light petroleum, coal, and natural gas are, for the most part, cheap to extract from the ground and cheap to process. That's why everyone uses them. And in some respect they may be more environmentally benign than the substitutes since they exist in intense concentrations and thus the footprint imposed by wells and mines is less than would be the case for a low BTU feedstock such as biomass or oil shale (on the other hand, fuel crops are carbon sinks, and fossil fuels are not).
Prices of fossil fuels are not going up because of production costs, which in many cases have actually fallen. It's all a matter of supply and demand—or speculation, if you believe that, and I'm not sure I do.
Most alternative fuels continue to have an inherent cost disadvantage vis a vis conventional fuels. They can only play in the market at all because the prices and profit margins of conventional fuels have risen so high. An alternative fuel manufacturer can, by taking advantage of elevated market prices, shaving his or her own profit margins, and slightly underselling the coal, oil, and natural gas companies, survive. That wasn't true in the past, at least not in many places, and in most cases not without subsidies.
A good example of the current situation of the alternative fuel sources is provided by the Canadian oil sands industry, whose production costs are several times those of Saudi Arabia. The Canadian producers still manage to make plenty of money in a world where oil sells for over $130 per gallon.
The oil sands producers have succeeded in making a highly successful play within the established petroleum distribution industry. Refined products from Canadian bitumen appear in your gas tank mingled with hydrocarbons originating in Mexico, Nigeria, Iraq, and God knows where else.
But the oil sands producers do not constitute a good model for the alt fuels industry at large, particularly those portions of it occupied by startups and entrepreneurs. The oil sands were developed under a strong government mandate and most of the resources went to a handful of huge, well financed companies. And the very size of the resource, well in excess of a trillion barrels, ensured that the developers could eventually play in the larger petroleum business.
The Ethanol Model and Its Shortcomings
Ethanol made from grain and sugar crops is the most successful alternative fuel apart from bitumen, and certainly the most successful processed biofuel (wood is in fact the most widely used fuel for heating). But only in Brazil is it truly well established as a motor fuel, and here in the U.S. it is primarily utilized as a fuel additive for boosting the octane of gasoline.
Furthermore, the ethanol industry, at least in the U.S., appears to be at an impasse. The draw of ethanol distillers on the corn supply has been sufficient to raise both corn and manufactured food prices sharply in the U.S. and in Mexico (corn is the principal source of sweeteners in the U.S. and the favorite starchy grain in Mexico), and the promised deliverance of cellulosic production techniques has not come about because the techniques remain immature and uneconomical.
But, above all, the industry has failed to realize its potential because it has chosen to adhere to the basic model wrought by the petroleum industry, a model that is admirably well suited to the latter but fundamentally ill suited to ethanol, or to any alternative fuel for that matter. To be sure, that basic model has been embellished and modified, but not changed sufficiently to alter its basics. Hence ethanol's current difficulties.
Most ethanol is sold at ordinary filling stations either in the form of ethanol laced gasoline or as E85, a mixture of 85% ethanol and 15% gasoline which requires a dedicated pump and storage facilities. E85 can only be used in specially designed flex-fuel vehicles and requires more frequent refills because the energy content is only about 60% of gasoline by volume. Only a tiny fraction of filling stations, mostly independents in the Middle West, have E85 pumps, and E85 currently accounts for a small fraction of 1% of motor fuel consumed in the U.S. Even with subsidies and even with record high gasoline prices, E85 is not an especially good deal for the motorist.
Like the petroleum industry, ethanol is a business dominated by a few giants, including Archer Daniels Midland, Cargill, and Poet among others. It's essentially an oligopoly, and the economics of production are such that plants having capital costs much under $100 million are scarcely viable.
And yet the ethanol industry lacks many of the appurtenances that ensure the petroleum industry's success. It has no real brands or effective industry advertising, it has no significant enthusiast constituency among motorists, and, most significantly, it has no independent distribution and transport system to get it to market. There are no ethanol pipelines whatsoever in the U.S. today, and thus the product must be transported by more expensive means—barge, rail, and truck.
Ethanol has succeeded modestly well as an oxygenate and octane booster for gasoline but as a real rival it has failed utterly in the U.S. and in all other markets save for Brazil.
Whether the ethanol industry will right itself and present the petroleum industry with real competition is uncertain. I don't think so but explaining my views on the matter is a whole other discussion. Suffice it to say that the ethanol model doesn't work very well and should not be followed by purveyors of second and third generation alternative fuels.
Two More Recent Models That Won't Work Either
Many in the alternative fuels business have chosen to follow a standard business model for new technologies, especially for new chemical industry production techniques—and, after all, alternative fuels are in a sense a part of the chemical industry.
According to this model, you develop the basic technology, set up a very small bench level production installation, proceed to a pilot installation where you're producing your product in volume but not in commercial volumes, and only then commence the construction of a full sized commercial facility. Generally, in between each phase of the process, you attempt to raise more capital using the presumed success of the completed phase to woo investors.
Only it never really happens that way. No one ever makes it to the commercial stage or almost no one. Usually they stall right after the bench phase and spend two or three years vainly trying to raise capital and then simply call it a day. Or start another company all over again. And, if they do make it to the pilot, they don't get any further because economies of scale generally dictate facilities costing tens of millions if not hundreds of millions of dollars.
This particular model characterized the attempts on the part of literally dozens of firms to develop America's oil shale resources during the seventies and eighties. Few of those companies were startups, but the model is generally followed by alternative fuel startups at the present time. It is also the model that has been embraced by high technology startups. Fuel cell and hydrogen generation companies, for example, have normally adhered to this model, and almost never reached the production stage.
In some high tech segments pursuing such a model often worked to the advantage of the founders and managers. At the very least, the first round of funding would provide them with ample salaries and the freedom to undertake interesting work, and, if they were extremely fortunate, they could end up selling the company or taking part in an initial stock offering and exercising their options and thus attaining instant and sometimes enduring affluence.
As a technical writer covering the telecom and IT industries during the late nineties, I met many individuals who flourished by jumping from one startup to another, and even today it's possible to do so in Silicon Valley or Boston's tech corridor. You can spend your prime working years in a sort of pseudo- career where you never really accomplish anything but you pull down a lot of money. And now the model is migrating to the alternative fuels business. Vinod Khosla and other prominent venture capitalists are sinking huge sums of money into alt fuels startups, and while major IPOs are almost nonexistent, there have been some big buyouts where large firms have acquired startups with interesting intellectual properties.
Such a model inevitably breeds over-valuations and over-investment in various peripheral sub-sectors, and in many cases produces next to no real technological advancements, at least none of commercial interest. The great boom in hydrogen and fuel cell investment, which occurred in the nineties and first few years of this century, resulted in a wave of bankruptcies and lost investments and in very few significant product introductions. Will the advanced biofuels contingent endure similar travails? Almost certainly it will. It is nearly inconceivable that all or most of the proposed technologies for liquid fuels production will succeed in the marketplace. Most of the startups will go under, and most of the venture dollars will eventually find their way into the pockets of commercial property owners, various equipment suppliers, and of course the yacht brokers who always seem to thrive during booms and bubbles. But the industry as a whole will not thrive and could be greatly discredited. There's not much hydrogen hype anymore, is there?
The second false model that is widely accepted at present has a certain plausibility about it. The notion here is that the alternative fuels producer will concoct products that are hydrocarbons having essentially the same properties as refined petroleum products, so-called "green gasoline" and "green diesel fuel". Biogas which sells through natural gas channels would be another example.
What we're talking about here are bio-based synfuels, which are actually close analogs to coal-to-liquids products but which use biomass as the feedstock.
The presumption of most companies attempting to develop such fuels is that they can be sold through normal channels—in other words, they would be dumped into the blending and distribution networks currently serving the petroleum industry and would be mixed with the products of conventional refineries, or the upgraders used to process oil sands. They're all hydrocarbons, so the thinking goes, and the point of origin doesn't matter, just the chemical composition and that's roughly equivalent regardless of the source.
This model avoids some of the problems that have plagued the ethanol and biodiesel industries in the United States. No special E85 or biodiesel pumps are required and no separate distribution network. The problem is that the alternative fuel producer becomes an adjunct of the petroleum industry and lacks the ability to define or exploit individual markets, to establish brand identity or a public image, or to control his or her own destiny. Worse yet, by being tied to the increasingly discredited petroleum industry, the advanced biofuel producer inevitably share in its woes. And rather than offering any kind of solution, the biofuel producer becomes part of the problem, at least in the perceptions of the public.
The larger question arises as to who would possibly want to fund a company following such a model all the way to full commercialization. Remember, the final round of funding is apt to be in the hundreds of millions of dollar, way beyond what a venture capital firm can come up with. That’s major equity investment. And if I'm going to invest that much money, why not a surer bet such as another Canadian oil sands play or even a coal to liquids facility. Biomass processors tend to be limited in size compared to oil refineries or coal-to-liquid facilities due to the diffuse nature of the feedstock and the expense of transporting it. The potential revenue stream of any particular project is almost inevitably smaller.
In short, the biofuels industry is hampered by its adherence to failed models and will continue to founder until it rejects them. A fresh strategy is urgently needed.
A Radically Different Model
Here I am going to speak from personal experience and I am going to turn the discussion to the needs of various groups—market segments if you will—for fuel and how those needs may be satisfied while affording a profit for the provider of alternative fuels.
Recently I contacted a manufacturer who claims to have obtained a formulation that will allow biodiesel to be utilized in ordinary spark ignition gasoline engines. Essentially the stuff is an additive which alters the combustion characteristics of biodiesel.
I have no idea whether the stuff works as advertised, and I'm still awaiting the arrival of a sample. But I'm already exploring potential markets.
Obviously, one couldn't offer the mixture for sale at the local filling station for use in cars. No independent filling station operator would want to dedicate a pump to it because he would be underselling his primary product, and in any case it's not certified for use in automobiles. Now you could buy your own pump for 75 thousand dollars, but where would you put it? And how would you get around the certification requirement? Or meet it, assuming you wished to do so?
What I'm saying is that normal distribution channels would be closed to someone attempting to mix this additive with cheap biodiesel made from used cooking oil. You might be able to sell the fuel profitably for two dollars per gallon even if you made it in small batches, but you wouldn't have a means of getting it to market.
Or would you?
I'm not saying I'm ready to go into the biofuels business at this point, but I was moved to investigate potential markets further, and the obvious markets were those where uncertified fuel could be sold. Those would include power tools of various sorts, off road recreational vehicles, jet skis, race cars and motorcycles, and gasoline powered boats.
I started by asking the head of a work crew employed in renovating houses as to whether increased prices for gasoline had made any difference in his use of power tools. He replied that he had no choice but to use the tools but that high gasoline prices were hurting. Would he be interested in two dollar gas he could use in a chain saw but not in a car? Indeed, yes. Incidentally, way back when powered tools had their own dedicated fuel known as white gasoline which lacked lead.
I got similar responses from some people involved in off road motorcycling. So long as the cheap fuel didn't damage the engine, they would welcome it.
What about companies in the logging industry? They use a tremendous amount of gasoline powered tools. I haven't approached any logging companies because I don't have any product yet, but I'm confident I'd get a hearing.
Here's the reality. There are methods for converting biomass to liquid fuels today that at least in some local markets would allow end user prices in the neighborhood of three dollars a gallon, perhaps less, even at small production levels. They are essentially good to go. People in this industry shouldn't be thinking of further pilots. Pilots only lead to more pilots, just as we've seen in the fuel cell industry. We need to be thinking about real markets right now. Go to the markets first and get commitments. Fulfill the commitments by whatever means. Don't worry about perfecting any particular process or even being wed to any particular process. The aim is to meet the needs of a given market, not to explore the potential of a given technology.
We need to be thinking about facilities that are in the one million dollar range tops. Or maybe a hundred thousand, maybe fifty thousand. Start small and get it right. Don't indulge in pipe dreams like the hydrogen economy.
Pursuing these kinds of ancillary markets is not going to make anyone a billionaire at least not at first. But you don't start out as a billionaire. In most new industries you start out as a pauper. You think the Jewish furriers who founded the American film industry a hundred years ago made a lot of money starting out?
You start small and you don't take money from venture capital groups. They're never in it for the long haul and they welcome the bubbles that are so dangerous to fledgling industries. Very frequently your pain is their gain.
Another essential is to resist the lure of high margins in established markets. You need to build loyal markets by offering them long term fuel contracts at good prices. You can sell in the established petroleum market and make much more at first but you can always be bid down by distributors who know you can't afford to ship long distances. You should focus on business markets who need you as much as you need them.
Eventually, this business may boil down to a large scale assemblage of business co-ops and may follow a quite different model than traditional corporate capitalism. Successful companies may be those who can franchise technologies and allow local business organizations to empower themselves.
Eventually, maybe a mere seven or eight years out when hundreds of local advanced biofuel producers have built ancillary markets and proven that you can sell cheap if you sell direct, the countless millions of people buying certified fuels for eight dollars per gallon will start to look at biofuels seriously. Biofuels will never be produced in the kinds of volumes petroleum products are now, but in a world adapted to constrained fuel supplies they could be a very major play and one that could meet anticipated carbon regulations.
Let's throw out another nineties term, window of opportunity. That's what the biofuels business is contemplating today. That window will not last indefinitely, and may soon become a window of vulnerability. Here's why.
The automobile culture cannot adapt to continuously diminishing oil production. If production does not trend upwards—and it probably won't—the price of refined petroleum products will be intolerably high for most motorists and will demand too great a share of personal income. It will also drive up the cost of any products transported by ship, rail, truck, or aircraft.
If petroleum production actually declines in the near future, a distinct possibility in view of the fact that it hasn't increased in three years, then prices will begin to ascend to prohibitively high levels very quickly. Automobiles utilizing internal combustion engines simply cannot increase mileage beyond a certain point. Carnot's Law governing heat engine efficiency imposes an upper limit. The auto manufacturers confronting fuel price escalations that could destroy their consumer mass markets will act to protect themselves. They will transition over to the production of pure electric cars. Such cars are marginal in many respects compared to today's evolved gasoline and diesel burning cars, and they will probably continue to be marginal for years if not forever. But they beat walking.
The biofuels industry either sees a path beyond subsidies, grants, conscience money, and speculative investment, a path that leads to real markets, or it joins the other technology busts of the recent past.