Week of November 30

Alternative Fuel Finance…corn ethanol dissed…biocrude…Obama's alt energy policy…fuel from fungus….

Just about everybody in the alternative energy biz has money on his mind these days. Where's the investment going to come from? How much will be available? Is the mini boom that seemed to be shaping up through the summer of 2008 finally at an end?

To get some answers we consulted Ed Feo a Manhattan based attorney who specializes in alternative energy investment.

"No question, there's a shortage of capital, a shortage of equity," says Feo. "I think the projection was $5.2 billion in equity funding for alternative energy for this year. The reality is going to be closer to $3 billion."

And, according to Feo, the situation is only a little better in the world of venture finance. "The impact has come a bit later," Feo relates. "It's only in the fourth quarter that we've seen a real drop, and it's still not as precipitate as with equity investment. Obviously, there haven't been any conspicuous bankruptcies among venture firms, at least not yet."

Feo, interestingly, is quick to caution entrepreneurs not to place their hopes on federal funding. "The new Administration certainly talks a lot about supporting renewables, but there are too many conflicting demands on the federal purse.

"We're looking at a miserable year in 2009," Feo continues, "but it will probably be worse in the fuels space than anywhere else. With the drop in petroleum prices it will be much harder to attract investment in alternatives."

As a matter of interest, alternative fuels constituted by far the hottest investment area in the renewable space throughout most of 2008, but Feo confesses to a lack of enthusiasm all along. "There's no assured margin in that business," he insists. "There are a lot of embedded commodity issues. Look at the grain ethanol guys and how many of them have failed. And that's with a developed market for fuel additives."
Feo does not spare the cellulosic ethanol camp either. "There's no assurance that they are going to achieve good economics. It's funny. You look at all the next generation biofuels companies Vinod Khosla has invested in, and he doesn't seem to be talking about them anymore. It's like he's moved on to something else."

At the same time, Feo expresses his commitment to continuing to promote alternative energy technologies. "The fact is there are still strong reasons for supporting alternative energy. Those haven't gone away. It's just that raising money has gotten a lot harder."

Another blow to the Grain Ethanol Camp

An article appeared recently in the journal "Global Change Biology" which dealt another telling blow to the pretensions of the North American grain ethanol fuel business. The industry has continued to insist via various trade publications and organizations that corn based ethanol is the answer to the nation's fuel problems while economists, biologists, and process engineers alike have continued to cast doubt on such claims. Now, according to an article by Evan DeLucia, a University of Illinois plant biologist, evidence is available showing a 50% decline in carbon in prairie soils after they have been utilized for corn cultivation and native grasses. DeLucia maintains that the soil is by far the biggest carbon sink and that the deep ploughing practices utilized for grain cultivation in the U.S. contribute greatly to greenhouse gas problems by reducing the effectiveness of the largest carbon sink. DeLucia's article would appear to suggest that cellulosic ethanol production based on the use of switch grass as a feedstock would in fact constitute a much better approach for reducing dependence on petroleum products. That view, however, is not universally shared among grain ethanol fuel detractors. David Pimental of Cornell, who has written many scientific articles on biofuels, actually believes that cellulosic ethanol is among the worst choices for a petroleum substitute.

On a similar note, I happened across a report on biochar, a substance I discussed in an earlier article on terra preta, the black soil found in Amazon Valley and believed to have arisen from the practice of native tribes impregnating the soil with charcoal as well as nitrogenous wastes such as fish heads. The report, prepared by Polish academic researchers, tends to confirm what anecdotal evidence suggests, namely that biochar can increase the fertility of soils several fold, and that it is an effective means of sequestering carbon—a true win-win tactic in the carbon mitigation struggle. It should be noted that biochar is not just carbon neutral, it's carbon negative, that is, a way of actively reducing carbon intensity, not just holding the line.

Obama's Interstate Highway System

Barack Obama has indicated that he intends to initiate massive public works projects to stimulate the sagging and lagging economy, and the wishful thinking among the alternative energy contingent is that a lot of money is going to come our way. Sort of like Eisenhower's Interstate Highway Project. Could be, but don't hold your breath. President Obama, like any politician who aims to succeed, will be focused on his midterm survival prospects and will attempt to steer funds to those projects that are apt to have the biggest impact on employment and are apt to exert a secondary stimulus by drawing on goods and services from areas of the economy not directly connected to the projects. The question then becomes, how do alternative energy projects fare in this sort of competitive environment? Of course the larger question is what alternative energy initiatives will have the greatest lasting impact on the economy and on the society as a whole, but that question may not be posed by Obama's inner circle simply because expediency nearly always trumps wise stewardship in the political arena. And indeed we see signs of this already in the utter disregard for the mounting deficit and its likely long term baneful effects on the economy. This is not to say that Obama may not be correct in turning his attention first to the mounting unemployment and fiscal instability of the present, but in doing so he is still governed by expediency.

Obviously one gets the greatest immediate stimulus from projects that are both capital intensive and labor intensive. Modernizing the power grid would meet those definitions. So would subsidizing almost any kind of large scale electrical generation requiring a lot of heavy construction. On the other hand, sponsoring a lot of scientific and technical research, however fruitful it might ultimately prove, would not be apt to provide a lot of employment. Nor would it win the allegiance of civil engineering and construction firms like Bechtel and Black & Veetch who are heavy contributors to political campaigns. FDR in his public works project assiduously cultivated the big construction firms of his day and they were among his few corporate backers. We would expect Barack Obama to do the same.

What about green car initiatives packaged as part of the Detroit bailout? This could in fact be Obama's major green initiative. Bailing out the auto makers should help shore up the economy, at least temporarily, and while not reducing unemployment, would at least not be contributing to it.

But there is a disturbing element of the command economy in such an initiative, and the likelihood of it working well seems slim to me. How does the government participating in the design process help me as a manufacturer to make a better product, unless of course, government agencies are staffed with highly capable product development and industrial engineering professionals.

Now, I don't necessarily believe that state run enterprises are incapable of producing good products. Alfa Romeo, which was run by the Italian government for many years, produced a succession of classic sports cars which are highly prized collectibles today. The famous Kalashnikov rifle, a marvel of industrial design, was the product of a state enterprise, and has aptly be said to have been "designed by geniuses to be used by idiots", as good a definition of an effective military weapons as one could possibly imagine.

But what's called for today is rethinking the very nature of the personal automobile, and of public transportation, for that matter, "creative destruction" in the words of Schumpeter. Would someone like Raymond Loewy work for the department of transportation? Probably not.

I suspect that regardless of the bailout one of the surviving majors is going to disappear. Inconceivable? Chrysler, the least of the Big Three, has already atrophied to the point where it can't be considered a Big Three auto maker any longer, and it is likely to atrophy further, but, curiously, General Motors, the erstwhile world leader in automobile manufacturing is the most imperiled. My guess is that Obama administration will not allow GM to disappear, but would not be unduly troubled by Chrysler ceasing to exist or at least to continuing exist in anything like its current form.

One could write a very long book about the failings of the U.S. auto industry—or of the U.S. motorcycle industry, but that's a whole other story. The majors lost a huge amount of market share forty years ago, and while they regained some lost ground temporarily in the eighties and nineties, they have not proven very agile in advancing core technology, an undertaking which is arguably essential to long term survival. For decades American car companies have been technology laggards, always last to adopt significant innovations such as all independent suspension, turbocharging, continuously variable transmission, electronic fuel injection, overhead valves, disc brakes, high compression common rail diesel engines, front wheel drive, and on and on. Instead the emphasis has been on packaging and styling concepts like the Hummer, the sports utility vehicle, and the PT Cruiser, plus a few that haven't worked like the Dodge Prowler and the revived Thunderbird. I would contend that you just can't build a motor vehicle business on pure image anymore, and even Harley Davidson is finding that out.

Frankly, I have no idea what the majors can do at this juncture, and I keep thinking of an engine designer who told me that "the young, rebellious engineers that create true innovations just never get hired by the Big Three. Nor would they want to work there even if they could get hired."

Nevertheless, the auto makers assuredly will be getting a lot of your tax dollars, and the bailout will be a big part of the energy policy of this new Administration. Whether that will represent dollars well spent is another matter.

Saudi Arabia under Your Toenails - Funky Fungus Fuel

Among the more primitive sorts of plants, algae have been getting most of the attention as a fuel feedstock. Now their lowly brethren the fungi are getting into the act, as I, incidentally, predicted they would.

A researcher at Montana State University named Gary Strobel has identified a fungus in the Patagonian rainforest called the ulmo tree fungus that produces long chain hydrocarbons that are much like diesel middle distillates refined from petroleum.

Mr. Strobel is under the impression that his find is a first. Unfortunately for him, it ain't so. As readers of this publication are aware, there are several plants that produce fuel grade hydrocarbons including the Philippine hanga tree, the candlenut tree, the petroleum nut tree, and the diesel tree of Brazil.

What's interesting about Strobel's fungus is that it can produce hydrocarbons by consuming cellulose—cellulosic diesel, if you will. Unfortunately, he doesn't say anything about yield rates or how much you're likely to get per acre or per dollar. One would imagine that the Patagonian rainforest rather resembles the rainforests of British Columbia, Southern Alaska, and Washington State, and that a fungus acclimated to that environment requires a special combination of cold and wet, but not too cold. Where are we likely to find such an environment other than those places mentioned? Temperate zone rainforests are much more restricted in area than their tropical brethren.

Some researchers are suggesting that the genes controlling the process can simply be transplanted into another organism, but to date such genetic engineering has not born fruit in the biofuels arena. Hope springs eternal, however.