A lot has been written about North America's love of the automobile and the freedom of hitting the road (thanks in no small part to the myth-making and dream-selling departments at the major automakers), but in these historically-high gas price, heightened environmental concern, energy-security-conscious days, one has to wonder what the future holds for the internal combustion engine and its adherents. While it may not be going away any time soon (although the chart of Total U.S. Auto Sales below may suggest otherwise as sales have plunged to levels not seen since the early 90s), it seems inevitable that the fuel used in the engine will continue to evolve, and Bioethanol looks like it will play a significant role. Bioethanol you say? But isn't that driving up the cost of food and producing only modest energy gains? Well, no, not when you're talking about cellulosic ethanol. Here's the scoop:
- Bioethanol is currently derived from three primary sources: sugarcane, which is widespread in Brazil where ethanol accounts for 40% of fuel consumption; corn, which is mandated to be blended with fuel in the U.S.; and biomass, which is a broad grouping of organic materials including corn stover, woodchips, switchgrass... the common link being that these plants are roughly 2/3 cellulose or hemi-cellulose.
- Sugarcane ethanol is cheap and proven. According to the Sao Paulo Institute of Agricultural Economics, it currently costs just US$0.84-1.20 per gallon to produce. Furthermore, sugarcane ethanol provides more than 8 times as much energy as is used to produce it and cuts Greenhouse gas emissions (versus oil-based gasoline) by 80-90%. The problems are transportation and politics. After transportation expenses and the U.S. import tariff of $0.54/gallon, the cost rises to US$2-2.30/gallon. Suffice it to say, if sugarcane grew as well in Iowa and Indiana as it does in Brazil we would be having a different conversation.
- Corn-based ethanol is made by extracting starch from corn and hydrolyzing it into sugar, and then fermenting it into ethanol (sugarcane starts at the fermentation phase and thus cuts out this first step). The problems with corn-based ethanol are numerous: according to the U.S. Department of Energy, it provides only 26% more energy than it takes to produce it; it requires roughly twice as much acreage to be planted as sugarcane does for an equivalent amount of ethanol; it costs roughly US$3 per gallon to produce; it reduces Greenhouse gas emissions by only 10-30%; and perhaps most pointedly, it reduces the amount of corn available for food use (the food versus fuel problem). But on the positive side, it plays well in Peoria, meaning it has a fair bit of Midwest voter support.
- Cellulosic ethanol needs more processing than corn or sugar based ethanol as the robust plant fiber must be broken down into starch before it can hydrolyzed into sugars and fermented. This extra step is an added expense to the ethanol production cost, but the potential benefits of cellulosic ethanol include: greenhouse gas emissions reductions between 80-100%; cheap high-yielding feedstocks than can be grown on marginal land not used for food production (grown in Texas, Oklahoma, Kansas, etc.); technological advancements in the areas of enzymes and gasification used in treating cellulose that could sharply reduce the cost of production in coming years.
All right you say, I'm interested, but how far away is cellulosic ethanol from becoming a reality? The answer is "sooner than you think". As it stands, the U.S. government is keen to promote domestically created transport fuels (see our piece Earth, Wind and Fire - June 27th for more on the rise of renewable energy), and has mandated that by 2022 transport fuels must include 36 billion gallons of biofuels. Of these 36 billion gallons, a maximum of 15 billion can be corn-based, while a minimum of 16 billion gallons must be cellulosic. Just to put this into perspective, in 2007 the U.S. consumed 142 billion gallons in motor fuels, so we're talking about roughly 25% of an enormous market. Putting their money where their law-signing pen is, the government has included a $1.01 tax credit per gallon of cellulosic ethanol and US$320 million in loan guarantees for refiners making cellulosic ethanol, while the Department of Energy will invest US$385 million in six cellulosic ethanol plants over the next four years. Well that's pretty impressive, but what about the rest of the world? We don't want to hang our hopes and dreams on the sometimes-volatile U.S. legislators. Relax. The European Union will need 11 billion gallons of low emission biofuels (i.e. cellulosic) in order to meet its 2020 target of 10% of transport fuels from biofuels. Furthermore, China has a target of 15% biofuels by 2020, meaning it will require between 18-23 billion gallons... and China has recently frozen corn-based ethanol production at 2006 levels in order to alleviate food concerns.
For the investor, there are a range of technologies and production ramp-up plans amongst the companies in the emerging cellulosic ethanol industry. Most of these companies, however, are still private, with only a handful trading on the public markets. In the coming months though, it is likely that a number of these companies will be coming public as they seek the funding they need to move from the demonstration phase in their technology to the commercialization phase. These are exciting times for renewable energy as the forces of economic growth, environmental concerns/emissions and energy security converge to promote new energy technologies. As always, we will attempt to place ourselves at the forefront of this transition.
In other news...
It would seem that we've become victims of Wall Street Crisis fatigue (it's like Michael Phelps fatigue, but without the bling) as a recent investor letter from Sophocles Value Fund manager "Imus Keepup" reminds us that over the past 8 years the major Wall Street investment banks have created no less than five greed-driven investment debacles. In chronological order we had: fake research reports endorsing companies they sought investment banking fees from; unfairly allocating hot IPOs to the CEOs of favored companies; after hours trading in mutual funds; the subprime loan mess; and finally, illiquid auction-rate securities. Any of those five travesties would have left an ordinary industry reeling, but alas, the investment industry soldiers on.
Auto sales gearing Down