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From Global Conference: Challenges facing biofuels

I attended the 2012 Milken Institute Global Conference last week in Los Angeles, where a panel of company advisers and a Department of Energy official discussed financing and scale challenges facing advanced biofuels and also where there’s reason for optimism.

The U.S. is really good at producing biofuels, especially ethanol. More than half of world production in 2010 was here, and we even export to Brazil, home of the once-daunting sugarcane-based industry. Biofuels are helping the U.S., despite all of the money spent on foreign oil, inch closer to become a net exporter of energy for the first time since before the Korean War.

But there are problems facing advanced biofuels, including significant issues of infrastructure, scaling up at a competitive price and securing middle-stage financing. Panelists went into detail about obstacles before proposing ways the industry could make the “leap” to change the way America uses fuel.

There is no lack of technology for advanced biofuels, and no need for additional infrastructure, as natural gas or other oil alternatives might require. Biofuels have also long been a “drop-in” substitute. The problem is access to capital and project financing; companies with venture capital and smart ideas are “stalled,” and technology that is “easy to figure out and trust” is struggling to scale up, said Chris Groobey of law firm Wilson Sonsini Goodrich & Rosati. “Nonbank banks [e.g. GE Capital] aren’t what they used to be” before the financial crisis, said Richard Kauffman of the Department of Energy. Compounding the problem is that many companies are being advised against middle-stage investment, said Lynde Coit, a senior adviser to Plasco Energy Group.

Another challenge is the way the oil market works, Kauffman said. “The domestic oil industry doesn’t have really long-dated contracts” the way renewables often do, he said. “If you don’t have a long-dated market in conventional fuels … it’s hard to have a forward market for biofuels,” and thus financing becomes more challenging.

Sound like a negative outlook? The panel realized this and eventually shifted gears to talk about what companies can do besides wringing their hands in the absence of traditional middle-stage financing. If venture capital or project financing isn’t panning out, look to the oil and chemical industries for strategic partners, Groobey and Kauffman said. Chevron is one example of a major company investing in biofuel firms and joint ventures, said Chevron senior consultant Brian Chase.

Even in venture capital, producers can take a different angle: corporate social responsibility. The CSR argument for biofuels and against oil is idealistic and pragmatic, Coit said, as the industry has hard assets. “That plant is going to take something in and put something out,” he said, and questions about efficiency or cost can be answered only by going into operation. And if you don’t have low-cost technology, you better find one.

That sentiment by Coit seemed to set the tone: The industry has shown promise, but it needs to be creative and deliver results if it hopes to live up to its potential.