Emerging Markets Insight is a newsletter from Emerging Markets Online, a
business
intelligence
and market
research firm serving the needs of
clients in biofuels, oil, gas, government, R&D, and economic
development initiatives. Check back for the latest news from
Emerging Markets Online
The global biofuels industry is entering a transitional era of
emerging opportunities and
considerable challenges in reaching 2020 targets. The global
economic recession is already
shaking out many of the would-be players in a crowded algae space,
and favoring new
players with improved strategies. Why are some algae companies
attracting capital, and
scaling up their enterprises while others continue to peer into the
“valley of death” from the
laboratory to the pilot phase?
From 2008 through 2011,
Emerging Markets Online
(EMO) set out to
find how leading
companies in the algae business are beating the odds and adapting to
rapid changes in
markets, regulations and technologies. Over the course of two years,
EMO visited with
dozens of algae producing facilities, laboratories and
pre-commercial projects to find out
what it takes to qualify for investment and gain an advantage as an
aspiring algae producer.
During this time, EMO also ran collaborative R&D workshops and
participatory webinars with
support from leading minds from the Biofuels Digest, the American
Biofuels Council, the
National Algae Association, Biofuels International, start-up
incubator the Houston
Technology Center; winners of government grants for US DARPA and DOE
contracts, as well
as thoughtful guidance and insight from members of the Algal Biomass
Organization, the
European Algae Biomass Association, the National Biodiesel Board,
and every major oil and
gas company invested in the algae industry.
In short, the endeavor spanned stakeholders in nearly every aspect
of the algal biomass
business. Biofuels Digest Editor Jim Lane provided a foreword and
guidance on leaders in
advanced biofuels companies and insights on business models for
growth. The results were
published in Algae 2020, a strategic guide for investors and
technology developers in 2009,
and will continue with an updated study on more recent findings in
January 2011.
Based on the results of this massive collaborative undertaking, it
is absolutely clear that for
any algae producer or advanced biofuels company to receive
investment, and grow out of
the lab into a commercial enterprise, the practice of strategic due
diligence across a range
of domains is paramount to success. This requires dedicated
research, development,
collaboration and diversification to prepare for rapid, transitional
changes in regulations,
mandates, markets, technologies and subsidies.
Four Keys to Advanced Biofuels Investment
The key findings from Emerging Markets’ continuing R&D efforts in
Advanced Biofuels reveal
four common elements are critical for any algae company to attract
investment and survive
in uncertain regulatory and market conditions.
The companies that have successfully attracted capital and graduated
from the lab into pilot and demonstration projects have four
fundamental elements in common:
1. The production of advanced biodiesel, ethanol, and fungible
drop-in fuels.
2. The ability to demonstrate proof of concept to investors beyond
the lab/bench scale.
3. Most utilizing molecular biology or advanced systems engineering
platforms.
4. A diversified portfolio of fuels, advanced biodiesel and ethanol
fuels, drop-in biofuels,
biojet fuel, green chemicals and biopolymers.
Proof of Concept
Of the 80 or so companies involved in the algae space, less than 25
have moved from stage
1 in the laboratory to stage 2 at the pilot phase during the
economic recession. Few have
been able to convince investors to risk placing $1 million USD or
more to make this
necessary transition. If an algae venture is not (a) able to
demonstrate and prove its
technology works on a small scale or (b) produce more than 1000 tons
of algal biomass or
at least 100 gallons of algal oil with its partners, it is unlikely
investors will take serious
notice. Notably, some companies have been able to attract investment
based on initial proof
of concept at the lab/bench scale via strategic partnerships,
early-stage VC money, and
government grants.
Advanced Biodiesel, Ethanol & Drop-In Fuels
A common theme is found among the leaders of the field that have
progressed into pilot and
demonstration scale projects. In addition to biodiesel and ethanol,
these organizations are able to
produce drop-in replacement fuels from microalgae, and blue-green
algae also known as cyanobacteria and other microbes. Drop-in fuels
from created from algae and other forms of biomass are the molecular
equivalent of kerosene or JP8 aviation fuels, diesel and petrol and
are otherwise known as green diesel
or renewable diesel, bio-gasoline or green gasoline.
What explains the rising investment trends in advanced algae
biofuels during an economic recession?
Mandates and markets. In the biggest markets in Europe, the U.S.,
Brazil, China and India, government
mandates are requiring large oil and gas refiners to blend in
biofuels to their existing infrastructure. In 2008, the U.S.
government enforced mandates for ethanol. By the end of 2011, the
corn ethanol industry
will soon approach the “blend wall” at 10 percent of total gasoline
consumption or nearly 13 billion
gallons. E15 adoption remains uncertain and, if implemented, is
likely to be restricted by investment costs
in infrastructure development (pipeline, storage) and costs of
installing E85 pumps.
In the U.S., gasoline is the dominant fuel representing
approximately 130 million gallons of consumption
per year. Most oil and gas companies facing blending mandates, and
auto manufacturers and transport
companies considering fleet-wide upgrades to E15 or E85 wish to find
fungible fuels that are compatible
with existing engines, pipelines, storage systems and petrol
stations.
The aviation industry faces similar challenges. In 2012, U.S.
airline carriers flying into Europe will have to
endure imminent carbon penalties, and can not use traditional
ethanol and biodiesel fuels in their engines or at high altitudes.
Advanced drop-in fuels provide answers to systemic problems and
challenges in
regulations, infrastructure and sustainability criteria. It is a
tall order to fill, and most algae producers have
barely scratched the surface in this regard to date with the
exception of a few.
Investment Trends — Experience Matters
To meet the specs for advanced drop-in fuels, petrochemical
engineers will tell you every
molecule counts. In response, molecular biology pioneers are leading
the charge in
developing platforms from algae, cyanobacteria, and microbes to turn
carbohydrates
(biomass) into hydrocarbons (fuels). This is one of the reasons
Sapphire Energy has
attracted more than $100 million in investment on the concept of
green gasoline and
aviation, and why Solazyme has been successful in attracting more
than $100 million by
deploying a diverse platform for producing drop-in aviation fuels,
green diesel, green
chemical and polymers and biodiesel.
This trend also explains BP’s $10 million investment in experienced
algae producer Martek,
and Exxon-Mobil’s unprecedented $600 million collaborative R&D
venture with Synthetic
Genomics to create drop-in fuels and biochemical products from
advanced molecular and
biochemical engineering methods.
Diversification Key to Success
In a world of fast-changing regulations, there is a lot at stake in
the biofuels arena. At the
start of 2010, uncertain and impending sustainability criteria in
the EU and U.S. first generation biodiesel and ethanol markets are
effectively limiting the growth of traditional biodiesel and ethanol
markets.
The full impact of these regulations in the EU and the U.S.
continues to present a major risk
for first-generation biofuels stakeholders, as seen in the 2010 CARB
announcement and
2009 EPA biodiesel impacts. This was highlighted in the 2008 study
Biodiesel 2020, and
articles in Biofuels Digest, Forbes, Renewable Energy World, The
Futurist, and Biofuels
International as a message to biodiesel and bio-refining companies
to diversify feedstock
inputs and fuel outputs or face the consequences of fast-changing
and often unfriendly
national and state government sustainability regulations.
Advanced Biofuels Investments
In the capital markets, investors have far more confidence in market
demand as a measure
of long-term opportunity in transport fuels and petrochemical
derivatives. For this reason,
the early leaders in advanced algal and microbial fuels are
diversifying and targeting
existing petrol, diesel and aviation markets, as well as related
biofuels markets for green chemicals, polymers and power generation.
The diversification of biofuels companies beyond
one fuel — ethanol and biodiesel — to include a portfolio of
advanced biofuels represents a
wise long-term strategy to inspire investor confidence.
Over the next decade, the U.S., EU and the big emerging markets of
China, India, Brazil
and Africa will demand more energy. Governments and investors are
keen to see more
algae producers rise to the challenge, demonstrate proof of concept,
and deliver on
promises for advanced biodiesel, ethanol, biojet and drop-in fuels.
February 2011
Consulting Services
