Max Gladwell

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Reflections on the Decade II: Biofuel Boom and Bust

January 5th, 2010 by Max Gladwell · 5 Comments

The biofuel industry went through a boom and bust not unlike the dot-com era. Can Biofuels 2.0 revitalize the broken industry in the twenty-teens?

The previous decade will be remembered for giving birth to the clean tech movement and more specifically the business opportunity in green technology. When we look back, the 2000s will be credited for launching countless companies in solar, wind, geothermal, electric vehicles, smart grid, and biofuels. The latter is unique in that the biofuels industry experienced a roller coaster ride much like the dot-com era of the ’90s. We rode the wave from 2005 to 2007 and have been keen observers ever since. There is definitely a book to be written about the great biofuel boom and bust of the 2000s. This was our first-hand experience.

In early 2005, we were engaged as consultants for Earth Biofuels, a biodiesel startup based in Dallas, Texas. As you can imagine, building a vertically integrated energy company is highly capital intensive given the tremendous infrastructure involved. Fortunately, the economy appeared to be quite healthy at the time, and the investment environment for such things was quite favorable. By the fall of that year, the company was in a position to complete a reverse merger and go public. Concurrently, Earth Biofuels acquired Willie Nelson’s small biodiesel distribution company, complete with the BioWillie brand, and both Willie Nelson and actor Morgan Freeman joined the company’s board of directors.

Earth Biofuels entered 2006 with multiple biodiesel refineries either under construction or in the planning/acquisition stages. The BioWillie B20 biodiesel brand was being distributed at a handful of independent truck stops around the country. The press couldn’t do a story on biodiesel without referencing BioWillie, and the company was quickly expanding into the corn ethanol business. Goldman Sachs had already forecast $100 oil (though it wouldn’t be realized until 2008), which made a clear business case for biofuels.

Indeed, the case for biofuels was compelling across the political spectrum. Renewable, domestically produced fuels supported local and rural economies while reducing our dependence on foreign energy, and they were good for the environment by reducing both toxic and greenhouse gas emissions. Having personally conducted the market research and written the business plan for Earth Biofuels, we also realized the inherent limitations of soy-based biodiesel and corn-based ethanol. We didn’t believe these fuels represented a long-term solution but rather one of many ways to transition away from petroleum. We knew that second-generation biofuels such as algae-based biodiesel and cellulosic ethanol would be necessary for biofuels to be truly scalable, viable, and sustainable as fuel alternatives. We weren’t alone, however, in backing the first generation.

Looking back on the biofuel boom, there were a number of key moments and key players that made it what it was. In 2005, Bill Gates invested $84 million in Pacific Ethanol, taking a 27% stake in the company. Perhaps the most credible and passionate proponent of ethanol was legendary venture capitalist Vinod Khosla of Khosla Ventures, Kleiner Perkins, and Sun Microsystems fame. His PowerPoint presentations and white papers were widely distributed, and he made a compelling case for how corn-based ethanol would provide the necessary bridge to cellulosic. Sir Richard Branson himself entered the fray by funding Virgin Fuels, now rebranded as the Virgin Green Fund.

By the summer of 2006, the industry was firing on all cylinders (if you’ll forgive the pun). Ethanol producer VeraSun energy made its successful public offering, rising 30% above its IPO price and raising $421 million.

Riding a U.S. push toward ethanol as a substitute for imported oil, VeraSun is the first of three producers of the corn-based motor fuel to go public this summer. Still to come are Aventine Renewable and Hawkeye Energy.

The peak for Earth Biofuels occurred at roughly the same time, as this brief period marked the peak of the biofuel boom.

Following the reverse merger and stock split in November of 2005, Earth Biofuels shares traded at around 60 cents. By the summer of 2006, prices had risen to more than $6/share and reached an interday high above $7/share. The market cap exceeded $1 billion for several weeks, and on July 18th, Earth Biofuels announced that actress Julia Roberts had joined the company’s advisory board and would serve as spokesperson for a new clean school bus initiative. The announcement added roughly $200 million to the company’s market cap over a seven-day period.

This was a relationship we developed in an effort to drive awareness about the health risks posed by diesel-powered school buses and how biodiesel presented an easy and cost-effective solution. Regardless of how biodiesel is grown or produced, its emissions are non-toxic and, therefore, dramatically improve the air quality for students who ride them. Julia promoted the initiative on The Oprah Winfrey show, which prompted California State Senator Dean Florez to inquire about supporting our efforts. We worked with the Senator and his staff to draft a seven-bill package of biodiesel mandates and tax incentives during the 2007 legislative session. The fate of those bills, though, was consistent with that of the biofuel industry as a whole: a bust, thanks in no small part to opposition from Big Oil.

Having moved on from Earth Biofuels at the end of 2006, were were focused on two new startups. The first was a search and discovery learning technology designed specifically for healthy-green living, which is still in development. The second was Conserv Fuel, a green filling station in the heart of Brentwood, CA. It would become the first station in LA to sell both B99 biodiesel and E85 ethanol. Then-Senator Barack Obama used the station as a backdrop for a clean-energy campaign speech in 2007, and Men’s Vogue did a feature story on our efforts to develop Conserv Fuel into a franchise model for green filling stations nationwide. As the only source of E85 in LA, the station also enjoyed support from General Motors.

This was the period of the boom when GM and other auto manufacturers were pushing FlexFuel vehicles while urging us to Live Green and Go Yellow, a reference to E85 corn ethanol. In the fall of 2007, however, things started to unravel rather quickly for the biofuel industry. In truth, the industry had always been plagued by competing forces ranging from the economic and academic to the social and political.

The industry itself was competing for limited resources. There were only a few companies that could build biorefineries, so not only were they booked years in advance but they could charge whatever they wanted and renegotiate contracts as they saw fit. Since biofuels couldn’t be transported through traditional pipelines, they required rail cars and trucks. During the peak of the boom, no rail cars could be found. Most importantly, the primary biodiesel feedstock (soybean oil) was in short supply given the unprecedented demand. Producers couldn’t produce and those that could weren’t profitable. In the end, though, biofuels had trouble living up to the green hype.

In writing the business and marketing plans for Earth Biofuels, we relied on data from USDA studies and others that showed a positive energy balance for biodiesel of more than three to one (3:1). In other words, for every unit of petroleum energy you invested to bring biodiesel to market, you’d get more than three units of biodiesel energy in return. This contrasted with petroleum diesel and gasoline itself, which often yielded a net energy loss.

In terms of the food issues, we were  skeptical of the charge that biofuels were responsible for boosting food prices because there were much more powerful forces at work, namely rising energy prices across the board and unprecedented demand from developing nations. Neverthless, as the biofuel boom waned, the industry steadily lost support from one of its key constituencies: environmentalists.

The use of genetically modified soy never sat well with this group (for good reason), and the whole energy balance question had never sufficiently been addressed. The increased use of imported palm oil as a feedstock, which necessitated the clearing and destruction of rainforests, started turning the tide in 2007. The Sustainable Biodiesel Alliance emerged to address some of these concerns, but the biofuel industry had already passed the point of no return.

One of the defining moments of the biofuel bust—the beginning of the end—was an article published on February 8th, 2008, in the New York Times entitled Biofuels Deemed a Greenhouse Threat:

Almost all biofuels used today cause more greenhouse gas emissions than conventional fuels if the full emissions costs of producing these “green” fuels are taken into account, two studies being published Thursday have concluded.

This was a huge blow to the industry’s green credibility and its viability as a truely renewable fuel. We remember feeling grateful that we didn’t have to deal with this blowback. We can only assume that everyone involved in the biofuel industry was in full crisis mode. To use a war analogy, this article was the Tet Offensive of the anti-biofuel shift.

Later that year, VeraSun and several others filed for bankruptcy. Pacific Ethanol‘s Chapter 11 followed in May of 2009 and a month later the California State Water Resource Control Board made it illegal to store high biodiesel blends (above 5%) in underground tanks. This effectively put Conserv Fuel out of the retail biodiesel business.

Alas, the industry’s coup de grâce arrived on New Year’s Eve 2009, at the dawn of this new decade, when Congress blithely allowed the $1/gallon biodiesel tax credit to expire. This was the industry’s lifeblood. The credit gave producing and selling biodiesel a fighting chance at profitability. Without it, there is no biodiesel industry. And if you’ve read this far, it’s clear how this could make for an interesting book on the great biofuel boom and bust of the last decade.

Now that we’re into a new decade, it’s possible that the biofuel industry will reinvent itself just as the Internet did in the previous decade with Web 2.0 and social media. We’re ready for Biofuels 2.0. Are you?

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Tags: Alternative Energy