Corn-based ethanol production is set to peak this year as the Environmental Protection Agency’s advanced biofuels mandate has capped production of conventional ethanol at 15 billion gallons, or about 357 million barrels.

After Congress last year scrapped the $6 billion a year Volumetric Ethanol Excise Tax Credit, the
EPA cap marks the end of the road for accelerated rates of production, which saw corn-based ethanol volumes grow from 3.9 billion gallons in 2005 to a projected 14.9 billion gallons this year. Now that almost all the gasoline in the United States is blended with up to 10% ethanol, producers are looking to export markets and refiners are looking at retooling strategies to tap into the burgeoning second generation biofuels market.

Gevo, based in Colorado, is one of a handful of biofuels companies that says it is on the brink of producing at commercial scale.

Fungible Technology

Its first plant in the US “corn belt” of Minnesota will be operational in June this year, making 18 million gallons of isobutanol using a yeast-based process that “makes scotch taste like scotch”, according to Jack Huttner, Gevo’s executive vice president of commercial and public affairs. Its second plant will come online in late 2013.

“Our technology is designed to fit in existing ethanol plants – grain, sugar cane or tapioca, our yeast will work in that system so you don’t have to change the factory,” he said. “That is a lot cheaper than developing greenfield sites which would cost several hundred million dollars.”
Gevo’s first target market will be solvents and chemicals to make paint, solvents, cleaning agents, lacquers and nail polish. Its fuels strategy will start small by targeting marinas with plans to scale up to 350 million gallons of transportation fuels by 2015.

“That’s going to be a few years away for us,” admitted Huttner.

As well as increased energy density of 30% and reduced GHG emissions as compared with ethanol, Gevo’s isobutanol also reduces ground level smog in urban areas, claimed Huttner.

EPA will acknowledge these environmental benefits with 30% additional credits awarded under the Renewable Fuel Standard 2.

The RFS 2 has set targets for 36 billion gallons of biofuels by 2022:

• 16 billion gallons of cellulosic biofuels;
• 15 billion gallons of conventional biofuels;
• 4 billion gallons of advanced biofuels; and
• 1 billion gallons of biomass-based diesel.

Even though gasoline consumption at 120.6 billion gallons in 2011 dwarfs these figures, the RFS2 targets are ambitious. Recently the EPA had to dramatically scale back the 2012 target for 500 million gallons of cellulosic biofuels to 8.65 million gallons.

Solving the Second Generation Biofuels Puzzle

Huttner admits that cellulosic biofuel technology made from woody biomass is a harder nut to crack. Gevo also has a project to create isobutanol from cellulosic fermentation of biomass. Gevo is in discussions to develop the technology with Chemtex, parent company MNG, based in Italy, and HCL Cleantech based in North Carolina.

Gevo’s ramping strategy seems to be going to plan. But scale has not come so easily for other leading biofuels companies, despite successful initial public offerings. Amyris, a renewable chemicals and fuels company backed by Khosla Ventures, announced February 27 that it has secured an additional $87.3 million in funding.

The extra cash was welcome, especially after the company’s shares tumbled earlier in the month on the announcement that it was scaling back its plant expansions and firm management withdrew its 2012 production guidance of between 40 million liters and 50 million liters of biofene.

Even though the biofuels sector was a darling for VCs like Vinod Khosla, who claims to have made $1 billion from his biofuels plays, Amyris and companies like it haven’t been so well loved by the public markets.

Jumping the Gun

Sheeraz Haji, the CEO of the Cleantech Group, said that some investors may have been too eager to push portfolio companies to go public.

“There was a big flood of private capital pre-2008 and then they pushed to get companies public that were very, very early in terms of developing their business models. There is a sense that some were pushed out to the public markets too early. Some of the private investors had desires to show some wins, some of the investors felt pressure because they’re nearing the end of some funds and part of it was belief that there was access to additional capital which hasn’t quite proved true.

“Some of these did go public but were very thinly traded which meant that they were public companies in name but not in practice.

“Amyris is exhibit A. The highest profit potential markets haven’t been the biofuels so Amyris has been slowing down what they’ve been doing on the biofuels side and focusing more on the specialty consumer product offerings – which have higher profit margins but it’s a smaller market. So all of sudden the investors who bought stock in the public markets said this feels more like a niche market; ‘It’s maybe not that big.’ Khosla Ventures got some companies out like KiOR and Gevo and the companies just didn’t trade that actively in the public markets.”

“It feels like it’s cooled off. The Amryis news has been a big splash of cold water. If it’s already cooled who is going to fund the next $200 million in the private markets. There’s now a rush to find a big company or some strategic partner.”