Some thoughts on biofuels...

I wanted to offer some thoughts about a comment that was made at the Bill Richardson event the other night that "biofuels is a loser...especially corn ethanol", to which there seemed to be a murmur of agreement. As this is an influential group, and energy policy is likely to be an important electoral issue in the '08 race (probably a "top five" issue?), I thought I'd offer some thoughts as a VC investor who has focused for the last few years on biofuels and other "clean technologies". [Disclosure: my firm has investments indirectly in three corn ethanol plants and directly in three biofuels technology companies; I hope that means I'm informed rather than biased...!]

1) It's true that corn ethanol is far from a perfect or complete solution to either our foreign oil dependence or global warming, but perhaps we should think of corn ethanol as a "transition fuel", a stepping stone towards better solutions, rather than a "loser".
Some facts (as I understand them):
- The median estimates of the energy balance for corn ethanol are around 1.3X, which means you get out about 30% more fossil fuel equivalent energy that you put in to grow the corn, convert it to ethanol, and transport both. So, on net, corn ethanol does help to reduce our oil imports. Nevertheless, partly due to soil erosion from tillage farming, corn ethanol does not really help reduce our nation's greenhouse gas emissions; corn ethanol is just a wash GHG-wise.
- In 2006, ethanol production in the US was about 4% of the nation's gasoline pool, and to achieve that we used 20% of the US corn crop. As a result corn prices are soaring.
- In 2007, we might do double that (8% of all gasoline, using 40%+ of the US corn crop), and that's probably close to the maximum we should expect from corn ethanol.
- Generally speaking, when the gasoline price is under $3/gallon, corn ethanol depends on subsidies to be competitive (otherwise, other oxygenates would be cheaper). Although corn ethanol production is getting more efficient, that's more than offset by increasing corn prices. So I would expect corn ethanol to continue to require subsidies to be competitive.

2) By developing a corn ethanol industry now, we're doing more than just subsidizing the ethanol producers (although ethanol plants are primarily in rural communities and create good jobs, so maybe that's not such a horrible thing). What we're really doing is: (a) developing infrastructure such as ethanol plants, blending terminals, and "E85" retail pumps, that will be needed when new, improved biofuels come around (see below), and (b) moving the American people and our political leaders up the learning curve on biofuels towards an understanding that our energy options are not limited to securing new oil supplies. Both of these tasks take some time, and it's better that we start that process now with the biofuels that are available today. We shouldn't let the perfect be the enemy of the good. In addition, corn ethanol has activated political support from the farm lobby and farm states, which has been invaluable in moving the energy policy conversation forward. Finally, if we don't send the right messages on biofuels, I fear that it would be too easy for most Americans to conclude that this is all just hype, when in fact it's leading us in a very good direction for our country.

3) Better biofuels will be available in the next 2-4 years - these new biofuels will offer much better energy balances than corn ethanol and won't require subsidies (within about 5 years).

First off will be "cellulosic ethanol", or ethanol made from fibrous plant material such as wood chips, corn stalks, and other agricultural wastes, rather than from the more expensive sugars in corn kernels. Cellulosic ethanol has a much better energy balance than corn ethanol, containing 4-6 times the fossil energy used to produce it (as opposed to 1.3X for corn ethanol). In addition, cellulosic ethanol ultimately will be more economical to produce than corn ethanol, given the much lower cost of biomass relative to corn. Happily, cellulosic ethanol is getting pretty close to reality - the first full commercial plants should be up and running in the next year or two, financed primarily by private investors. Within a few years after that, technology improvements will bring the cost down to the point that cellulosic ethanol will no longer require subsidies in order to be competitive. The energy balance for cellulosic ethanol ultimately could reach as high as 10X, making a major contribution to reducing our oil imports and our GHG emissions.

4) We could meet more than half our nation's gasoline consumption with cellulosic ethanol, compared to about 8-10% from corn ethanol alone. Here's the math behind that claim:
- A 2005 study by the Department of Energy looking into this question said that there's 1.3 billion tons per year of cellulosic biomass available in the US, primarily from agricultural wastes and forest wastes. This biomass is available in virtually every region of the US, as opposed to just 5 Midwestern states that produce 80% of US corn.
- At a conversion rate of 80 gallons of cellulosic ethanol per ton of biomass (a reasonable figure, I believe), that's over 100 billion gallons per year (gpy) of ethanol, compared to 140 billion gpy of gasoline consumed in the US.
- Because ethanol contains 70% as much energy per gallon as gasoline, 100B gpy of ethanol is equivalent to 70B gpy of gasoline. That's half of our total gasoline consumption.
- In addition to biomass, though, it's possible to make ethanol from municipal solid waste, tires, plastic, etc. through thermochemical conversion technologies that will reach commercial status in the next 2-4 years. (The first pilot plants are being built right now.) That could add billions, or tens of billions, of gallons per year of ethanol without requiring any additional cropland.

5) Within a couple years, we'll also be seeing another new biofuel option - butanol. Butanol is an alcohol that can be fermented from plant sugars, like ethanol, but it has some major advantages over ethanol as a motor fuel:
- Butanol contains more energy per gallon - 90% as much as gasoline, whereas ethanol contains only 70% as much energy per gallon as gasoline
- You can burn up to 100% butanol in your existing gas-powered car with no modifications (really -- try it!).
- Butanol does not mix with water as ethanol does, so it will not corrode pipelines, tanks, and blending terminals as ethanol can. Thus, butanol can be used in existing fuel infrastructure.
- Butanol can be blended in any proportion with gasoline, with ethanol, or both.
- Butanol is not any more toxic than gasoline.

6) Of course, we shouldn't just focus on biofuels supply - conservation is also a necessary solution. This could include increased vehicle fuel economy standards ("CAFE" standards); more widespread use of hybrid, electric and plug-in hybrid vehicles; and “smart growth” policies that reduce the average distance Americans drive each day and that encourage mass transit.

Hope that's interesting and helpful to people.
- Sanjay W.