You don't often see giants in the energy space such as BP (NYSE:BP) and ConocoPhillips (NYSE:COP) fork over investment dollars to alternative-energy start-ups, and it's even less often that you see them team up with companies such as Google and General Electric (NYSE:GE) in these sort of ventures. That's what makes the $100 million CoolPlanet raised in venture funding so interesting: It has a business model that all of these companies believe can be profitable. If high-flying tech companies, blue-chip manufacturers, and the old guard of energy all see something in this company, it must be big. Let's look at what CoolPlanet does and why its getting so much attention.
What are we talking about here?
CoolPlanet is banking its future on two main products: cellulosic biofuels and a soil enhancer that's created from the byproduct of its biofuel manufacturing process. Cellulosic biofuels are what many would consider the next step in manufacturing biofuels, because unlike the methods we use today that use resources such as corn or sugar, cellulosic biofuels can be produced from plant waste, such as corn stalks and cobs, as well as scrap wood and certain grasses.
Cellulosic biofuels have been a priority of the United States' desire to augment gasoline with domestic biofuels for several years, but the technology to manufacture it on a commercial scale has not yet been able to take root. The U.S. EPA has repeatedly revised its quotas for biofuels not only because the recent decline in gasoline use has pushed ethanol beyond the limit of 10% fuel content in gasoline, but for cellulosic biofuels specifically because they have not been able to manufacture enough to meet the current quotas.
This is what really makes CoolPlanet stand out among its peers. Not only is the company looking to manufacture cellulosic biofuels in the range of 10 million gallons per year once its Alexandria, La., facility gets up and running, but it's also manufacturing what are known as drop-in fuels. Unlike ethanol from corn or sugar, drop-in fuels are chemically identical to gasoline, diesel, and high-octane jet fuel. So if this process were to take off, it can be used in any engine built today without any blending limits. This also allows the company to sell renewable fuel credits -- also known as RINs -- to traditional oil refiners such as BP and ConocoPhillips without needing to worry about the blending limitations.
That's not all, though. The cherry on top of it all is that the company's process is considered net carbon negative. The company's fuel manufacturing process creates a waste product known as biochar. This can be used as both a soil enhancer and as a source of granular-activated carbon that is used in water filtration. In certain states such as California that have carbon cap-and-trade policies, CoolPlanet could sell carbon credits as an additional revenue stream.
CoolPlanet's business model is the real reason companies are investing
The product that CoolPlanet plans to sell is sounds very promising, but several other companies have made similar claims but never made it off the ground. One of the big reasons that big money spenders such as Google and GE are backing this particular company over others, though, is that it's much less capital intensive than other biofuel facilities. The company plans to build its first facility in with a nameplate capacity of 10 million gallons, which is one-tenth the size of the average ethanol plant in the United States.
By focusing on these smaller facilities, it requires less capital to get off the ground and facilities can be located close to biomass feedstocks to reduce transportation costs. Using this approach, the company should be able to produce fuels at lower costs than its ethanol competition, especially since its feedstocks aren't also food.
The final piece that makes BP, ConocoPhillips, GE, and Google all interested in this company is that it is a high-reward scenario with a rather marginal capital investment. CoolPlanet is also being funded by other major players, such as utilities' venture capital firms, so the risk of this company not succeeding is split up among some very large players. With BP and ConocoPhillips spending tens of billions of dollars every year to develop traditional oil sources, a few million is a pretty small risk to take.
What a Fool believes
Ethanol producers haven't exactly had the easiest of times recently. The droughts in the Midwest last year made corn feedstock prices greater than what many companies could produce ethanol for, and the overall reduction in gasoline consumption in the U.S. means that further reductions in quotas could be coming. CoolPlanet does have some major competitive advantages over traditional ethanol producers, and the backing of major companies like BP and Google certainly helps its cause. CoolPlanet isn't a public company, but if it can prove its process to be commercially viable, then cellulosic biofuels may finally have a real shot at taking hold here.
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