Here are a few reasons you may not fully support corn ethanol, which is used as a gasoline blendstock (to reduce petroleum consumption) and oxygenate (to boost octane levels):
- The environmental benefits may be overstated, depending on what metrics are observed and how they are calculated.
- Ethanol has a lower energy density than gasoline, which means gasoline blends of 10% ethanol sap your fuel economy by about 3%.
- Corn should be used for food (although very little corn actually ever becomes human food) or more valuable uses, not fuel.
If any or all of the above resonates with you, then I have some good news. Abengoa SA (UNKNOWN:ABGB.DL), DuPont (NYSE:DD), and BP(NYSE:BP) are racing to bring next-generation renewable fuels to market while defending the advantages due to them as first movers. While the companies are competing to develop the best, most efficient platforms for producing next-generation fuels, the fiercest competition -- from a rather unlikely source -- may have yet to fully develop.
Step 1: Develop technology
The future of biofuels will likely include plenty of cellulosic ethanol. Why? Cellulosic ethanol is more sustainable than corn ethanol for the simple reason that it uses agricultural wastes produced as a byproduct of each corn (or other crop) harvest. Since no additional inputs of energy, pesticides, or fertilizer are required to produce cellulosic raw materials, products manufactured from them boast a remarkably clean environmental footprint.
Yet, to date only three commercial scale cellulosic ethanol facilities have been built in the United States. Why aren't there more? The technology is more complicated than most think.
The first facility, which churns out 25 million gallons of cellulosic ethanol annually, was built by ethanol leader POET and enzyme manufacturer DSM. Abengoa and enzyme manufacturer Dyadic International followed with a manufacturing plant of the same size. Not far behind is a 30-mgy facility from DuPont, which is developing its own enzymes through Genencor, its wholly owned enzyme business unit.
DuPont has also teamed up with BP to form the Butamax joint venture to produce butanol from agricultural sugars for use as a fuel blendstock. Butanol has a higher energy content than ethanol, can be safely blended in gasoline at concentrations up to 16%, and avoids much of the risk of rusting existing pipelines and engines -- a major concern of ethanol fuels. And since butanol contains twice as many carbon atoms as ethanol, it can be converted into a wider range of valuable nonfuel chemical products such as plastics, paints, and solvents, which would help to insulate producers from volatile fuel markets.
Each technology platform has benefited from tens millions of dollars of investments that have nudged them to commercial production. Now, the first movers have arrived at the next step: ramping production volumes to convert technology investments into bottom-line-boosting assets. As it turns out, the easiest way to do that may be to use someone else's manufacturing capacity.
Step 2: Gobble up production assets and/or sell licenses
The advantages of cellulosic ethanol and butanol support their ability to replace corn ethanol in markets and supply chains, but the next-generation fuels may literally replace first-generation fuel production.
You see, while 80-mgy of cellulosic ethanol production doesn't seem like much (the United States produces that much corn ethanol every two days), production volumes aren't actually important initially. Rather, each facility was constructed to serve as a proving ground for the respective technology platforms that will be deployed, which will allow Abengoa, DuPont, and BP to license their production processes to those looking to enter the next-generation biofuels market.
Of course, while the option for new construction is on the table, it's not shaping up to be the preferred option. Retrofitting existing corn ethanol production facilities, on the other hand, allows first movers to quickly monetize their investments in cellulosic ethanol and butanol while increasing capacity. And since the United States has nearly 2 billion gallons of excess annual corn ethanol production capacity today, there's no shortage of potential licensees from the first-generation biofuels arena.
DuPont and BP have already deployed such a strategy by licensing its technology to a 50-mgy corn ethanol facility that Butamax will use to fine-tune its butanol process at commercial scale. In fact, the joint venture appears to be targeting retrofits nearly exclusively, stating:
At Butamax, we are developing a comprehensive licensing package to supply current ethanol operations with new renewable fuel technologies enabling the economically advantaged production of biobutanol.
Sure enough, POET and DSM are offering licensing packages to existing corn ethanol operations. Ditto for Abengoa and DuPont's cellulosic ethanol ambitions. None of the three facilities have been online for more than 6 months, so no licensing deals have been finalized to date. But investors can expect the competition for first generation ethanol facilities to be fierce, especially when it comes to attracting the largest first-generation ethanol producers -- namely Archer Daniels Midland, Valero, and Green Plains -- to their respective technology platforms.
Why is a dogfight likely?
Consider that the three corn ethanol manufacturers listed directly above account for nearly 25% of America's total annual production capacity and generated nearly $12 billion in revenue in 2014 -- and none has next-generation biofuel technology in development. If the economics prove to heavily favor cellulosic ethanol and butanol, as the first movers attest, then the first to snag a market leader will be catapulted into the driver's seat for the future of biofuels.
Thus, investors looking to capture the next wave of growth in renewable fuels will want to be on the lookout for just such a deal. Billions of dollars in revenue could be on the line.