Navigant Research Blog

Cellulosic Biofuels Not Dead

— April 4, 2014

Risk_webCellulosic biofuels have multiple advantages over conventional biofuels like ethanol and biodiesel.  Primary among the advantages is that the fuel’s feedstock is agriculture waste, which means it avoids controversial topics like the food versus fuel debate and direct or indirect land use change concerns.  Despite these advantages, hope for cellulosic biofuels has eroded because multiple companies have failed to produce the fuel at scale and a competitive price point.

The many failures forced the U.S. Environmental Protection Agency (EPA) to cut the annual volumetric blending requirement for cellulosic biofuels mandated by the Renewable Fuel Standard (RFS) to levels ranging from 6 million gallons to 9 million gallons between 2010 and 2013.  For 2014, the EPA has proposed cutting the original volume requirement for cellulosic from 1.75 billion gallons to 17 million gallons.  Additionally, KiOR, the company closest to producing cellulosic biofuels at scale, has run into financial stumbling blocks.  This situation is leading some to question whether cellulosic biofuels will ever take off.  But while the industry has certainly appeared to be on the brink, investors do still have hope, as demonstrated by Cool Planet’s successful closing of $100 million Series D financing at the end of last month.

Saving Cellulosic Biofuels One Plant at a Time

Cool Planet has often been described as similar to KiOR, as the two companies take cellulosic biomass and convert it to hydrocarbons chemically identical to petroleum-based fuels.  The two companies are, however, also “dramatically different,” as described in interview with Cool Planet’s CFO Barry Rowan.  The most significant differences are related to Cool Planet’s novel approach to production plant development, the production process, and the development of the company’s propriety biochar, CoolTerra.

Rather than focusing on one or more major production facilities, Cool Planet will develop numerous small-scale (10 million gallons per year) plants.  This approach has multiple advantages.  First, it reduces risk to investors, as each small capacity plant is significantly less costly than one giant facility.  Second, the development costs of each new plant are reduced and production margins improved since Cool Planet is able to innovate on lessons learned from past plant developments.  Third, it allows Cool Planet to bring the plant to the biomass rather than the biomass to the plant.  This reduces the transport costs for the cellulosic biomass and insulates Cool Planet against feedstock shortages.  Rowan notes that the capacity of each plant is limited to a fraction of a region’s cellulosic resources.

Cool Planet can use a variety of cellulosic feedstocks, which the company exposes to high temperature and pressure to create a biovapor.  The biovapor is then converted to a high octane gasoline blend stock.  In contrast, KiOR’s process produces a biocrude oil, which is then refined into gasoline and diesel products.  When put through a proprietary catalytic column, the biovapor created by Cool Planet’s process produces the biofuels and a residual biochar – both of which have markets.

The biochar produced from the biofuels development is then treated by Cool Planet to create the company’s proprietary product, CoolTerra.  According to the company, which has five PhDs working on this product, trial results show improved crop yields and growth rates, as well as reduced water and fertilizer input requirements.  The resulting impact is a fuel that is carbon-negative; any carbon produced is sequestered in the CoolTerra, which will be used to produce carbon-absorbing plants and thus reduce atmospheric carbon concentrations.

Development of Cool Planet’s first 10 million gallon facility located in the Port of Alexandria, Louisiana is underway; the plant should be operating by 2015.  The development of two other plants in Louisiana is scheduled to follow in 2015 and 2016.  Rowan estimates Cool Planet can be profitable at oil prices of $50 per barrel, well below today’s rate.  Real world tests of Cool Planet’s business model will demonstrate its viability.  If anything can be gleaned from the recent struggles and successes of KiOR and Cool Planet, it’s that the industry is not dead; rather, it is simply taking longer to adapt to technological and logistical problems than expected.  And it’s clear investors believe Cool Planet may have a winning approach.


Electricity Pricing and the Economics of EVs

— April 2, 2014

The hottest global market for plug-in electric vehicles (PEVs) is Norway, where PEVs accounted for nearly 5.5% of all light duty vehicle sales in 2013.  Success of PEV sales in Norway has been credited to the country’s attractive purchase incentives and tax breaks, which include exemption from all non-recurring vehicle fees, annual road taxes, all public parking fees, and toll payments, along with free access to bus lanes.  While these incentives are appealing, equal credit goes to the massive price gap between the costs of petroleum fuels and electricity in the country.

One of the most attractive aspects of PEVs is that driving on electricity is significantly cheaper than driving on gasoline or diesel.  While this is largely true in most markets, the price difference can vary significantly by market.  The most meaningful variables in fuel cost returns are the retail price of petroleum-based fuels, the residential rates for electricity (since a vast majority of PEV charging is done at the owner’s home), and the average efficiency of new conventional vehicles compared to PEVs.

The Turkish Premium

The price of retail gasoline and diesel varies sharply from country to country.  The starkest example is in Turkey and Iran: in 2012, a gallon of gasoline cost $9.61 in Turkey (highest in the world) and $1.25 in neighboring Iran.  Electricity prices are also vastly different from country to country; residential electricity rates per kilowatt-hour (kWh) in France, which gets 80% of its electricity from nuclear power, are half the rates as those in Germany.  The variation in prices for each fuel determines which markets offer the best returns for PEV owners.

The best returns on fuel costs in Europe are in Norway and the worst are in Germany.  If the average new light duty vehicle in Europe has an mpg rating of 35 and the average new PEV has a miles per kWh rating of 2.7, then on a per-mile basis, Norwegian PEV owners save $0.16 per mile while German PEV owners save only $0.05.  Given that Germany’s incentives for PEVs are far less attractive than Norway’s, it’s not surprising that the Scandinavian country (population just over 5 million) still put around 1,500 more PEVs on the road last year than did Germany (population just over 80 million).

State to State

Among U.S. states (average new vehicle mpg is now 25) the best returns are in Indiana ($0.11 per mile) and the worst are in Hawaii ($0.03 per mile).  Given current government incentives, maintenance cost reductions, an annual vehicle mileage of 12,000, and an average $12,000 premium for PEVs, a battery electric vehicle (BEV) driven in Indiana nets a return in less than 4 years – twice as fast as one driven in Hawaii.

Fuel Costs per Mile of Fuel, Select Regions: 2014

Pricing-Economics of EVs blog (04-02-14)

(Source: Navigant Research)

Because PEV returns are so varied, local utilities can significantly affect markets by introducing time-of-use (TOU) electricity rates specific to PEV owners.  TOU rates, which incentivize off-peak electricity usage, can drastically reduce per kWh prices for PEV charging.  Residential TOU rates are limited, for now, to a few utilities in the United States.  Their adoption, however, is a win-win for utilities.  TOU rates can increase utility revenue by making market conditions for PEVs better, thus increasing demand for electricity, and TOU rates shift the increased demand to manageable off-peak hours.  The final outcome is one in which utilities make more money and drivers save more money.


Keystone Opponents Should Focus on U.S. Oil Consumption

— March 17, 2014

Last month, the contentious debate over the Keystone XL Pipeline resurfaced as the U.S. State Department concluded its final environmental impact analysis, finding the construction of the pipeline will have no significant impact on U.S. greenhouse gas emissions.  The assumption underlying the analysis is that the oil, derived from Athabasca oil sands in Canada, is going to be consumed regardless of development of the pipeline.  Opponents of the Keystone project decried the decision, but they are overlooking a key lever for slowing production from the oil sands: just use less oil in the United States.

Canada is determined to develop the resource, which has been slowly ramping production since 2003.  As such, advocates of the pipeline point out that if not transported via pipeline to the United States, it will be transported via rail (as is the current method) or via a combination of rail and tanker.  An additional scenario involves exporting the oil across the Pacific to meet growing demand in China.  While this is not a near-term prospect, its realization would increase global carbon emissions, not to mention the potential for oil spills because of increased oil tanker transport.  And, oil demand in the United States that would be met from a stable partner, and the largest source of U.S. petroleum imports, would have to be sourced from unstable supply lines from the Middle East.

Opponents argue that oil sands development is not yet a done deal, since alternative transport options besides the pipeline also face opposition.  Opponents take particular exception to the oil sands, as their development is far more carbon-intense than other forms of oil  production.  However, if it is true that the pipeline itself is irrelevant to oil sands development, then opposition efforts should shift to confronting consumption in end-use markets – specifically the U.S. road transportation sector.

Demand Side

In 2012, the United States  accounted for almost 20% of global oil consumption, the majority of which is consumed by vehicles on the roads.  Government programs and policies designed to blunt U.S. demand for oil, such as the Renewable Fuel Standard, can be highly influential on global oil prices, since the United States is the world’s largest consumer.  An increase in global oil supply, due to either increased domestic production of non-oil sand liquid fuels or a significant fall in U.S. demand, would lower the global price of oil.  A price dive in oil would dampen interest in costly oil sands development.

Although the existence of the oil sands has been known for almost a century, widespread development has not been economically viable until the last decade.  The cost of oil production from the oil sands is higher than production from more accessible reserves elsewhere.  Past oil price spikes have sparked interest in tar sands development, but those spikes have been short-lived and interest has faded with falling prices.  The steadily increasing price of oil over the last decade has sustained interest in the oil sands, leading to the development now taking place.  However, oil sands development is still a risky gamble, as shown by the losses incurred by Total and China Investment Corporation in 2013.

Increasing oil supply and cutting demand through increased domestic production of shale gas, rising biofuels penetration in the fuel supply chain, improved fuel economy of conventional gasoline- and diesel-powered vehicles, and spreading adoption of electric and other alternative fuel vehicles could effectively slow, if not halt, further development in Canada’s tar sands.  Oil consumption in the United States has declined since its peak in 2005; accelerating that decline, to more than offset increasing consumption in China and other growing economies, could displace much of the economic rationale for tapping Canada’s oil sands.  That would be more effective than asking the federal government to cancel a pipeline.


Another State Bans Tesla’s Sales Model

— March 14, 2014

This week the New Jersey Motor Vehicle Commission (NJMVC) voted to ban Tesla’s direct manufacturer-to-customer sales model, starting April 1.  The move places New Jersey alongside Arizona and Texas as the only states to ban direct sales of the Tesla Model S.  The upstart automaker has been selling its Model S through showrooms where customers can experience the vehicle.  They are then directed to the company’s website to purchase the vehicle.  Subsequently, it is delivered to the customer’s home directly from Tesla.  This sales model bypasses traditional dealers altogether, much to the dismay of state dealer associations across the country.  Accordingly, since Tesla first began production and distribution of the Model S in 2012, it has been fighting legal battles in many states to permit its sales model under existing dealer franchise laws, with varied success.

Dealer franchise laws exist in almost all states and were first created to prevent automakers from forcing excess inventory unlikely to sell on dealer lots.  Tesla’s rationale for the allowance of its direct sales model under state franchise laws is premised on the unique characteristics of the company’s Model S and future vehicles.  Tesla argues existing dealers are not adequately incentivized to sell the company’s vehicle due to the lower servicing requirements of electric vehicles; thus, the direct sales model is critical.  While this may be true, Tesla’s struggles with state franchise laws raise questions about the legitimacy of the laws and the value of the dealerships they protect.

Between You and the Automaker

The president of the New Jersey Coalition of Automotive Retailers (NJCAR), a primary opponent of Tesla’s sales model, has claimed that an important reason for franchise laws (and therefore dealerships) is that car dealers act as consumer representatives vis-à-vis the automaker.  If that argument is true, then it follows that if all vehicles were sold directly to the consumer rather than through a dealer, consumers would lose their primary automotive advocate and be more susceptible to automaker abuse.

The validity of NJCAR’s argument assumes that consumers are ill informed about manufacturers’ products, warranties, etc.  While that’s sometimes true, it’s hardly absolute, particularly in the Internet age.  Consumer preferences are strongly shifting toward online purchasing platforms rather than brick-and-mortar retail – a sign that consumers are not always interested in dealer interactions in the first place.

Clean My Windshield

As my colleague Dave Hurst points out in a blog on this matter, dealers provide “important services within the new vehicle purchase process” that may not be as easily or adequately provided by automakers or by the web.  That’s undoubtedly true, but whether these services are indispensable is a question best answered by consumers rather than politicians.

Allowing Tesla to demonstrate that its innovative (and yes, disruptive) sales model is beneficial for both the consumer and the automaker is an appropriate step in determining whether dealer franchise laws are actually meaningful or simply protectionist.  It’s possible for the direct-to-consumer sales model to exist alongside the dealer retail model.  The Internet hasn’t put realtors out of business; it has just changed their business practices.  Requiring Tesla to sell through dealers is akin to requiring gas station attendants to pump gas rather than allowing vehicle owners to pump their own gas.  Interestingly enough, New Jersey is also one of the two states that still have this law.


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