What impact has this year's backlash against corn ethanol had on investments in second generation biofuels? Will the cellulosic ethanol industry successfully meet the government's renewable fuels standard? During today's OnPoint, John Howe, vice president of public affairs at Verenium, discusses his company's new partnership with BP and its plans for a large-scale cellulosic commercialization plant. Howe addresses the heavy competition that exists within the cellulosic industry and addresses some of the key cost issues associated with cellulosic ethanol. He also discusses the ethanol mandate and whether his industry will successfully meet the government’s standards.
Monica Trauzzi: Welcome to the show. I'm Monica Trauzzi. With us today is John Howe, vice president of public affairs at Verenium, a cellulosic ethanol producers here in the U.S. John, thanks for being here.
John Howe: Glad to be with you, Monica.
Monica Trauzzi: John, your company recently teamed up with BP to develop a cellulosic ethanol production plant. BP has invested $90 million in the partnership and we're hearing a lot about different companies creating demonstration plans. How heavy is the competition on the ground? Is this really a sprint to the finish to see who can get there first and who can create this technology and make it viable first?
John Howe: Well, there are several companies interested in moving this technology forward, Monica. We're among the first rank. We don't believe it's necessary to be absolutely first, but there is growing interest in this field of enterprise. We're very excited about teaming with BP, the nation's largest petroleum producer, to accelerate our efforts. So, we've reached an agreement with them on a first phase to advance the technology and we'll be proceeding with a second phase negotiation to generate the resources to pursue commercial project development here in the next few years.
Monica Trauzzi: So, what about what you're doing is different from what the competition is doing?
John Howe: Well, our process is a hydrolysis process. We use enzyme technology and unique organisms that were developed at the University of Florida back in the early 1990s by a team led by Dr. Lonnie Ingram. It's a process that makes very efficient use of biomass by converting all of the sugars, both five-carbon and six-carbon sugars, into ethanol. And, because it's based on enzymes rather than heat, we anticipate there will be lower energy inputs. We'll be using very high biomass feedstocks, so we're looking to achieve a lower cost of production with a very favorable energy balance.
Monica Trauzzi: We'll get back to the cost in a moment. Where does the construction of this plant put you in the timeline of deployment?
John Howe: Well, what we've just completed was the first true demonstration plant in the country to break ground in February of 2007. We completed this plant earlier this year in the spring and we're now going through a commissioning process. So we anticipate having that plant completed and up and running by the end of this year. And on the strength of the results of the demonstration facility, our plan is then to move forward to close financing and construct a true commercial-scale plant. Our target timeline for that is financial closure by the end of next year. It will be approximately a two-year construction cycle, so we're looking at first commercial production of cellulosic ethanol before the end of 2011.
Monica Trauzzi: OK, so about three more years to go?
John Howe: To commercial production, yes.
Monica Trauzzi: OK, so are you expecting to share the market with corn ethanol for the first couple of years that you guys have commercially viable cellulosic?
John Howe: Well, this market is unfolding. There's now an expanded renewable fuel standard that Congress established through the Energy Independence and Security Act of 2007. This law provides support for up to 15 billion gallons of corn ethanol and, thereafter, a growing market support for cellulosic ethanol and other advanced biofuels, with a total target of 36 billion gallons of annual production by 2022. So it's that next traunch which begins to kick in here in a couple of years, but grows very rapidly through the middle part of the next decade. That's the market target that we will be competing for.
Monica Trauzzi: There's a lot of concern that your industry is not going to be able to meet that mandate though.
John Howe: Well, I believe, Monica, this is a case where we have destiny in our hands. If we believe this is important, I have no doubt that American firms and American technology can come up with the technological solutions to solve the problem. But we have a trillion dollar problem with the cost of petroleum today in our country, so we need to provide the resources today to advance the research and, more importantly, to provide support for the early scale commercial deployments. So that really is the stage that we're at right now. I have every confidence that we can meet these targets if we maintain strong and continuous public support for this commercialization effort. We're at the stage, you know, many industries go through what's called the Valley of Death where the technology has been proven at a small scale, but the question is how do we muster the resources to deploy it at commercial scale? And that's really where we are right now.
Monica Trauzzi: Right and what we saw with the corn ethanol industry is we didn't know everything we needed to know and there was this huge backlash. Has your industry been affected at all in terms of investments because of this sort of corn ethanol backlash?
John Howe: Well, there is a lot of noise and, frankly, a lot of distortions surrounding the debate about corn ethanol. That apart, I believe there's been strong and continuous support for cellulose ethanol technology development. I think a lot of the misstatements and distortions that have been made about ethanol over the last year, as people start to look at the relative cost of production for corn and agricultural crops relative to the skyrocketing price of oil that we've all experienced in the last few years more and more people will come to recognize we have no choice. We have to pursue biofuels, grow the corn ethanol industry toward that 15 billion gallon target. But really, if we're going to achieve much greater market penetration, there's broad recognition throughout the Congress and among industry experts that cellulose is really the place to look.
Monica Trauzzi: What do you see happening to the corn industry and the corn ethanol industry once you guys become the big players on the block?
John Howe: Well, there will always be a very important role for the corn ethanol industry and I would anticipate that corn ethanol will continue to play an important role. If we look at the cost of producing corn versus the cost of producing oil, those two commodities were at parity 60 years ago. Today there's about a 20 to 1 differential. The cost of producing corn has, relatively speaking, gone down while the cost of oil, producing new sources of oil, has continued to go up. This is part of the historic shift that's taken place here over the last couple of decades. If we go back 200 years we were a carbohydrate energy economy. We've lived through a couple of hundred years of using hydrocarbons, but now we're realizing the limits of hydrocarbon energy and the environmental consequences. So we're now involved in a shift back toward carbohydrate-based energy, but with a whole new level of technology available to apply.
Monica Trauzzi: You're talking about cost again; it's a lot costlier to produce cellulosic ethanol than it is to produce corn ethanol. How do you expect to bring that price down?
John Howe: Well, the corn ethanol industry has been through now several decades of coming down the cost curve, scaling up the technology, getting repeated opportunities to build new plants. And there is continuous improvement taking place with corn ethanol production. This exact same thing is going to happen with cellulose ethanol production. The first facilities are going to be more capital intensive. The enzymes are certainly more expensive with cellulose ethanol than with corn ethanol, but we anticipate that cellulose will create the opportunity for lower-cost feedstocks. And, over time, as our industry has the opportunity to build more facilities, capital costs will come down, we will learn new solutions on how to reduce the quantity of enzyme and the cost of producing those enzymes. So I have every confidence that our experience will more or less replicate what we've seen with the advances and falling cost of corn ethanol production.
Monica Trauzzi: So, we need to the patient here. The market may not flock to cellulosic immediately if it is the more expensive option.
John Howe: Well, that's why we need to have strong, supportive policies in place during the early stages of this industry. Congress has laid an excellent framework with the Energy Independence and Security Act, as well as with last year's farm legislation. And it's essential that we not retreat from those commitments. If anything, build on them and continue to put in place the kinds of policies that will help to assure that we can keep going with this transition toward more renewable, sustainable, environmentally beneficial fuels.
Monica Trauzzi: I want to go back to the timeline we were talking about earlier. If you try to produce cellulosic too quickly, you try to get to that end result too quickly, do you risk glancing over some of the major problems, some of the environmental impacts a lot of people are concerned about just to get cellulosic on the market?
John Howe: Let me just explain a little bit about our process. We've gone from pilot-scale production; we are now building a demonstration scale facility. Our company is approaching this in a very methodical fashion. We recognize there are a lot of technological issues that need to be addressed before we should take the step of moving forward and scaling this up. That's why we've taken this patient, step-by-step process and made the investments that we have. Likewise, during this period, we've been spending a lot of time looking at the agronomic side of the equation. I believe there are solutions available to identify the land resources necessary to grow the feedstocks so that we can achieve in the end more food, more fuel, and lower carbon emissions. One of the aspects of our company's plan, we're very focused on fast-growing biomass crops, grassy crops in the southeastern United States. And we see the opportunity because of the conversion factors, how much grass can grow in that region and how much ethanol can be produced per ton of biomass, that we will be able ultimately to achieve multiples in terms of ethanol production per acre, compared to corn ethanol today. So, as I see it, there's an opportunity here for us to actually dramatically improve the environmental profile of ethanol production by continuing our pursuit of cellulose ethanol.
Monica Trauzzi: Are we going to be needing to import feedstocks?
John Howe: I wouldn't anticipate we'll import feedstocks. This will be, I think, in ethanol production from cellulose, all cellulose is local. It's very expensive to move large quantities of biomass over large distances. So, our business plan, for instance, will be to look at sites around the country where there are ample supplies of biomass available or where they could be grown and collected to a central processing facility. So the production of cellulose ethanol can be highly distributed around the country, but it will be somewhat concentrated around the facilities where they occur.
Monica Trauzzi: I just want to touch on one final point before I let you go. It seems like this is really becoming a battle between the petroleum companies, because all of the major companies are investing in demonstration plants and commercialization plants for cellulosic ethanol. It's pretty interesting.
John Howe: Well, Monica, I'll just share my personal view on that. What this is about is providing convenient, safe, clean, liquid fuels for the consumers of this country. And the petroleum companies are the entities that have the infrastructure in place, are the experts in meeting consumers' liquid fuel needs. I think those companies that view themselves as exclusively petroleum companies are going to see this more and more as a threat in the future. But those other companies, and this is why we are so excited about working with BP for example, with a company that takes a broad view and is very excited about pursuing this opportunity with us. Companies that recognize themselves as liquid fuel providers will recognize in cellulose ethanol an opportunity to continue to grow their markets and meet their customers' needs in even more environmentally beneficial fashion.
Monica Trauzzi: OK, we're going to end it right there. Thanks for coming on the show.
John Howe: Well, thank you, Monica.
Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.
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