Biofuel Startups Need Attention

Biofuel gets a bad rap for being more costly than petroleum and less efficient.  The science behind biofuel is inconclusive only if it doesn't account for costly inputs like fertilizer.  Ammonium nitrate in fertilizer adds energy inputs to biofuel feedstock crops that make the biofuel a net energy sink.  Exchanging those inputs for smart agriculture makes biofuel more competitive.  Startups in this space have options worth pursuing before they go to market with an inefficient solution.

Energi's insurance products are designed for the energy sector.  I do not know whether their policies offer discounts for brokers or producers who incorporate biofuel into fuel cycles.  It's worth a look if insuring a biofuel feedstock takes some risk out of crop failures.  Project finance for biofuel might be more difficult.  Joule Assets finances efficiency projects, and I believe a comparable model could cover biofuel projects tied to facilities like grid sector fuel cells (yes, such things are more than just drawing board dreams).

The Joint BioEnergy Institute (JBEI) underwrites some tech development with help from major labs.  The whole DOE Bioenergy Research Center effort touts the numerical output of patents filed but I don't readily see numbers for commercialized success stories.  If biofuel incubation is another process-oriented bureaucratic runaround it will turn off results-oriented entrepreneurs.  I hope these centers implement the NSF Innovation Corps standards or they'll have a hard time getting respect from VCs.  Meanwhile, someone with less patience could take a biofuel idea from the US DOE Algae Testbed Public-Private Partnership (ATP3) and run it through the Carbon War Room to see if anyone in the ecosystem endorses it.

The phrase "attention capital" is not so new.  It dates to design articles from the last decade and beyond.  The important thing is that startups draw attention to themselves early enough to gather buzz.  Leveraging the biofuel ecosystem is one way for startups to get that buzz.  

Algae.Tec (ALGXY) Growing Algae For Energy

Algae.Tec (ALGXY) has designed a prototype bioreactor that uses carbon dioxide and sunlight to drive algae growth.  The algae is supposed to be harvested for conversion into fuel.  Let's walk through their technology to see if their business model is viable.

One metric ton of algae has an energy content equal to seven barrels of oil, according to this company.  One Algae.Tec 40-foot container can produce 250 tons of algae per year (they claim).  The company's projections envision a configuration of 500 containers producing 125K metric tons algae per year.  That configuration will be difficult to reliably achieve due to the space required for sunlight collection.  Algae.Tec's parabolic solar collection system requires about 1/2 of a hectare to emplace the collectors.  Their business model envisions these container installations adjacent to existing fossil fuel power plants so the carbon dioxide captured from the plant's generation can feed the algae reaction inside the containers.  How many mixed-use power plants in the world have at least 250 hectares of empty real estate around their plants for the assembly of these containers and their solar collectors?  That, and the willingness of utilities to buy adjacent land for expansion, will determine whether Algae.Tec's plan is scalable.

Consider the potential financial returns.  Oil is now priced at about $100/bbl, so one Algae.Tec container can yield (7x250) no more than 1750 bbls/yr, worth $175K/yr in gross revenue.  That's the equivalent of a small oil well.  Algae.Tec claims an all-in cost of production at around $47/bbl (perhaps lower), so one container will yield ($53x1750) about $92,750/yr in net income at current oil prices.  It's important to remember that the oil will probably have to be trucked to refineries because most coal/gas power plants don't have petroleum pipelines leading out from their facility.  Trucking small batches of algae oil to refineries will be costly, unless the company can further refine the algae oil on site directly into biodiesel.  If the final product from these cogeneration facilities is biodiesel, it can be sold directly to local gas station franchises.  The amount of algae each container will yield also depends on regular sunlight and carbon dioxide inputs.  Power plants in cold northern climates will not have year-round sunshine.  Algae.Tec's facilities will thus be most viable in places like the American Southwest.

My analysis does not include the value of other products like animal feed that can come from this process.  That can add to the net income of $92,750/container.  Algae.Tec is thinking big by planning 500-container installations that can produce a net income stream of over $46M/yr by my math, but space requirements are everything.  Their pilot plant in Australia needs to prove that the whole integrated concept can work before they pursue cogeneration and carbon capture agreements with utilities.

This stock is very thinly traded for something with a market cap over $100M, with daily volume in the mere hundreds.  The inventors of their core technology hold 78% of the stock.  That makes it difficult for individual investors to exit a long position.  It appears that their Pink Sheet listing is brand new.

Frankly, I find this stock intriguing.  Most of its initial installations will be small and geographically limited to sunny climates but the income per container is valuable to utilities that need affordable cogeneration options and carbon capture tax credits.  I'm skeptical that the 500-module configuration will work everywhere, but as long as Algae.Tec keeps its costs low and has accurately estimated its production then the concept can attract the interest of utilities.  This one actually has some promise.  Let's see if they deliver.

Full disclosure:  No position in ALGXY at this time.  

Clenergen (CRGE) Has Not Cleaned Up For Investors

It's time for another dive into my dusty old mailbag of slick promotional brochures from investment newsletter publishers.  A few months ago Shawn Ambrosino at Trinity Investment Research sent me a mailer touting Clenergen (CRGE), processor of plant-based biofuel.  The pitch is that this company's Indian-sourced feedstocks make it a winner.  Let's examine the track record. 

CRGE debuted on Sept. 30, 2011 at $0.84/share.  Today it trades barely above four cents per share.  Investors who bought this stock at any time in 2010 or the first half of 2011 are now so far underwater they may never see the light of day. 

Figuring out why this stock has suffered isn't difficult.  Accounts payable have been roughly twice as large as current assets for the past four quarters.  Clenergen has apparently never seen a bill it didn't like.  With negative free cash flow and only $160K cash on hand as of April 2011, it won't be long before the company is completely unable to pay its bills. 

Clenergen's business model up to the present quarter has been flawed.  Their efforts to simultaneously build stand-alone biomass power plants in several emerging markets have no synergy.  Try running multiple, non-integrated supply chains under multiple regulatory regimes in countries where you have little on-gound presence and see if you'll make any money.  No wonder their costs are out of control.  A look at their senior management team reveals limited bench strength in the energy sector, with a CEO who's had some experience in biofuels and other people who never seem to have touched the stuff before coming to Clenergen.  Clenergen's decision this year to change its business model from owning and operating power plants to licensing its technology for use by local power companies is probably the best move it could make under the circumstances.  This is the only business model they ever should have pursued given management's lack of experience in energy project execution. 

Full disclosure:  No position in CRGE, ever.

Algae Biofuels' Promise Deserves Serious Scrutiny

The green energy revolution was supposed to have arrived by now.  That's what we were promised back in the 1970s or so by the Whole Earth Catalog and other friends of sustainable development.  Renewable energy gets sidetracked whenever wishful thinking and pipe dreams distract public policymakers from the most promising technologies.  Algae-based biofuels may or may not be one of those promising technologies, depending on where and how it's produced.

Mainstream scientific thought endorses algae-based biofuels but with realistic expectations.  People who've done the math know that replacing a small portion of America's liquid fuel would require devoting enormous amounts of farmland to algae crops with very low yields.  This does not mean algae-based biofuel should never be produced under any circumstances.  It means there is a niche somewhere for limited production that doesn't crowd out food crops.  Seaweed-based biofuel may avoid a food vs. energy tradeoff.

People who haven't done research take the easy way out and seek government subsidies.  The algae-fuel industry is pushing for federal tax incentives that will put it on the same footing as the ethanol industry.  That is very premature and probably a poor use of public money.  Ethanol is a controversial energy source because it does not always produce a positive EROEI.  Factoring in energy used in fertiliser added to crops gives ethanol a negative EROEI.  Growing it organically gives it a positive EROEI but, like all things organic, limits the yield.  Algae-based fuel must not fall into the same trap if it is to be viable. 

Full disclosure:  No investments in biofuel companies at this time.