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Next-Gen Ethanol Firms on the Hunt for Funding – Good Luck

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While there is funding available for U.S. cellulosic ethanol companies in the form of grants or loan guarantees from the departments of both Energy and Agriculture, these days, it doesn’t come close to matching demand. And without help from the federal government, some projects may never get off the ground.

“If you don’t have a loan guarantee, you aren’t going to be building any projects,” said Gerson Santos-Leon, executive V-P of Abengoa Bioenergy New Technologies, at the Biomass 2009 conference in Maryland on Tuesday. And this from a man whose company already has a big backer — it’s part of Spain’s Abengoa, a publicly traded firm with operations in infrastructure, environmental services and energy.

“Equity two years ago wasn’t a big deal for Abengoa,” said Santos-Leon. “Now it is.” He said there is a lot of competition for cash within the company as it evaluates which projects across its wide portfolio can give it the best return. And advanced biofuels may be a product without a market.

“Right now in the ethanol industry we are in excess capacity mode, 20-25 percent excess capacity,” he said. “We are talking about building new cellulosic capacity, but we cannot sell the ethanol that we presently manufacture.” But for the time being, Abengoa is pushing ahead with its plans for cellulosic ethanol, likely in hopes of stricter regulations on biofuels that would give non-food based ethanol a leg up in the marketplace. The company previously teamed up with the DOE on a pilot plant in Nebraska and is now is working with the agency on a commercial-scale, biomass-to-ethanol plant in Hugoton, Kan.

Startups aren’t faring much better. Earlier this month, Coskata said it was pinning its hopes for a commercial plant on a loan guarantee from the DOE. Coskata, with backers including General Motors (s GM) and Khosla Ventures, had expected to break ground on a plant this year and have it up and running by 2011, but those plans are on hold until that loan guarantee comes in.

Will Coleman, a partner at Mohr Davidow Ventures, which has investments in biofuel and biofuel-related firms including ZeaChem, Catilin, Genomatica and OPX Biotechnologies, said VCs just aren’t set up to back large construction projects.

Coleman said they focus on the earliest funding stages, and start reducing their percentage of funding as the technology moves through to the commercial level. VCs have a very specific set of returns that their limited partners expect, according to Coleman, so VCs can’t put up the amount of capital for a commercial plant over the time period that’s needed. They’d either have to compress the time frame or increase the return — both big hurdles in these tough times.

Lignol Innovations, part of Vancouver, British Columbia’s, Lignol Energy, thought it had a good thing going when it teamed up last year with Suncor (s SU), a Canadian oil and natural gas company. And Lignol had already lined up $30 million in funding from the U.S. DOE for a demonstration plant in Colorado. But Suncor pulled out of the partnership last month due to economic conditions.

“Potentially, we will need to change all the major parameters of the project,” said Mike Rushton, COO of Lignol. “The partners, of course — the main partner is gone. The location will probably change, the feedstock will likely change, the capacity might have to change. And the financing. There’s not a hell of a lot left.” But all is not lost; Rushton said his company is in talks with the DOE about restructuring the project.

Rushton also has some ideas on ways the government can help move cellulosic biofuels to the commercial market, including what he called a DOE dating service. He said it could match existing recipients of government funds with other well-funded projects. Even though it could end up pairing up potential competitors, Rushton said he thinks they could set aside their long-term competitive goals to help each other get to market.

He also thinks there should be cross-border funding between the U.S. and Canada. Lignol may have crossed the border for its Colorado project, but the money didn’t. Right now, projects funded by the U.S. have to be located in the U.S., and Canadian cash only goes toward projects in Canada. If nothing else, cross-border funding could save Lignol some travel expenses.

2 Responses to “Next-Gen Ethanol Firms on the Hunt for Funding – Good Luck”

  1. Orng Crush

    There’s no investment because there’s no market. 10 percent ethanol is the limit right now for standard vehicles, and ethanol production will hit that barrier this year. If the EPA approves blends of up to 15 percent for standard vehicles, ethanol will have access to the market again, and investors will again be interested in cellulosic ethanol. An EPA waiver request was submitted this month to do just that.