What Happened to a Buck a Gallon?

Coskata will produce ethanol for under US $1.00 a gallon anywhere in the world, from almost any input material.Coskata Vision Statement

A bit more than a year ago, I read a number of claims from ethanol start-up Coskata stating that they would be able to produce ethanol from cellulose for less than $1.00 a gallon. One thing that is very important to me as an engineer is that you deliver what you say you will deliver – or more. If you deliver less, you lose credibility. If it becomes a habit, you lose all credibility.

I am not a fan of hype, and I don’t like my tax dollars funding hype. So when I think someone is overly guilty, I will often report on it. I did:

Coskata: Dead Man Walking

A couple of comments I made in that essay:

The fact that they don’t even have an operating pilot plant should tell even the most optimistic supporter that they have little basis for their claims of producing ethanol for less than $1/gal.

My prediction? I predict that Coskata’s suggestions that they will produce ethanol for less than $1/gal will look ridiculous in hindsight.

There were two reasons that I took exception to their claim of “under $1/gal.” First, they had no pilot facility upon which to base that claim. Making such a claim on the basis of lab tests is pretty reckless, as you are staking credibility on the line with little to back it up.

Second, the claim was incredibly misleading because there was no capital recovery in the number. If you don’t understand what that means, consider this. Let’s say I claim to be able to make gasoline for a nickel a gallon. But to do that, I have to build a plant that costs a trillion dollars. Do you really think then that I can make ethanol for a nickel a gallon? If I specified that my operating expenses amounted to a nickel a gallon, then that may be a true statement – which would then lead to questions about capital costs. In the case of Coskata, these capital costs are not trivial, and thus “$1/gal” immediately goes way up because capital isn’t free.

Well, that was a bit over a year ago, and two things have happened. First, they now reportedly have an operating pilot plant:

Coskata leaks word that demo plant is up and running

Ethanol developer’s CEO tells the Cleantech Group at the Boston Forum that its pilot facility, capable of producing 50,000 gallons a year, has been operating for nine weeks.

Warrenville, Ill.-based ethanol developer Coskata has been planning to announce the opening of its demonstration plant in October. But CEO William Roe leaked the news a little early.

Let me congratulate them on that accomplishment, and sincerely wish them the best. They will gain important operating knowledge from this plant – and I believe they will learn that their earlier cost claims weren’t credible.

The second thing happened at this week’s gasification conference. Coskata’s gasification provider – AlterNRG – made a presentation. Apparently they did not get the memo from Coskata, because they had on their slide that “Coskata expects overall operating costs to be less than $1.25/gallon.” That may not seem like much, but that’s a potential upward creep of 25%, and their pilot plant is barely warm. Further, they specified that this was just for operating costs; something Coskata’s early claims did not specify.

Another thing that AlterNRG said specific to their gasifier is that it really needs tipping fees for the economics to work. I expect long term, there will be more competition for biomass, and tipping fees will start to decline. So a company that is dependent on tipping fees is making a pretty risky bet in my opinion. In my first ever essay on Coskata almost two years ago – Coskata Hype – I wrote about the potential need for tipping fees:

My guess is that unless they found someone to pay a steep tipping fee to get them to take biomass, there is nowhere in the world that they will be able to make ethanol via gasification for under $1/gal.

Coskata would not be the only company back-pedaling on their cost claims. Last year Mascoma claimed “The cost of fuel from the process is similar to Coskata’s at about $1-1.50 a gallon.” (Like Coskata, Mascoma is a Vinod Khosla-backed venture).

Now they have changed their tune:

“Governments need to help with the financing for the first plants, once you have those the private sector will start to come in,” said Jim Flatt from research and development at U.S. biofuels firm Mascoma, speaking at a conference in Amsterdam.

“Oil needs to trade at a sustainable level of $100 or above to make this competitive,” said Flatt.

Both of these companies have quietly increased their projected costs (although Coskata still has the

14 thoughts on “What Happened to a Buck a Gallon?”

  1. What Happened to a Buck a Gallon?

    Easy answer. The Laws of Thermodynamics caught up with them.

    Every company that writes a business plan needs someone on the team that understands those dreaded — and immutable — Laws of Thermodynamics.

    Every politician should also have a refresher course on the Laws of Thermodynamics before being sworn in each term. In the state I live in, politicians are always trying to rewrite those immutable Laws of Thermodynamics.

  2. Wes Clark putting his foot in it again? Wasn't he (or his wife) on CWT's board? Huge booster of TDP, as I recall.

    The guy doesn't seem to learn…

  3. I've always been leery of Coskata. They seemed real "blue-suedish," right from the start.

    And, tipping fees, are, of course, going to be a thing of the past pretty mos' skoshe.

    However, having said all that, if oil does what a lot of us thinks it will any technology that can get ethanol "out the door" for anything like $2.00 – $2.25 gallon is going to be a welcome addition. Even $2.50/gal W/O Subsidies will probably, sooner, rather than later, be a Big Winner.

    There's a lot more going on than we realize, I think. Every company that's trying to do something isn't putting out "press releases" every other day. I think a clearer picture will start to emerge in a year, or so.

  4. And here's today's comic relief: If you thought Global Warming might not kill the economy soon enough, well, our allies, the Saudis, has your back: Saudis want aid if world cuts oil dependence: Saudi Arabia has led a quiet campaign during these and other negotiations — demanding behind closed doors that oil-producing nations get special financial assistance if a new climate pact calls for substantial reductions in the use of fossil fuels.

    I guess our allies aren't greedy, they just like a LOT…

  5. The Saudis aren't the only ones looking for a handout:

    Offering carbon credits to farmers will not be enough to get corn growers to support a climate bill. They also want subsidies to help cover the upfront costs of going to no-till or other farming practices that would qualify for credits. "It's all about economics," said Darrin Ihnen, a Hurley, S.D., farmer who took over last week as president of the National Corn Growers Association. The association's new first vice president, Bart Schott, put it another way: "Are the dollars going to be there to take these conservation practices forward?" Schott, who farms in southern North Dakota, says more money is needed from the Environmental Quality Incentives Program, which helps farmers pay for equipment.

  6. Optimist:
    Hey, those gold-handled toilets do not come cheap. And it takes, oh, three, four or five Third Worlders to keep every Saudi comfortable.
    They might even get cracks in the leather seats of their Gulf private jets! (apologies to Steve Martin).

    I wonder what the total bill is for ethanol? Maybe the amount of help we are giving Detroit won't look so big if we looked at it that way.

    Did you know we spend hundreds of billions of dollars every year propping up rural communities? Rural highways, water systems, power systems, phones, postal service, airports, ethanol, farm subsidies, even schools and medical clinics, and housing programs.

    Alaska gets back $18.84 for every dollar it sends to DC.

    So maybe a couple hundred billion for US automakers is not the end of the world.

  7. Robert, good topic. Going back to your Title – Question, let me put it to you in another way: Cellulosic Ethanol : The ?? Million dollar gallon!!

    An interesting report in Zfacts.com presents a table provided by the Chief Economist for USDA, in March 2007, that the estimates for Cellulosic Ethanol (full in) would be $2.65 per gallon. Target by DOE for 2010 – 2012 would be $1.10 full in. The future prediction indicates a feedstock cost of $30 / dry ton. All of the numbers in the cost column show huge drops in cost without an explanation of how those costs might come down.

    How about Verenium?

    Verenium (the merged operations of former Diversa and Celunol) reports it is operating and optimizing its 1.4 million gallon per year (this is about 2.7 gallons per minute) about 90 barrels per day. The company got $4.6 million from DOE for enzyme development back in 2007. In 2008 awarded another grant from DOE to speed up enzyme development, looks like $4.6 million wasn't enough…. Later in 2008 the company awarded another grant from DOE in a $40 million program to support development of their proprietary "patented" process. Around this time period Verenium were given a 3-year $5.4 million grant from New Zealand Foundation. They also announce a partnership with BP but no financial information provided. Their website (www.verenium.com) shows several collaboration partners. I seem to recall this technology may have originated with a much earlier commercial operation BC International using a unique strain of E.Coli to derive alcohols from cellulose. This was back in 2004 and was funded heavily by government grants.

    I'm just wondering how much of our tax dollars have gone into this technology?

    If it becomes commercial, does the public ever get any of this back into the Federal bank? Just being facetious of course.

    The company also reports its licensed its technology to Tokyo-based Marubeni Corp. to commercialize a project in Thailand with a capacity of 3 million liters per year, thats around 1.5 gallons per minute or 52 barrels per day. Sounds better when you report 3 "million" liters per year I guess.

    From my perspective these are really small volumes and at what cost. I'm betting millions and millions. So factoring that back into the future cost per gallon the process has to scale really big in a hurry so that the costs of development doesn't remain a fairly large line item in the cost per gallon. So I wonder ?? million gallon for cellulosic ethanol.

  8. Wendell Mercantile wrote "Every company that writes a business plan needs someone on the team that understands those dreaded — and immutable — Laws of Thermodynamics. Every politician should also have a refresher course on the Laws of Thermodynamics before being sworn in each term."

    Perhaps this layman's paraphrase I once heard would help:-

    – You can't win.

    – You can't even break even.

    – You can't get out of the game.

    That's all to be understood in an energy context, of course, but something similar applies in economics.

  9. I wonder what the total bill is for ethanol? Maybe the amount of help we are giving Detroit won't look so big if we looked at it that way.

    I'm thinking it's the other way around. Next to the $81 billion auto industry bailout, $17 billion for ethanol, biodiesel, hydrogen over 7 years doesn't look so big.

  10. Clee-
    Good point.
    Also, $1 trillion for Iraqistan, and we ain't even out yet.

  11. Watch out, Benny, two wrongs (more like seven or eight) DO NOT make a right.

    So maybe a couple hundred billion for US automakers is not the end of the world.
    OK, but what is the point of that "investment" that we've already been told we won't see in our lives? A federal jobs bank? Can we get some of that in CA?

    If you haven't noticed, NOTHING has changed at GM or Chrysler: still bleeding market share, sales in apparent terminal decline, lots of backslapping of all managerial staff, even though the sales results suggest a kick to the posterior would be more appropriate…

  12. “Second, the claim was incredibly misleading because there was no capital recovery in the number.”

    I certainly agree with this criterion but I think RR often ignores it when it suits him.

    When I was developing renewable energy projects, I would start with a model provided by my company. First, I would add six months to the schedule. Then I would reduce the tipping fee to a small number. No farmer was going to pay a tipping fee. Next I would reduce the CO2 credit to a small number. You can wish in one hand and see which fills up faster.

    At this point, the project would have a poor ROI based on just the energy produced (what my customers understood). Next I would gut expensive unreliable equipment. Maybe this stuff made sense in Germany but I was not in Germany. Next I would add in more expensive equipment that had higher reliability and produced more energy (more efficient) that your customer already had experience with. The ROI would be good enough for consideration.

    I also maintained that proof of concept should be done away from the limelight. Get it done ahead of schedule, under budget, and find revenue streams your customers had not thought about.

    The frustrating part was watching projects in the limelight. I watched more grant money over 10 years get spent on feasibility than it would have cost for my proof of concept project. Every time the limelight got great press and every time ‘due diligence’ rejected financing.

    Three rules. Under sell. Over deliver. Avoid California.

  13. Optimist-
    Hey, were it up to me, we would eliminate all federal subsidies.
    Still, we pour umpteen billion a year into the agribusiness sector.
    My informal calculations are that we subsidize annually rural areas in general as much as $100 billion a year, and perhaps $200 billion a year (think roads, water systems, power systems, phone systems, postal service, airports, train stops, medical clinics, schools, even housing, ethanol, and farm subsidies).
    Do you know we spend $8 billion a year just so rural people can have telephones? mThat's every year. Not a one-time sunsetted deal, like the clunkers for cash program, which was $3 billion.
    Having created a gigantic rural welfare state, the incessant demands are to sustain it–indeed, some say we will never tax gasoline enough in the USA as rural representatives will forbid it. Rural living becomes impossible at $6 a gallon.
    You are right, adding more subsidies doesn't make me feel any better–yet, if our domestic auto industry can be rescued, something tells me we ought to do it.

  14. "Saudis Want Aid if World Kicks the Oil Habit"

    You cannot make this stuff up.

    The Saudis are lobbying for foreign aid in anticipation of declining oil revenues. Hat tip reader Michael:

    Saudi Arabia has led a quiet campaign….demanding behind closed doors that oil-producing nations get special financial assistance if a new climate pact calls for substantial reductions in the use of fossil fuels.

    That campaign comes despite an International Energy Agency report released this week showing that OPEC revenues would still increase $23 trillion between 2008 and 2030 — a fourfold increase compared to the period from 1985 to 2007 — if countries agree to significantly slash emissions and thereby cut their use of oil…..

    The head of the Saudi delegation Mohammad S. Al Sabban dismissed the IEA figures as “biased” and said OPEC’s own calculations showed that Saudi Arabia would lose $19 billion a year starting in 2012 under a new climate pact….

    Al Sabban accused Western nations of pursuing an agenda against oil producers, under the guise of protecting the planet.

    From: "Naked Capitalism"


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