Almost 30 years ago as an organic chemistry student we studied solutions to the then peaking oil and energy crisis. Back then we had fears of a coming ice age, Reagan was just taking office and OPEC had just finished a series of embargoes that devastated the U.S. and other economies. To my dismay I would sit in class and study how to solve our energy problems through organic chemistry, and then watch policy makers push wind and solar. Neither went anywhere, and common sense solutions like the Fischer-Tropsch process that can turn carbon based materials into fuel were ignored, even though it was proven technology and firms had been using it since the 1920s.
Unfortunately the central planners in Washington seem intent upon repeating the mistakes of the late 1970s. As this linked article highlights, wind and solar are basically political constructs, and exist only because they represent the chosen policy of some central planner that has the power to spend other people's money to create an industry the free market has shunned...and for good reason.
"The general economic thesis of the renewable energy sector hasn't changed," said Karl Miller, chairman of Newco Energy Acquisition Holdings, LLC, which acquires energy-related assets. "It's still a heavily subsidized industry. It requires a major federal tax credit to make it work." It still doesn't appeal as "a capital market investment," he said.
A tremendous amount or resources have been wasted on industries that have the lowest chance of succeeding, and because of this waste, it threatens the viability of energy solutions that may actually solve our energy problems. Wind and Solar will never have any real chance at solving our energy problems. Variability isn't something that goes well with our existing energy infrastructure, and until our economy can start and stop based upon whether it is day or night, windy or calm, wind and solar will always be the least likely solutions to our energy problems. Solyndra didn't use solar to power its factory, and GE doesn't use wind to power its factories either. My favorite saying on this topic is that "we will never power our homes at night with solar, or fly our jets with wind." To make these two energy sources truly work we would need to totally redesign our economy and society, and that just isn't likely.
"EVs are a really difficult sell today," the CEO of Toyota's North American business, Jim Lentz, said in an interview. "Until we see substantial change in battery technology it's going to be difficult to see EVs really take off...
Even in California, where the central planners are well funded and supported, they can't make these technologies work.
In October 2004, then California Governor Arnold Schwarzenegger rolled up to a pioneering fueling station at Los Angeles International Airport in a hydrogen-powered metallic blue Hummer loaned to him by General Motors Corp.
The "California Hydrogen Highway," Schwarzenegger's vision to ensure that every Californian would have access to a hydrogen fueling station by the end of 2010, called for the state to spend more than $50 million to help deploy up to 100 hydrogen fuel stations that would serve 2,000 fuel cell vehicles. "We got 200 stakeholders around a table, literally, and mapped out who could get stations where," said Terry Tamminen, a top adviser to Schwarzenegger.
But nearly nine years later, California has just nine hydrogen stations open for the public, and only about 200 fuel cell cars that can use them.
It never ceases to amaze me just how arrogant and ignorant power can make people. Do these people really think a group of 200 politicians and their sycophant cronies can sit around a table sipping tea and eating crumpets and solve Herculean engineering problems that have confounded the best and brightest to this day? The market is infinitely complex, and almost inevitably, once a central planner makes a decision the markets change making their "central plan" obsolete. Japan's focus on analog when the market turned to digital is the classic example, but the same principle applies to energy.
Development of renewable energy technology has been undermined by an explosion in fossil fuel production in the United States, particularly cleaner-burning natural gas - a development that wasn't expected when many green energy projects were being dreamt up.
Cheap natural gas "clearly has an impact on how much renewables we'll do," said Alex Urquhart, CEO of GE Energy Financial Services, the unit of General Electric Co that invests in energy projects.
The shale oil and gas boom in the United States has also provided opportunities for companies that had been more focused on pure green tech.
While central planners may waste our tax dollars on wind, solar and food-based energy sources like corn-based ethanol in the short run, it is doubtful that they will exist in the long run. Tax payers and voters are notoriously fickle, and all it takes is a single election and these industries can become extinct with the stoke of a pen. With the hostility generated by the AP phone tap, Benghazi and IRS scandal now bleading over into the EPA, that likelihood is becoming ever more probable.
What then are the characteristics of companies and processes that are likely to succeed in the alternative energy industry and actually have a reasonable shot at solving our energy problem?
#1: The process will eventually become commercially viable, and not dependent upon government subsidies. As mentioned above the Fischer-Tropsch process has been in use since the 1920s, and the abundance of coal and natural gas make this one a clear front runner.
#2: The fuel or energy source works within the existing energy structure. Ideas like hydrogen fuels cells would require buying new cars, building fueling stations and developing space age technologies that are simply not competitive. A simple and common sense approach is to produce a fuel that is "drop-in" to the existing infrastructure and runs existing engines without modification. The less disruptive to the current system the better.
#3: The feedstock should be abundant and cheap. Natural gas and coal all into those categories. Using food while we have people starving in this world is only nonsensical, it is inhumane. Corn ethanol and soybean oil-based biodiesel fall into the food for fuel category. The regulatory structure has dramatically increased the price of corn and soy bean oil, and has greatly disrupted the agricultural markets. Acreage that was previously being used to grow tomatoes, grains and other foods is now being used to grow corn and soy beans, not so that we can eat them, but so we can burn them. Wetlands and environmentally sensitive areas are also being plowed under to grow crops because the profits to be made are greater than the subsidies farmers are paid to keep those lands out of production.
#4: There must be a substantial net energy production. Some studies show that ethanol is a net energy loser when all factors are considered. Consuming more than one gallon of fuel to produce one gallon of fuel simply makes no sense what so ever, and is why only central planners that spend other people's money develop these schemes. The free market would never dream of such nonsense, nor would it allocate resources to fund such folly.
"In terms of renewable fuels, ethanol is the worst solution," Patzek says. "It has the highest energy cost with the least benefit."
#5: They actually have to solve the energy problem. Wind, solar and food-based biofuels don't solve any of our real problems, and are extremely disruptive to our current system. If the goal is to get politicians elected, waste money through crony capitalism and grants and create temporary jobs until the money runs out, then wind, solar and food-based biofuels is the answer. If the goal is to solve our energy problem, they don't have a chance.
What then did I learn over 30 years ago that makes me bullish about some firms in the alternative energy sector? Gasoline is simply a carbon chain, and all of organic chemistry is simply manipulating carbon and the elements that bond to it. Diamonds, or crystalline carbon, can be manufactured deep under a mountain using natural processes, or manufactured in a lab using chemical processes. The same can be done for manufacturing fuels. Biodiesel simply takes a molecule that has three long chains of carbon attached to it, and shaves off the long carbon chains. Long carbon chains are what make up fuels like gasoline, diesel and jet fuel. Octain is a chain of eight carbons, propane is a chain of three carbons. Fuels are defined by how many carbons they have in their chains. I can still remember then 30 years after taking the class; methane, ethane, propane, butane, pentane, hexane, heptane, octane, nonane and decane.
Not only are fuels made out of carbon chains, just about everything else that once lived is as well. Grass, trees, algae, garbage, coal, natural gas, paper, corn, soy beans, vegetable oils, sugars, cellulose and animal fats are all made up of carbon chains. All those naturally occurring items can be easily and relatively economically turned into fuel. Some processes like biodiesel are so easy they can be done in your garage. Note in that video the stated marginal cost of a gallon of biodiesel is $0.77/gallon when he is using waste vegetable oils.
What firms then stand a chance of surviving in the alternative energy space, regardless of what party is in control of the political process?
KiOR will say it expects to be making its renewable crude for $69 a barrel when it achieves full scale at the Natchez plant.
Renewable Energy Group (REGI) and Biox (OTC:BXIOF) manufacture biodiesel out of waste products such as used vegetable oils and animal fats from food processing and inedible corn oil from ethanol production. Because the regulatory environment distorts the costs of feedstocks it is hard to say what the real cost of a gallon of biodiesel is, but the operating costs are less than $0.50/gallon, and before the regulations made the waste valuable, yellow grease used to go for under $0.15/lb, and it takes about 7.6 lbs per gallon of biodiesel. Without the regulations you would have to assume that the free market would price waste oils at their highest and best use, and I can't think of any better uses for garbage than making fuel, and before the regulations waste oils were priced as waste, so the markets couldn't figure out a better use either. Without the subsidies, the free market should price the waste oils at a level that would keep this industry alive as long as a gallon of fuel doesn't sell for less than about $1.60 ($0.50 + 7.2lb x $0.15).
Rentech (RTK) has greatly scaled back its efforts towards comercializing its Fischer-Tropsch process, but it has a nice portfolio of a gasification and Fischer-Tropsch refining process. As of today it has been unable to finance the building of a fuels plant, but its recent purchase of wood processing firm leaves open the door for a future plant because the process can convert wood waste into fuel. In this video the CEO of Rentech claims its cost of production is $60/barrel. He also highlights how the fuel is a "drop-in" fuel that will work with existing engines and infrastructure and can be made out of garbage. The Natchez plant he refers to never got built, and the land is currently up for sale. Ironically while Rentech is closing up shop in Natchez, KiOR is planning to open a plant in Natchez. Another irony is that the KiOR process uses wood waste as a feedstock.
Syntroleum (SYNM) has a portfolio of both Fisher-Tropsch and a hydrogenation technology called bio-synfining. SYNM has a 75 million gallon a year plant up and partially running. I say partially because it has yet to get the plant to run consistently, and is currently in standby mode until mid to late July. The plant is a joint venture with Tyson Foods (TSN) called Dynamic Fuels that takes waste oil and produces a "drop-in" renewable diesel and jet fuel. When the plant is running, its margins are typically superior to soy bean oil-based biodiesel, and competitive with firms like REGI and BX.TO. Its fuel, however is a renewable diesel with superior qualities to biodiesel. In my opinion, the real promise of SYNM is its Fischer-Tropsch gas to liquid and coal to liquid technology. In the last conference call it was stated that it costs about $22 in feedstock to produce a barrel of fuel. From another presentation there is also $15/gallon in OPEX, so the entire cost is about $37/barrel. That is highly competitive with petroleum at its current cost of over $90/barrel.
We are focusing significant management time on advancing a concept of a project integrating a 4,000 to 5,000 barrel per day GTL plant to a natural gas field in an integrated project the cost of the gas is the cost of drilling and operating the wells typically but depending on the play acreage and drilling costs for dry gas are about $1 per mcf and operating costs are another dollar per mcf. Therefore at an 11 mcf per barrel conversion ratio, synthetic hydrocarbons would be produced at about a $22 per barrel feedstock cost. We believe an integrated project is financeable for the following reasons.
Another Fischer-Tropsch company is Oxford Catalysts (OTC:OXFCF), which owns a company named Velocys. It has a "microchannel" technology and a small-scale modular reactor system that allows it to target smaller opportunities than the conventional multi-thousand barrel per day refineries. It just recently got an $8 million order for its small-scale gas-to-liquid reactor. This approach may give it an advantage by allowing it to go after smaller producers of natural gas in more remote locations that don't have access to pipelines. The natural gas can be refined into higher margin fuel on the location and then trucked out.
The one bright stop on the horizon of truly solving our energy problems is that the cornerstone, this push for "green energy" is the belief that carbon dioxide is causing global warming. Wind, solar and ethanol are almost totally dependent upon this belief maintaining political support for their industries. Recent evidence and the decade long pause in global temperatures are seriously challenging this theory and the computer models used to justify all these climate policies. Climate models are literally teatering on the 95% confidence level of being rejected. When that happens it should be much more difficult to maintain political support for green energy and opposition to using coal, natural gas and fracking. When that happens, real progress towards solving our energy problems will become possible.
In conclusion, while the spectacular failures like Solyndra grab the headlines, investors should not allow the sadly many failures to scare them away from alternative energy investment all together. Unfortunately much of the effort and funding has been directed towards the energy sources that have the least chance of success, but the greatest political appeal. That however isn't likely to be a long-term condition, as political fads come and go with the wind. I would anticipate that voters will soon tire of the tremendous expense and few benefits of the wind and solar industry, and the food price distorting effect of corn-based ethanol. When they do, greater accountability is likely to be demanded, and when that happens, if there is still funding to be had, it will likely go to the projects that actually have a chance at succeeding economically and producing a fuel that will be demanded by the consumer. Those firms are the firms that can produce fuels at a competitive price, use existing infrastructure, use abundant and cheap feedstocks and are the least disruptive to the economy. Believe it or not, those processes do exist and they can be found in any entry-level organic chemistry text book. This article highlights those firms attempting to turn the theories taught in text books to the practical realities of the market place.
Disclosure: I am long SYNM, RTK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Disclaimer: This article is not an investment recommendation. Any analysis presented in this article is illustrative in nature, is based on an incomplete set of information and has limitations to its accuracy, and is not meant to be relied upon for investment decisions. Please consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.