KIOR is the latest object lesson in how energy investors ignore science at their own peril. As of 30 June 2013 this start-up was down to $11.5M in cash and $20M in untapped credit, with long-term debt of $150M and a quarterly burn rate well over $30M. Since commissioning its 10 MGY commercial-scale facility last October, it has produced no more than 73,000 actual gallons of RIN-eligible cellulosic blendstock with total revenues of $310,000 (~$4/gal). Cost of product revenue totals $20.5M (~$280/gal) and shows how far it is from break-even, let alone profitability. With about 60 days of liquidity left, bankruptcy looms before the end of September without an infusion of new investor cash.
Recently a class action shareholder lawsuit was announced claiming that CEO Fred Cannon's forecasts of production and revenues were unreasonably optimistic. The Company's widely-circulated expectations to produce 3 million to 5 million gallons in 2013 contrasts with a production rate less than 1/10th the necessary annual pace. It is not just shareholders, but Wall Street analysts and government agencies that seem to have been caught by surprise. The EPA's original 2013 renewable volume obligation counted on KiOR for over 5 million of the 14 million gallons of cellulosic gasoline and diesel required. Cannon's most recent prediction for 2013 has been revised downward to 1 million to 2 million gallons.
Why is producing competitively priced liquid fuel from cellulosic feedstock such a challenge? The answer is in fundamental chemistry and biology and physics that stubbornly limit what even the cleverest geneticist and richest venture capitalist can do. A comprehensive and mutli-disciplinary look at the full spectrum of biofuels is available via the Waterloo University Institute for Complexity and Innovation. Hopefully a brief discussion below can outline the basic case and help more investors from being separated from their money chasing this white rabbit.
To illustrate the ultimate futility of cellulosic ethanol, it is instructive to compare it with corn ethanol. US corn farmers, benefiting from generations of technical and genetic improvements, have increased yields six-fold since 1940 and today can produce from a single acre as much as 500 gallons of ethanol from 5 tons of corn kernels. However, growing and processing the corn at such scale consumes huge amounts of energy. Rigorous lifecycle analyses have revealed that the energy return on investment (EROI) of corn ethanol is only 1.25:1; only 1.25 units of energy are output for every unit of energy input into farming and processing. And the energy portion delivered as ethanol is just equal to the energy input from natural gas and petroleum fossil fuel. Only the creative bookkeeping practice of counting the distillers dry grains and solubles byproduct (DDGS) as energy instead of animal feed gives the overall process that tenuous 25% energy profit. The massive US corn ethanol program than consumes more than 40% of the corn crop is essentially a way to convert non-renewable fossil fuel into non-renewable ethanol with a bit of renewable animal feed protein supplement as a kicker. When compared to the EROIs of gasoline and diesel fuel and coal electricity, which range from 10:1 to 30:1, it is clear that corn ethanol represents a huge opportunity cost in terms of using that same fossil fuel energy more directly to serve society.
The facts are even less kind to cellulosic ethanol. The input energy required to make alcohol or other fuel blendstocks from cellulosic biomass is about three times higher than from corn kernels, which means cellulosic biorefineries at scales similar to today's corn ethanol refineries deliver a product that has a negative energy balance and EROI far less than 1:1. Scaling up the operation just digs a bigger hole faster. The reasons for this disparity in EROI are basic chemistry and basic farming.
The basic chemistry of crop-based biofuels is growing plants to harvest their sugar and convert it into fuel. The snowflake-shaped sugar molecule is the building block of all green plants and can be assembled into many forms, all of which are collectively known as "carbohydrates." But not all carbs are created equal, as any dietician knows. Some sugar molecules remain loners or bound in pairs and comprise the simple sugars and starches found in the easily digestible, high-calorie, food portion of crops such as fruits and sugarcane sap and corn kernels. These are also the portions most easily converted into alcohol. But carbohydrates also come in the form of million-molecule polymers of sugar molecules that are chained together to form cellulose fibers. These massive molecules are incredibly tough and resistant to being broken down. Compounding the problem is that cellulose fibers are trapped in a matrix of lignin, another massive polymer molecule even tougher to break down, and the two must first be separated at the cost of huge additional amounts of energy. Even after separation, cellulose is indigestible to humans and can only be broken down in nature by specialized ruminant animals like cattle that spend their entire waking hours grazing and chewing and fermenting it in their four stomachs because it is a low-density, low-power, low-EROI energy source. A field of grass can provide energy at a pace to sustain walking cows, but not speeding cars, so we must multiply the energy by harvesting more acreage.
However, both corn ethanol and cellulosic ethanol fail to benefit much from scaling up. This is because farming is an industry that is more responsive to economies of density than economies of scale. The major costs of farming (fertilizer and chemicals and farm equipment fuel) are proportional to the acreage of land that must be sown and harvested. When yield per acre is low, the cost of harvesting and collection and transportation rival the per-acre value of the crop. All the revolutions in agriculture over the past century have been targeted to squeeze more yield out of fewer acres. To illustrate how scaling up actually hurts, consider that a biorefinery surrounded by crop fields must send its trucks further outward from the plant with longer round trips to collect each additional increment of biomass - feedstock unit costs go up rather than down with increased plant demand and production.
The tyranny of geography is one of the reasons why start-ups moving from pilot to commercial-scale biorefineries have not seen their feedstock prices coming down as they anticipated. Sustainably growing enough cellulosic biomass to replace US petroleum fuels without boosting crop density with fertilizers and other EROI-decreasing practices of modern intensive farming would require multiple billions of acres of crop land. Even intensive farming of cellulosic biomass crops with the same energy-intensity as corn will only reduce the farm land necessary to about half a billion acres -- more than twice the nation's currently harvested crop land -- and the energy return would be hugely negative.
The sobering truth of all the above is reflected in the price of bioethanol. US corn ethanol continues to be more expensive than gasoline when compared on an equal-energy, equal-octane basis, which is much more meaningful than the volumetric basis (gallon-to-gallon) favored by the EPA and refineries because it hides the wholesale cheating of consumers that is being done via the Renewable Fuel Standard (RFS). Energy in the gas tank, not gallons, is directly proportional to the distance a vehicle will travel. As of January 2013, the US Department of Energy reported that, on an equivalent energy content basis, E85 ethanol was $1.19 more a gallon than gasoline. American Automobile Association surveys of pump prices also reflect that E85 is consistently more expensive on an MPG-corrected basis than premium octane gasoline. If the price of bioethanol is plotted out against gasoline over the past 8 years, it is not only consistently much higher, but shows the same degree of volatility. The higher price per joule or BTU of ethanol translates into an additional $8.1 billion that Americans paid in 2012 at the gas station for miles not put into their gas tanks because they got ethanol instead of gasoline. When added to the $6.1 billion in federal expenditures for corn crop program subsidies and ethanol blending tax credits, the total cost was $14.2 billion to displace 9.5% of US motor gasoline volume (6.4% of its energy content) with corn ethanol -- and the cheaper petroleum gasoline being displaced was ironically being exported to Venezuela and Europe and other countries while we increasingly import Brazilian sugarcane ethanol. Such is the perverse effect on our national energy security of ill-conceived policies uninformed by science.
If generations of hybrid breeding and decades of direct genetic engineering performed on corn and the enzymes and bacteria and yeasts that process it cannot deliver ethanol with competitive EROI and price from the inherently more favorable chemistry of starch feedstock, then what scientific basis is there to expect inferior cellulosic feedstock to deliver more?
Cello, Range Fuels, KL Energy (OTCPK:KLEG), Iogen, ZeaChem, Virdia, Virent, Gevo (NASDAQ:GEVO), Coskata, Primus Green Energy, Chevron, Shell, and Codexis have all beat their heads and fistfuls of cash against this wall and failed to make a breakthrough in commercially viable bulk fuel from cellulosic feedstock. Geneticists and venture capital cannot bypass the laws of physics and chemistry. BP (NYSE:BP) apparently saw the writing on the wall last October when it suspended plans to build a commercial-scale cellulosic biofuel plant in Florida. KiOR and INEOS Bio are having their turn at figuring it out the hard way right now. Next up with planned commercial-scale plants are Abengoa (OTCPK:ABGOY) and DuPont (NYSE:DD).
A recent trend in cellulosic ethanol plants, as evidenced by INEOS and Abengoa, is to build natural gas co-generation facilities instead of pure cellulosic biorefineries. This author suspects the plants are being built this way because these companies are coming to grips with the truth of cellulosic ethanol above and are positioning themselves to convert to compete in the natural-gas-to-liquid (NGTL) fuel race as Coskata and Primus have already done. NGTL is another topic for another article, but suffice it to say that it is a far more viable pathway to commercially competitive liquid fuel than cellulosic ethanol.
Investors would do well to make their plays anticipating that no company relying exclusively on bulk liquid fuel sales from cellulosic biomass feedstock will ever see profitability. KiOR, like Cello and Range Fuels, has nothing to fall back on and is irretrievable. INEOS Bio may find a way to eke out a living as a landfill methane-powered electricity and heat plant, but not as a bulk liquid biofuel vendor. Abengoa and DuPont's biorefinery efforts are ill-advised and will never make any honest profit for their parent companies. The only scheme for survival of such plants is with taxpayer help in the form of direct federal subsidies for their product in combination with selective additional taxes on their competitors. So far EPA RINs and blending mandates have proven inadequate to compensate for the inherent energy deficit of cellulosic ethanol. Even a steep carbon tax is unlikely to shift the scales enough to make cellulosic ethanol competitive, and it will certainly never be able to compete with corn ethanol or sugarcane ethanol if all are getting the same federal financial and regulatory assistance. In Europe, the standards for claiming "renewability" for liquid fuels are getting tighter. If that trend crosses the Atlantic, it will further hinder liquid biofuels by exposing their true lifecycle GHG emissions and large fossil fuel energy content.
The liquid biofuels sector is living on taxpayer-funded life support and cannot survive without it. KiOR is proving once again that cellulosic ethanol cannot survive, even with it.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.