Biodiesel, a vegetable oil-based substitute for the regular petroleum-based diesel that trucks use, has had a tough time getting respect lately. Prices have shot up for biodiesel made from food oils from soybean, canola and palm, the last of which is environmentally damaging to farm. And like ethanol, biodiesel has been accused of pushing up food prices for the world’s poor.
However, ethanol’s name has recently been rehabilitated by companies like Verenium, Mascoma and Coskata, all of whom promise to make the fuel from materials like wood chips and grass, grown on non-crop lands. Most of the hope for biodiesel, meanwhile, has turned to algae ponds. But some companies, like Newark, N.J.-based Innovation Fuels, say there’s still a viable business in producing biodiesel from agriculturally grown plants.
Today, Innovation makes just under a million barrels a year of biodiesel from tallow, poultry fat, used vegetable oil and other waste sources at a New York harbor, from which it ships the fuel out to buyers. There’s a limited amount of used veggie oil in the world, so the company is pinning many of its hopes on Central American shrub called jatropha.
Jatropha, sometimes called the “bioenergy tree,” has quickly The hardy plant, which can easily be grown on marginal lands and is resistant to drought, makes seeds with up to 40 percent oil content; when crushed, the seeds’ extract can be used in a standard diesel engine.
Jhill Johns, a research analyst at Frost & Sullivan, believes that Southern African countries like Mozambique and Namibia, which have millions of uncultivated arable land between them, could provide ideal sites for mass production. Though China is poised to become the world leader in jatropha production, with an estimated annual production of 2 billion gallons of oil expected by 2010, the plant is indigenous to many parts of South Africa and is very cheap to grow, after which its seeds can be shipped to production facilities.
The problem is that much of the press on jatropha so far has been hyped. The plant takes several years to become mature, and reports of flourishing plantations are often overblown, as energy blogger Robert Rapier discovered in India. However, Innovation says that it already has some jatropha production coming online, and that its financial projections for producing from jatropha are very attractive.
Jatropha alone is not the answer for companies like Innovation, which also uses a proprietary technology called transit verification system, an easily modifiable batch process, to make biodiesel. It also has another method to process high fatty acid feedstocks and crude vegetable stocks. Neither process requires a second refinery step. The company is aiming to hit 5 million barrels (over 20 million gallons) of production capacity within the next 2-3 years.
But despite the allure of jatropha, there are some concerns about its toxicity and long-term impacts on biodiversity and soil quality. Moreover, because jatropha has never been properly domesticated, its productivity is widely variable, and the long-term outlook for the plant is not well known. Despite the concerns, Johns notes that jatropha has already attracted a wave of new investments, with companies like BP and D1 Oils pouring millions into these countries. Other up-and-coming challengers to jatropha’s title could include sweet sorghum, switchgrass and Miscanthus, Johns says.
New generation of startups?
Innovation’s CEO John Fox is bullish on the prospects, and thinks the time is right to expand. Having recently secured a funding and large credit line, Fox is moving to aggressively purchase competing biodiesel facilities at ports around the United States. He expects to produce fuel at $10-20 per barrel on an annualized basis. The task has been made easier by the fact that the property market has been depressed, allowing the company to “buy for cents on the dollar,” according to Fox.
Its international outlook and focus on alternative sources should help Innovation weather the inevitable consolidation storm, Fox says. “We want to be the consolidator of choice, but at strategic ports. The opportunity to scale up to that size is important.”
If Fox is right, there’s an opportunity for a new generation of biodiesel start-ups to take over from the mom-and-pop operations that were the main biodiesel producers a few years ago. They’ll have to contend with aggressive companies like Innovation, which is already seeking a new $25-30 million round in equity capital and more working capital for acquisitions. But with 40 billion gallons a year of diesel consumed in the US alone, there’s plenty of room for competition.