Sugar Rush: Sweetwater, Front Range ink $100M cellulosic biofuels deal

Jim Lane | January 16, 2013

Front Range becomes third ethanol plant in 3 weeks to head for cost reductions, RIN opportunities with advanced feedstocks, technology.

Sweetwater Energy’s deal-flow-a-go-go.

In New York, Sweetwater Energy announced a 15-year commercial agreement with Colorado-based Front Range Energy, to supply renewable sugars for up to 3.6 million gallons of cellulosic ethanol per year during the initial phase of the relationship at Front Range’s current corn-ethanol facility. The agreement has a total potential value in excess of $100 million, and requires a minimal capital outlay by Front Range while stabilizing the company’s feedstock costs.

Sweetwater will use its patented, hub-and-spoke process to convert locally available cellulosic, non-food biomass, such as crop residues, energy crops, and woody biomass into highly fermentable sugar, which Front Range will ferment into ethanol.

The announcement mirrors a deal inked earlier this month by Sweetwater Energy and Ace Ethanol. More about that here. Earlier, Aemetis announced that it would switch over to a combination of grain sorghum and biogas technology in order to access advanced RINs for its ethanol.

“Supplementing our corn with this sugar allows us to displace some of the volatility of the corn market, with the goal of moving a higher and higher percentage of our production to cellulosic.” says Dan Sanders Jr., Vice President of Front Range Energy. “We’ve had great success fermenting Sweetwater’s sugar, and from a business standpoint, we have great confidence in Sweetwater’s management team.”

The corn ethanol fleet diversifies

The original premise in the expansion of the US ethanol fleet was relatively simple. There was one feedstock (field corn), one processing technology (fermentation), and two products (ethanol and distiller’s grains). Growers likes it because it provided an additional market for corn, investors liked the low capital costs and the potential for high returns, communities liked the jobs, and the nation as a whole appreciated the progress on displacing foreign oil and on reducing carbon emissions.

Then along came fuel vs food, the global economic crisis, the theory of indirect land use change, the ethanol blend wall, and rising corn prices. Profits became challenged, the additional market for corn brought protests from the incumbents, and oil companies and the public became progressively less nervous about carbon and more attracted to low-cost natural gas.

For ethanol plants, the answer has been in diversification. Corn oil extraction technology has been universally popular as a quick-payback way to boost revenues and profits, and diversify the product stream.

THere are other options. 10 US ethanol plants have joined early adopter groups or begun the process of switchover to biobutanol — using technology from the likes of Gevo, Butamax, or Green Biologics. POET-DSM is pursuing the cellulosic ethanol add-on module – in this case, instead of varying the end product, they are varying the feedstock. Green Plains Renewable Energy is developing an algae biofuels technology with BioProcess Algae, that will convert excess CO2 and heat into a value-add product. Now, there’s the Aemetis option and the Sweetwater technology.

Driving value: The RIN opportunity

In the case of changing up feedstocks, there are cost opportunities available in switching away from corn. But also, as we have discussed here and here, there is also the opportunity in accessing high-value advanced or cellulosic RINs.

[BACKGROUND: RINs, or Renewable Information Numbers, are the bar codes introduced in the Renewable Fuel Standard that are associated with each gallon of renewable fuel. Each obligated parties must present the EPA, at the end of each year, with its mandated quota of RINs. They may obtain them by buying and blending renewable fuels. They may buy them from producers or other obligated parties. They may buy them from the EPA.]

Currently, corn ethanol RINs cost less than a nickel, advanced RINs sell for $0.45 – so a gallon of ethanol that qualifies in the “advanced pool” (that is, achieves a 50% reduction in emissions compared to fossil fuels) is worth 40 cents more per gallon than a gallon of traditional corn ethanol.

Now, there is the Sweetwater option — which has attracted two plants to date, and we’d expect more to come. In this case, the technology provider assumes the cost and risk of building the facility and sourcing biomass, which is converted into a stream of renewable, cellulosic sugars. Initial modules supply enough sugars to produce up to 3,6 million gallons of cellulosic ethanol per year — and, according to Ace Ethanol CEO Neal Kemmet, makes good economic sense for the ethanol producer.

The Bottom Line

Cellulosic ethanol has always had advantaged economics via the Renewable Fuel Standard – accessing a higher-priced band of RINs, and having a mandate all its own in the form of the cellulosic biofuels pool nested within the Renewable Fuel Standard.

The problem was, the RIN economics weren’t so good that anyone thought it was a slam-dunk to build a cellulosic ethanol capacity — and the mandate only requires obligated parties to blend cellulosic biofuel if, generally, it is available or expected to be available. It doesn’t require anyone to build that capacity.

Where Sweetwater is shredding the status quo is in providing a economically feasible entry-point for ethanol producers to access cellulosic RINs and to manage down the average cost of corn buy swapping renewable sugars for their highest-cost bushels.

How far could it go? It’s early to speculate, but consider this.

In liquefying biomass before it reaches the ethanol plant — Sweetwater is not only changing the feedstock source, it is changing the economics of shipping by densifying the biomass. Cutting the weight will expand the distance over which biomass can be shipped.

POET-DSM has estimated that a 100 million gallon ethanol plant could acquire enough biomass to produce 25 million gallons of cellulosic ethanol. That number could double — and if that is the case, there’s more than 7 billion gallons of cellulosic ethanol available through the impact of this technology, just in the current ethanol fleet.

That doesn’t solve the ethanol blend wall — but it would place a premium on bolt-on technologies that can produce biobutanol or hydrocarbons at current ethanol plants. Making for interesting times ahead both for ethanol producers and the technologists who serve them.