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Structures of a biofuel business.
A personal view from European perspective.
by Hakan Falk at Energy Saving Now.

Renewable Energies are already big business in some fields and are destined to be huge. Hydropower has been big for more than 100 years already and windmills for more than 1,000 years. A new example is the Danish Wind Mill electricity business that started around 20 years ago and is now the market leader in large generators, with more than $1 billion in annual revenues and still only scratching the surface of the potential. The same can be said of Solar Power, but this business is spread over many suppliers. The PV cell market is now mature enough for the large companies to take an interest and the Japanese are emerging as potential market leaders from the current Germans. These are two fundamentally different businesses, one with large projects and few clients and the other an end-user market with many customers / installers and relatively few manufacturers.

The traditional fossil-fuel markets are markets with a few producers and a huge client base. A few companies which financed the prospecting and the large investments required in production/distribution facilities dominate. It is however not difficult to see that fossil fuels will be subject to severe price increases during the next two decades, leading to more energy crises. The pressures for replacement fuels and improved energy efficiency will be tremendous.

The biofuel market is quite different from the markets mentioned above. It will always be dependent on many small producers of the raw material and have to distribute to the same huge client base as fossil fuels. The biofuel market can be divided into groups, based on fuel type, necessary production facilities, investments and use. The first divisions are based on the end use and will be transport, electricity and heating.

Transport market
Transport needs are related to engine technologies in the short and medium term, namely gasoline or diesel engines. Hybrids are emerging (hybrid electric vehicles - HEVs), but they also use either gasoline or diesel engines. Small electric vehicles (EVs) will start to emerge with slow penetration and typically in city and short-distance applications. It is difficult to see a major change in these basic vehicle types coming within two replacement cycles, each around 10 years so the timeframe is 20 years. The major battleground in the short and medium term will be between the gasoline and diesel technologies, or on a biofuels basis between ethanol and biodiesel/SVO (Straight Vegetable Oil). WVO (Waste Vegetable Oil) will make a contribution, but its use may be more of a smart and profitable waste recycling method than a major contribution to energy needs, especially if diesel fuels in automobiles becomes more common. [Note: The US produces an estimated 2-4 billion gallons of WVO a year, of which about 10% is currently collected/recycled; the US market for distillate fuel oils is 57 billion gallons per year, up to 7% of that is quite significant. Other industrialized nations probably have a similar ratio; collection rate is generally about 10%. from http://journeytoforever.org ]

Electricity market
Biofuel, specifically biodiesel or SVO, will be the dominant replacement player in electricity generation. Because of its size, consumption and stationary nature, preheated SVO seems to be a logical choice. Hydrogen and fuel cells will be a high-profile development, but will not be a major player in the short or medium term. Replacement cycles are 30 to 35 years and a major impact from new technology could take around 60 years to be seen. Electricity generation with diesel engines is a very large market and it is hard to see ethanol playing any significant part in it. [Fuel cells using ethanol could become a player in the longer-term future, but the oil companies do not favour this route.]

Heating market
Heating of buildings is a huge market. Another use is cooling, but it is possible to shut down in a supply crisis with high prices. Again the only logical replacement fuels are biodiesel or SVO. Because of the wide range of equipment, storage and varying conditions, biodiesel seems to be the logical replacement choice. Replacement cycles are 15 to 20 years and a major impact from new technology could take around 40 years to be seen. It is important to mention that even with fossil oil, there is no difference between diesel and heating oil.

Replacement fuels for gasoline and diesel
If the foregoing is not too far from the reality, the preferred fuels will be ethanol and biodiesel/SVO. Both are markets with many producers and users. There is probably one fundamental difference, shown by experiences with ethanol in Brazil, and that concerns the production of the feedstock. If we consider replacement cycles, it is quite a safe and stable business environment.

Characteristics, comparing Ethanol, Biodiesel and SVO.
The following table is a first attempt to map technical feasibility of fossil to biofuel replacement.

Process:	Ethanol	Biodiesel	SVO
Fossil fuel to replace	Gasoline	Diesel oil	Diesel oil
Potential fossil replacement vehicles	more	less	less
Potential fossil replacement electricity	less	more	more
Potential fossil replacement heating	less	more	more
Possible raw material sources 1)	similar	similar	similar
Possible products	less	more	more
Preparation raw material	more	less	less
Filtering - pressing	yes	yes	yes
Fermentation	yes	no	no
Chemical altering or distilling	yes	yes	less
Energy for production 2)	more	less	less
Net energy gain 3)	less	more	more
Conversion of end user equipment	yes	no	yes
Current suitable vehicles	more	less	less
Current suitability electricity	no	yes	yes
Current suitability heating	no	yes	yes
Cost to produce	similar	similar	less
End use efficiency for fuel/technology 4)	less	more	more
Needed quantity to replace fossil fuel	more	less	less
Storage time	more	more	less
Suitable for fossil - bio mix	more	more	more
Time to general implementation vehicles	less	more	more
Time to general implementation electricity	more	less	less
Time to general implementation heating	more	less	less
Suitable for local small scale production	yes	yes	yes
Suitable for local large scale production	yes	yes	yes
Suitable for existing distribution	yes	yes	yes
Large improvements in pollution	yes	yes	yes
Biodegradable	yes	yes	yes

1) Potential crops for combine ethanol and biodiesel production have hardly been explored yet. Methods for production of both from the same crop is also hardly explored, which means most or all of the grains at least.

2) This is the actual energy used for production method, without evaluation of the sources of that energy. Biodiesel will take more energy to produce than SVO, but less than Ethanol.

3) Net energy gain is also dependent on the source of energy for production. If residues from the source itself can be used, net energy gain should reflect that. it is very difficult to make a general statement. Co-production of ethanol and biodiesel/SVO from the same crop could be very efficient.

4) This mostly reflects the larger difference in efficiency between gasoline and diesel engines, the differences in the fuel are smaller.

Ethanol
The available energy crops give fewer choices for cost-efficient ethanol production than for biodiesel/SVO. The Brazilian experiences over many decades now, points to high sugar and starch rich crops with high yield per acre and large/medium size production facilities. It seems that Sugar cane and sugar beet works better and maybe a few other crops. Local alcohol regulations and perceptions, may be an inhibitor for the small ethanol producer.

Biodiesel/SVO
Biodiesel/SVO leaves a richness of possible choices and agriculture conditions. Biodiesel/SVO are already cost-effective in a small producer environment and even more so if the fuel can be produced at the same place or close to the raw material. There are arguments between large and small producers over quality control etc., but this is easily solved and is a non-issue. Corporations seeking to maintain their control over the food business use the quality and health issue and we can see attempts to copy this in the biofuel industry. This is harder to do with biofuel and with future needs for fast growth of supply, it is likely to fail.

Business environment
Very large companies seldom create new markets and/or participate in the entrepreneurial stages of market development. They are slow and not geared up to go through the first painful stages of a business, and the strong and stubborn individual spirit required is difficult to nurture in the large company structure. The same reasons very large companies are effective, work against them in the entrepreneurial situation. The usual and most cost-effective way for large companies is to buy into the market once it reaches a critical size, and to prepare for it in the meantime.

The large oil companies are very well aware of developments in their business sectors and spend much money researching, analyzing and manipulating. They have much better analyses and background material. They develop strategies to get into a favorable position as markets start to become established and it is time for them to enter. They spend a lot preparing, influencing, delaying or speeding up the process, according to their current strategy. Often they are among the first to recognize new technologies, but the last to participate. We can now see signs of change in their posture every day in the media. Almost all the big oil companies are spending fortunes changing their images and how the public perceives them. All of them now claim to be pro-alternative energy and pro-environment and have become "experts" on responsible and sustainable development. [However, note that BP spent more on their new eco-friendly logo in 1999 than on renewable energy.] They are also spending fortunes on lobbying and affecting the political process in preparation for their entry to these markets. They are also participating in several startups.

At the moment the large oil companies are entangled in a complicated game of jockeying for future control and creation of a favorable business environment. It is clear that the methanol - hydrogen - fuel cells route would be the best development for them, with an backup of using Ethanol. It would be easier to buy up and control in the future, but the problem is the viability and time perspective of implementation. The biodiesel/SVO route will be far more difficult to maintain control over and will always have many more players, and it is already proven to be viable. It is a more unpredictable route with much less business stability for the large companies.

Business organization.
If we look for probable business models for ethanol or biodiesel/SVO, we can find them in the food industry. Ethanol would probably be organized in a manner similar to the market for refreshment drinks. Biodiesel/SVO will have similarities to the market for milk products.

It is interesting to see that almost all ethanol producers with venture capital funding are now carrying a quite visible "for sale" notice and are flirting with the oil industry. This is natural, as the replacement of MTBE (the toxic gasoline oxygenate produced from fossil-fuel sources and increasingly banned) by the growing use of gasoline/ethanol mix ("gasohol") makes the oil companies the largest customers of the ethanol producers. This is not yet the trend in the biodiesel/SVO sector, even if some venture capital-based producers of biodiesel are flirting with oil companies and alienating the future community of suppliers - which might not be a very clever strategy.

It is quite interesting to see the "Chinese wall" built around the US on Gasoline/Diesel questions. Despite the dominant use of diesel in heavy transport, electricity and heating in the US, oil/automotive industry maintain and support negative perceptions of diesel in the automobile sector. It is the same players that in the rest of the world are very supportive of diesel technology, forced by the larger existing market and fast growing demand.

My opinion is that diesel technology not only provides for necessary and substantial energy savings and, with biofuel, a near-zero pollution alternative, it also secures the position for viable biofuel sources in the future. For the consumer it creates a supplier side that is diversified and with better chances of an economical fuel source. For the suppliers it provides an advantage, with more independence and possible participation in refining. It also has better potential for fast growth to meet demands.

Diversified biodiesel/SVO is probably the only reasonable route to fast and effective implementation in the short term (the next 10 to 20 years), which is one to two cycles of automobile fleet replacement and one cycle for electricity and heating. This is because it is diversified, near the raw material source, and uses low-cost production equipment. It is repeatable with quality reliable high-quality production, the distribution organization and user equipment exists and can be improved. Allowing for the parallel start-up of many thousands of growers / producers is faster and more feasible than building large plants for processing. Already there are "processing plant in a container" products available for producers. The direct and large energy savings of diesel technology will also make any large-scale implementation more feasible.

Window of opportunity
In most bootstrapping businesses that I experienced and have noticed how the "window of opportunity" opens and close. In a market it is many activities of promotion. In the beginning most of them from local environment, but also from large players that want to prime the markets. This is going on now, with the new green look of Big oil and other things. They know that a change is coming and spend money on preparing, not on deliver products. This is a part of what creates the famous "window of opportunity", were a small supplier can grow big. The phase after that is when the market is big and established enough for the large companies. That is when they "buy the available market shares" starts, in order for larger organizations to get the needed volumes and some startups will continue on their own and grow by buying others. The latter create the newcomers in the Big companies. The moment that the buy up period starts, the "window of opportunity" closes rapidly. The ticket to entry the market get too expensive for a small/medium large company. Many of the startups also becomes important suppliers to the "Big whatsoever".

If you are too early in a market and want to be big, you have a good chance to fail. If you are too late, you cannot afford the ticket. If you hit the window, it is a fair chance to be successful. This is why the entrepreneur is so important. He enters early and small because of enthusiasm and is often stubborn enough to stay until the "window of opportunity" opens. He is successful not because of smartness, but because of enthusiasm and stubbornness and that is probably the only clear common factor among successful entrepreneurs.

If I was involved with small or medium-scale commercial production of biofuel in Europe, it would be biodiesel/SVO with co-production of ethanol. It is my personal reflection base on my natural environment, which is Europe. If you can see chances of success in the ethanol field in yor natural environment, it might be better with Ethanol with co-production of biodiesel/SVO. I come to realize, from discussions in the biofuel discussion list at "Journey to Forever", that the ideal is a production of both. My basic strategy would include the following:

Good economics of the crop and the process used. This is obvious and I am only saying this because if I leave it out, it would lead to a large discussion. Suitable crops with variety, reliable and scaleable processing are the goals.
I would do my business plans on using SVO, but when possible use WVO for biodiesel. This to bring down the costs in the beginning and to establish a waste recycling part of the business. I would also concentrate on biodiesel products with SVO as complementary.
I would look carefully on possibilities to create, package and market complementary lubrication products like cleaning additives, chainsaw oil, etc.
It is markets that can be designated as definitely green (sensitive environments) and where marketing efforts can give succesful environmental results,such as
- Fuel an lubricants in agriculture use,
  - biodiesel to replace diesel.
  - SVO based products replacing motor oil.
  - lubricants replaced by SVO based products.
  - Hydraulic oils replaced by SVO based products.
- Fuel and lubricates in forest application, such as,
  - chain saw oils.
  - two stroke fuel, by two stroke oil in gasoline mix or ethanol/SVO.
  - fuel of machinery.
  - hydraulic oils by SVO based oils.
- Fuel and lubricants in maritime applications. such as,
  - Biodiesel replacing fossil diesel.
  - Ethanol replacing gasoline.
  - SVO based products replacing motor oil.
  - two stroke fuel, by two stroke oil in gasoline mix or ethanol/SVO.
all of those would reduce important loads on the environment. The viability of green lubricants is proven by use in Europe and US, sample on a company for those kind of products is GREENOCO in NY, it is a very large market with space for many suppliers.
If the feedstock allow it and most do, I would look at possibilities to have complementary production of ethanol as co-production. Would be for production of biodiesel and if surplus as fuel. It is many governmental programs for encourage production of ethanol, see http://www.newrules.org/ and could provide for start up assistance.
Products, marketing and sales strategies more directed at the heating market or at least as much as the transport market. The heating oil market is very interesting, is less regulated and has a lower profile. I know that some small biodiesel producers are making heating oil and that they have a substantial demand for it, but most producers seems to be fascinated by vehicle use and seem to forget the large energy use of heating.

I also want to concede that I might have a strong preference towards biodiesel/SVO and diesel technology. The more I deal with alternative fuels the more I appreciate the benefits this technology could give on short term. It is not many "ready for use" technologies that can give corresponding benefits.

It is usable in almost all current critical needs for transport, electricity and heating.
It is low startup costs and scalable.
It is a cost efficient "ready for use" technology that together with energy saving, passive solar and electricity from wind generators, can give rapid relief on the mounting energy problem.
It provide for 30% energy savings in the type of combustion engine technology, which is a crucial benefit.
It provides for very large reduction in pollution, not only for transport. The pollution for heating and electricity are significant today and it will provide for rapid improvements in those sectors.
If a solution can be simple and implemented by many small producers with profits and employment opportunities, it is a crime against humanity not to do it as fast as possible.

In medium and long term, it is a need to diversify and a one source solution can put future generations into the same situation as we have today. To get the time to develop solutions, we need key "ready for use" technologies for rapid implementation. In my opinion Ethanol, biodiesel/SVO and diesel technology belongs to them.

The solutions must be sustainable, available worldwide, for use of the people and not reserved for a rich elite.

Hakan Falk
http://energysavingnow.com/

Thank's to Keith Addisson at Journey to Forever and the biofuel discussion list members on the same site, for helping me with education, valuable views and proof reading.