Despite struggles, next-gen biofuels continue to find funding

Updated: Next-gen biofuels in the U.S. have failed to produce much at commercial scale, despite receiving hundreds of millions of dollars from the government and private investors. I was reminded of this unfortunate fact by two articles that came out last week, one in Scientific American, The False Promise of Biofuels, and the other, a post by blogger and biofuel exec Robert Rapier, How to Fix the Broken Cellulosic Ethanol Incentive System.

However, despite the lack of results, next-gen biofuel companies continue to receive a significant amount of both government and investor support. At what point will the funding transform into advanced biofuels being produced at scale and fueling our vehicles?

Biofuel funding still flowing

Last Friday, Spanish engineering giant Abengoa said its biofuel arm, Abengoa Bioenergy, has received a conditional commitment for a $133.9 million federal loan guarantee from the Department of Energy to build a cellulosic ethanol plant. The loan, backed by the DOE’s guarantee, will come from the Federal Financing Bank, and Abengoa Bioenergy says now that it has the guarantee, it will start building the plant in Stephens County, Kan., “in the very near future.”

Other recent biofuel recipients of the loan guarantee program include cellulosic ethanol startup Coskata, waste-to-energy company Enerkem, Diamond Green Diesel, a joint venture from oil giant Valero (s vlo) and Darling International (s dar), and corn ethanol company Poet. The USDA also recently offered a $75 million loan guarantee to INEOS Bio and its partner New Planet Energy to build an advanced biofuel plant near Vero Beach, Fla. (Update: Diamond Green Diesel later found its own funding and didn’t accept the DOE loan guarantee deal).

Private investors continue to back these companies, too. Coskata announced on Friday the first close of its Series D round, and investors included The Blackstone Group, Khosla Ventures, Total’s (s tot) investing arm, ATV, Globespan Capital Partners, General Motors (s gm), Arancia, and Sumitomo (s smfg). Earlier this year, biofuel maker KiOR (s kior) decided to put its loan guarantee application on hold and said it was confident that in 2012, it would be able to find loan terms at least comparable to those offered by the DOE.

Flawed subsidies

But next-gen biofuel subsidy programs haven’t seemed to have worked, and I am skeptical that the loan guarantee program will make much of a dent in helping these next-gen biofuels reach commercial scale. The Renewable Fuel Standard, maintained by the Environmental Protection Agency, has certainly failed to live up to expectations.

Every year for the past couple of years, the EPA has had to readjust the estimated volumes of cellulosic biofuels produced. Originally in 2010, the EPA estimated the industry could produce 100 million gallons, but basically it turned out to be zero. For 2011, five companies were estimated to be able to produce about 6 million cellulosic ethanol-equivalent gallons and it’s unclear if they are going to make that estimate.

For 2012, the EPA previously estimated that the cellulosic ethanol industry would have a capacity to able to produce 500 million gallons. But in June the EPA quietly proposed to reduce that volume estimate to 3.5 million to 15.7 million. The EPA counts DuPont Danisco, Fiberight, Fulcrum Bioenergy, INEOS Bio, KiOR, KL Energy, Terrabon and ZeaChem as companies that will be able to produce small volumes of cellulosic biofuel in 2012. The EPA thinks that by 2012, “advanced biofuels” will only make up 1.21 percent of the fuel supply, and cellulosic biofuels will make up as little as .002 percent of the fuel supply.

Is the system able to be fixed (or worth fixing)?

While next-gen biofuels have stalled, corn ethanol has morphed into a massive, albeit unsustainable business, thanks to the federal government’s 10 percent fuel mandate. According to Scientific American, corn ethanol produced 13 billion gallons in 2010, and received subsidies north of $5.68 billion that year. Corn ethanol also contributes to global riding food prices, and is a naturally inefficient way to produce energy (particularly compared to sugar cane ethanol).

While next-gen biofuels and cellulosic ethanol are supposed to be far more sustainable, they have struggled to get their costs down. The Scientific American article notes:

Breakthroughs remain possible, and the scientific quest for a better biofuel continues, but investors and politicians might be wise not to stake much money or policy on a high-risk bet.

Robert Rapier offers up a more concrete suggestion to fix the system: Instead of the renewable fuel standard and loan guarantees, why not offer a direct per gallon subsidy for product that is sold. That way companies could receive government support for a product they can (and are) producing, not for the hope that one day they can produce it.

What do you think?

Images courtesy of Amyris, Dogpath Biofuels, KiOR, and GigaOM.