After I ran the section of the interview with Terry Tamminen on ethanol, venture capitalist Vinod Khosla (whom we interviewed here) contacted me and asked to respond.
Naturally, I said yes. His response is below the fold.
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Terry Tamminen: Right now, obviously, corn ethanol is not a very good bargain -- depending on where it's made. It might make some sense if you're producing it in Kansas or Iowa and using it there to power farm machines. If you're putting the corn on a train, you're consuming lots and lots of fuel and dumping tons of CO2 and particulate matter into the air moving that train out to California. And then using more energy to convert it into ethanol. Now you're negating a lot of the potential benefits.
Wrong assumptions. Corn is already being shipped to California, Texas, New Mexico and other places. If that same corn can be used for ethanol production then in fact the balance looks much better. Cilion is going to do this in California, Arizona, New York and other destination states where ethanol is consumed. We would give our eye teeth to get a 20% improvement in vehicle efficiency (1 mpg is estimated to cost hundreds of dollars per vehicle to reduce carbon emissions), but won't take an easy 20% improvements from corn ethanol (Argonne National Labs data). Why?
As to subsidies, while ethanol subsidies are at $0.51 per gallon, the total dollar amount is probably negative. Corn subsidies have actually gone down far more than total ethanol subsidies in 2006. While totals ethanol subsidies were about $2.5b (mostly collected by the oil companies) in 2006, a number I heard (can somebody help me verify it?) is that corn subsidies declined by $6b in 2006 because of higher corn prices.
And why don't we ever talk about oil subsidies? The absolutely lowest estimate I have seen is about $0.25 per gallon using only the direct subsidies to oil producers. The conservative estimate of subsidy per gallon of oil including indirect costs is a few dollars per gallon ($4.00 per gallon was been computed) while aggressive estimates are twice that. How is a new fuel to compete?
Having said that, there is no question that corn ethanol can not meet a material part of our gasoline needs (10% or less is a reasonable estimate). It is very likely that solar and wind, as currently used without electricity storage, cannot supply more than 10% of our electric power either, but more on that another time -- there are exciting new things to talk about in this domain too. We should measure all renewables with the same yardstick. As to the competitiveness of switch grass, first there is no question in my mind that we should use grass cocktails and not a monoculture. It is fortunate that Prof. Tillman's research shows this actually produces more yield and we need to increase research in this area.
I hope President Bush calls for more research in agronomy around energy crops. But Miscanthus is yielding 15 tons per acre now in a wide variety of regions, including the UK. The University of Illinois achieved over 15 tons per acre in Illinois test plantings across a variety of sites using standard miscanthus stock. And who said we cannot get cost effective fuel (when gasoline is $3 per gallon) at 5 tons per acre? Most estimates indicate that at $40 per ton on biomass costs we could produce ethanol at about $1.25 per gallon. For a detailed discussion of how much biomass and cellulosic ethanol we could produce (and consume) and the acres required, please see the Appendix in "Imagining the Future."
$40 per ton biomass is very feasible even at single digit yields in acres per ton of miscanthus or switchgrass (or hopefully diverse grass cocktails) without any significant irrigation or fertilizer. And corn farmers will make more money using these grasses if they can get about $200 per acre. And so far little genetic engineering has been applied to these crops because there hasn't been much reason to do it. In fact, I have seen private companies in with yields north of 20 dry tons per acre using only traditional plant breeding techniques. I personally don't have a problem with genetic engineering but we don't need it to achieve these yields. I suspect 6-8 tons per acre will make cellulosic ethanol competitive even if oil prices decline, because of the much lower level of farm inputs required compared to corn/soy.
TT : So you're absolutely right. There are companies in California experimenting with switchgrass -- at best you can get 5 tons an acre yield. They acknowledge you won't make ethanol from switchgrass economically feasible until you get to 15-20 tons an acre yield. Despite all our years of genetic engineering, we haven't been able to figure out how to get those kinds of yields, but they think they will.
That sets aside whether or not any farmer wants a genetically modified crop growing next to his crop, which he wants to sell to Europe or some other country.
DR: Or Northern California.
TT: Yeah, exactly. There are tons of those kinds of problems. Cellulosic is still a challenge because, despite many advancements, we are certainly not there in terms of yield. If you've got to send out trucks over 50 miles to get enough cellulosic material to come into your central refining station, you just used up all the energy you otherwise would have saved, dumped all the CO2 into the atmosphere, and so on. We're just not there yet. We may get there. I would argue that it's a benefit to go ahead, even with corn ethanol and even with some subsidies. You're building a marketplace for something that displaces petroleum, and then if smarter people can make it out of cheaper materials -- and there's a lot of investment going on in that area -- they've got someone to sell it to. They've got cars that run on the stuff, they've got refiners who are willing to blend it into fuel or even sell it as E85, and so on. You're building a marketplace, albeit with an imperfect starting product. I'm agnostic about it. I would love to see development go further, but what I take issue with are people who think we could somehow displace any significant amount of our petroleum with biofuels. The best research I can find shows that you're going to displace 10, 15, 20 percent maybe, if there are a lot of efficiencies in the automotive sector. What do you do with the other 80 percent?
The best research is a matter of judgment. Conventional wisdom always assumes that things will stay as they are. I could be wrong, of course, but hopefully I am unbiased because if I am biased I will lose a lot of money. I so believe that $1.25 or cheaper cellulosic ethanol is less than three years away (though the question of putting plants in place and getting Wall Street to finance debt for such facilities still looms large) that I have invested in a number of companies in this area, Mascoma, Kergy, Celunol, Amyris, Gevo, LS9, Coskata among them. I so believe this is just a matter of time that I am investing in other companies producing ethanol and other transportation fuels from cellulosic materials. In fact, if any expert or guru wants to put their money where their mouth is (as I have done) I will take on any bettors that the costs above will be achieved by at least one company within three years if a 100mgpy plant is built.
Many of them are using very different technology approaches from biochemical to thermochemical conversions and everything in between. There is no question in my mind we can reach these cost targets but it is not clear which technology will be the cheapest or which fuel will win for which application. Gasoline, diesel, jet fuel, home heating oil all have different requirements. It is easy for theoreticians and policy gurus to pontificate about extrapolating historical trends, but have they funded the latest breakthroughs or delved deep into all the technology secrets that private companies will not appropriately divulge? Some of the optimists in the startup world will surely be wrong, but will a dozen companies all fail? Unlikely.
We have seen the same kind of "historical extrapolation" thinking in personal computers, in biotechnology, in telecommunications, in media and the internet before. The experts all claimed less than ten years ago that the internet would never start to replace traditional telecommunications. Ten years from now, using our scientists and technologists powered by the entrepreneurial energy of the Silicon Valley mindset, the energy world will look as different as today's telecom world is different from 1995. We have found scientists working in breakthroughs in Dartmouth (Mascoma), in pipe fitting shops in Denver (Kergy), in India, in New Zealand, in Brazil, and just about every other corner of the world.
And no discussion of ethanol is complete without addressing the question of energy balance. This is not even a relevant question! (See "Is Ethanol Controversial?"). Electricity has 30% of the fossil energy efficiency of corn ethanol so why do we still use it? Because energy balance is not a relevant issue. Why doesn't the American Petroleum Institute talk about electricity? The API is on a massive campaign against real alternatives to oil while the oil interests say nice things about renewable energy and go on with business as usual making profits, funding Mideast terrorists, funding misinformation, and spending lots of nice money around hollow PR campaigns around "going green." Why else would the API be interested in food prices? Do they care that much about the world's poor and hungry? I could be wrong, but I would guess the last Exxon CEO got more of a termination package than all the money they have ever spent helping the poor. Why do they worry about the poor countries when the poor countries are trying to eliminate U.S. farm subsidies and raise prices so their farmers can compete? That is a big reason why the Doha round of trade talks is not working.
DR: I just read that Bush is going to come out with a bold new energy initiative. But you read between the lines and what is it? A massive increase in subsidies to international corn growers. Somehow, at the federal level, energy policy has become synonymous with corn ethanol.
TT: Bush can't implement those policies. He can say in a State of the Union address, here's what I'd like to do, but he has to work with this now Democratic and more thoughtful Congress if he wants to get it implemented. I think they're going to have some ideas of their own about what a more thoughtful energy policy ought to look like. It ain't going to be the federal energy act of 2005 -- with a stroke of a pen he added $6 billion more in subsidies to oil companies and gas companies, exempted them from even more aspects of the Clean Water Act, the Safe Drinking Water Act.
What would I like President Bush to say in the State of the Union? How about targets for ethanol use with price relief valves if prices get too high because of an aggressive RFS (my numbers in the above mentioned paper show 39 billion gallons of ethanol production is possible at reasonable cost by 2017 on 19 million acres and 139 b gallons by 2030 on 49 million acres). Consumers will be protected, price limits will protect livestock producers, and yet we will have a high goal so if any company meets the cost targets for cost effective ethanol they will have a market for their product.
If nobody achieves that goal we will automatically end up with a lower RFS. More importantly, it is a goal that he will get Democratic support for in the House (it is part of Nancy Pelosi's innovation agenda) and in the Democratic Senate where Senator Reid is very supportive of cellulosic biofuels. Equally importantly, many of the presidential candidates for 2008, from Senator Biden to Obama, from Senator Clinton to Senator McCain, all support such policies in general.
I ask all the experts and gurus to look at the facts, look at the latest developments in our labs, and imagine the future -- do not extrapolate the Saudi world using conventional wisdom. Lets stop funding mideast terrorism and the war on terrorism. Lets start funding a war on oil with the same aggressiveness. President Bush please declare a war on oil!
Comments
View as Flat
greenmachines Posted 5:48 am
22 Jan 2007
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sunflower Posted 6:13 am
22 Jan 2007
Your war against oil seems more about political power and profits than it is about global warming and civilization.
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Ron Steenblik Posted 4:42 pm
22 Jan 2007
No, Mr. Khosla, the number for subsidies to ethanol is not $2.5 billion a year. Try doubling that number for starters. The subsidies one needs to count are not just the (VEETC), but also the Federal Small Producer Credit, various incentive payments, tax credits and excise-tax breaks offered by individual states (some of which are almost as high per gallon as the VEETC), plus bushels full of grants and government-intermediated loans provided by local and state governments, and federal agencies. (And we now have the unedifying prospect of top U.S. Department of Energy officials heading off to the Conference of Mayors' meeting in Washington, D.C., to discuss the use of municipal bonds to fund biofuel plants.)
Even assuming no price-related commodity payments for production of the feedstock, those all add up to support for ethanol in the range of $1.00 per gallon -- a gallon that has 2/3 the energy content of gasoline, and yields very little if any (especially if coal is used in the production process) improvement in net CO2 emissions.
Let's even accept Mr. Khosla's argument that ethanol subsidies "save" taxpayers billions in what they would have paid for price-linked commodity payments to corn farmers (a policy that itself was and is in need of urgent reform as well). And let's ignore the fact that large segments of the farm lobby want to maintain those programmes as a kind of insurance. (They, like some in the ethanol industry, no doubt realize that an over-enthusiastic response by farmers to the current high prices for corn could lead to over-production and prices dropping back below $3/bushel.)
That "savings" is, if one accepts those arguments, a one-off savings at best. You cannot project out huge increases in corn produced for ethanol, and then "credit" that increased production with savings on what commodity payments would have been due in the absence of ethanol, because that corn would not have been produced in the first place.
So, looking into the future, one has to look at each incremental gallon of ethanol produced as benefiting from what are, essentially, open-ended subsidies, and price support provided by mandates on ethanol's use and a hefty import tariff (recently extended by Congress for another 15 months -- as it has been extended many times in the past). Bills are before Congress now to make both the VEETC and the import tariff permanent.
So, what would 60 billion gallons of ethanol cost taxpayers and consumers if those policies were indeed made permanent? Around $60 billion a year.
Mr. Khosla asserts, "And why don't we ever talk about oil subsidies?" I don't know which "we" he's been conversing with, but there has been a lively debate about subsidies to oil for years. (And hasn't the U.S. Congressional leadership been talking about almost nothing but subsidies to the oil industry recently?) Indeed, the author of our study on support for biofuels in the United States, Doug Koplow, also wrote the definitive study on oil subsidies", for Greenpeace, back in 1998. (For a full copy of the study click here.) Some others who have tried to measure subsidies to oil have also included government highway expenditure, and externalities associated with automobile use, including accidents and noise -- additions which drive up the estimate considerably. However, if "subsidies" associated with highway building, road accidents and noise apply to petroleum transport fuels, they apply equally to biofuels used for road transport.
The propper public policy approach is not to create countervailing subsidies for a government-chosen alternative to oil (actually, a complement to oil, since for many years biofuels will be used as blends with petroleum products), but to internalize the externalities (including any "threats to national security" externalities) associated with all fuels, and let the different cleaner options compete on a level playing field.
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odograph Posted 12:12 am
23 Jan 2007
Well boys, get some funding for the research end of things, and remove subsidies from the market side. Flatten that playing field so that we can see, without the usual hand-waving, what is going on.
The ancient and correct essay on this comes from Jerry Taylor of the Cato institute and Dan Becker of the Sierra Club:
http://www.commondreams.org/scriptfiles/views03/1029-07.h...
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Julia Olmstead Posted 12:03 pm
23 Jan 2007
If our focus is a 20% reduction (as a start, right?) in vehicle energy use, there are lots of ways to get there that don't involve increasing the Gulf of Mexico's hypoxic zone, topsoil loss, and the pollution of groundwaters here in the cornbelt. We know how to NOT make giant, inefficient cars. We have hybrid and electric technology just begging for improvement and expansion. There are lots of models (Europe, for one) for public transportation systems to study and replicate.
I think what you're trying to say is that we should improve efficiency AND use biofuels. But that's short-sighted and I think misguided. Right now, biofuel demand is worsening Midwestern environmental problems. It's wreaking havoc on precious tropical ecosystems as native forests are destroyed to make way for oil palm plantations. And most dangerously, it's a mirage that's preventing us from making real changes that would make our societies substantially less dependent on fossil fuels.
Let's keep biofuels local, and work on other ways to truly reduce energy consumption in this country.
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Sam Wells Posted 1:34 pm
23 Jan 2007
But wait, ethanol is worse for your car, your fuel economy, and emissions. I don't give a crap about the production or subsidy side, when burned in a car it sucks. Try methanol if you really want some expensive racing fuel.
Recent studies I am reviewing shows that the evaporative and leak effects of ethanol are approximately TWICE those of regular gasoline (E0). The more one jacks up the concentration of ethanol (E10-E40), the worse it gets (to a point - this is non-linear and is something I am investigating). There goes the ozone, folks.
Ethanol is nasty stuff, since it cannot be put in a pipeline since it would mix with water and ruin your car engine and the product itself. It must be trucked and shipped by rail, another source of heavy diesel emissions. When put in a tank it tends to stratify, especially under cold conditions. Therefore, you suck pure gasoline for a while and then pure ethanol, which it not good if the engine misfires. At every stage in ethanol distribution, alcohol fumes are being released due to duirnal heat expansion (temperatures going up during mid-day). The stuff is effective at reducing carbon monoxide in exhausts but for other purposes it is relatively worthless.
Daddy Bush signed the "one pound waiver" for ethanol blends in the Clean Air Act of 1990. This meant that ethanol-gasoline blends could have a vapor potential (Reid Vapor Pressure, RVP) that could be maybe 8 psi with gasoline but 9 psi with ethanol blends. This was a major concession to the strong Mid-West farm lobby. We were pissed back then and still are today.
Junior Bush in 2007 is perpetuating the same madness, without a damn for environmental impacts, saying it could reduce foreign oil imports (which it will never in a hundred years).
I rest my case. As Mark Twain once said, whiskey is for drinking and water is for fighting.
/Sam
Onward through the fog
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Biodiversivist Posted 3:01 am
24 Jan 2007
A consumer can always opt to purchase a car with better gas mileage and in most cases will save thousands of dollars. Moving from a Touareg to a Subaru Outback would save ten thousand dollars and seven miles per gallon. Alcohol producers will naturally do whatever it takes to maximize profit. More than likely, that means turning to coal for distillery energy. There is a reason that no distillery will burn a portion of its own ethanol to fuel the refinery. It would be too inefficient and expensive to do so, ditto for transporting it to market.
And why don't we ever talk about oil subsidies? The absolutely lowest estimate I have seen is about $0.25 per gallon using only the direct subsidies to oil producers. The conservative estimate of subsidy per gallon of oil including indirect costs is a few dollars per gallon ($4.00 per gallon was been computed) while aggressive estimates are twice that. How is a new fuel to compete?
We talk about them all the time here. Typically, pro-ethanol types use them as an excuse to subsidize their fuel. But, instead of lobbying to end those oil subsidies, they lobby for their own, creating an escalating subsidy arms race. Lobby George to get rid of the oil subsidies and your critics that say you are using government welfare (money from our pockets) to line yours will be muted.
And corn farmers will make more money using these grasses if they can get about $200 per acre.... I suspect 6-8 tons per acre will make cellulosic ethanol competitive even if oil prices decline, because of the much lower level of farm inputs required compared to corn/soy.
The world, as it heads for nine billion souls, will be entering untested territory, especially if farmers find it more profitable to grow grass for cars instead of food. There are almost as many undernourished people in India today as there are people in the United States. The whole concept of growing fuel for our cars along with food for nine billion people, while hoping to save the planet's biodiversity strikes me as being near-sighted.
In fact, if any expert or guru wants to put their money where their mouth is (as I have done) I will take on any bettors that the costs above will be achieved by at least one company within three years if a 100mgpy plant is built.
It sounds to me like you are asking critics for advice a little late. You should have done that before you invested. While I share your hope that renewable fuels will one-day replace fossil fuels, those new fuels must not be even more environmentally destructive than those they replace. The fact that you won't use your own assets to build that plant suggests your confidence falls somewhere short of 100%. I see that according to Wiki, your track record isn't spotless. Venture capitalism is a lot like poker, a game where luck is a major component. The best player in the world can go all night without winning a hand:
"While recognized for several venture "hits", Khosla also played a key role with several of the tech industry's most spectacular failures, including Asera, Zambeel, Dynabook, Excite, and others."
Conventional wisdom always assumes that things will stay as they are.
I would call that a simplified definition of conservatism, not conventional wisdom. Everyone expects his or her computer and cell phone to be obsolete in less than a year. My hope is that this exponential growth will soon apply to our energy generation and consumption.
Ten years from now, using our scientists and technologists powered by the entrepreneurial energy of the Silicon Valley mindset, the energy world will look as different as today's telecom world is different from 1995
I fully agree with you here. But the only way to flush out winners is on the free market. Our government is into its fourth decade of subsidizing ethanol production. Your scheme for increasing government funding of ethanol when oil prices drop, and decreasing it when they rise, thus holding the subsidy steady to the price of oil disengages it from free market forces. You claim this will protect the consumer when it obviously protects the investor. Your profits will depend on further subsidization for years to come, and probably forever.
Electricity has 30% of the fossil energy efficiency of corn ethanol so why do we still use it?
Why do we still use electricity? Ever hear of a concept called URGE2? Are you talking about the conversion of fossil energy to electricity verses the fossil energy used to grow corn ethanol (excluding the fact that it will finally be burned in a 30% efficient internal combustion engine)?
The API is on a massive campaign against real alternatives to oil while the oil interests say nice things about renewable energy and go on with business as usual making profits, funding Mideast terrorists, funding misinformation, and spending lots of nice money around hollow PR campaigns around "going green."
You know as well as I do that petroleum companies are also investing heavily in biofuels, and like you, they are doing it solely to make a profit. There is something irritating about a guy from Pune who has moved to candy land telling me that the fuel he hopes to grow even wealthier on (using my hard earned tax dollars) is going to stop terrorism on American soil. Not only is that concept bullshit, it is not why you are investing in Ethanol. Hummer drivers fund terrorists with their 9 MPG. This is a hollow PR campaign if ever I saw one: Live Green Go Yellow.
Why else would the API be interested in food prices? Do they care that much about the world's poor and hungry? I could be wrong, but I would guess the last Exxon CEO got more of a termination package than all the money they have ever spent helping the poor.
Agreed. They are not really all that interested in low food prices and the world's poor, but then, neither are you, especially considering your roots. We all have flattering self images, so you are not alone. Having emigrated here from a country with over a quarter of million malnourished citizens, your comments strike me as ironic. Although your burning desire to line your pockets and those of American farmers with my tax dollars to protect us from terrorists is commendable, Ghandi you are not. Your venture is not destined to help feed India's masses.
Why do they worry about the poor countries when the poor countries are trying to eliminate U.S. farm subsidies and raise prices so their farmers can compete?
Let me translate this. "Displacing food with ethanol is raising food prices for poor people all around the world, and that is a good thing." You are saying that instead of dropping our subsidies so these countries can sell food back to us, we will just suck the corn off the world market and put it into American SUVs instead.
I am also all for declaring a war on oil. To do that the government needs to fund more research and create level playing fields (like carbon costs) so that winning competing technologies can rise to the top (instead of being propped up into a fourth decade by tax payers).
In the end, it all comes down to biodiversity. Poison Darts--Protecting the biodiversity of our world
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DBLJ Posted 7:35 am
24 Jan 2007
Thank you Julia, it is nice to see another smart Iowa Stater that has not been indoctrinated by the "industrial farming lobby" that basically built ISU.....
On to more pressing issues. Whatever the reasons behind the investment Mr. Kholsa has put into cellulosic ethanol I commend him for doing so. However I am a little concerned with some of the numbers given
<blockqoute> $40 per ton biomass is very feasible even at single digit yields in acres per ton of miscanthus or switchgrass (or hopefully diverse grass cocktails) without any significant irrigation or fertilizer. And corn farmers will make more money using these grasses if they can get about $200 per acre. And so far little genetic engineering has been applied to these crops because there hasn't been much reason to do it. In fact, I have seen private companies in with yields north of 20 dry tons per acre using only traditional plant breeding techniques. I personally don't have a problem with genetic engineering but we don't need it to achieve these yields. I suspect 6-8 tons per acre will make cellulosic ethanol competitive even if oil prices decline, because of the much lower level of farm inputs required compared to corn/soy. </blockqoute>
This simply is not my experience. I have worked for several years on finding new markets for prairie grasses and other perennial crops and the largest bottleneck we come to is that boimass is by its very nature dispersed, requiring large amounts of energy to accomplish the tasks of harvesting, transporting, processing, etc. and for what?..... to make fuel. The price the energy facility wants to pay to the farmer does not come close to what he/she needs to compare economically to corn/soybeans. As to the figure of $200 per acre return with perennial grasses..... consider cash rent in my neck of the woods is $150-$190 acre I know of one large farmer that just paid $220 per acre, up front, to rent some farm ground. Why has the rent price for good farmland gone up so much in the last 5-6 years? In part because of the subsidies paid to corn/soybean growers. it is vicious cycle.
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DBLJ Posted 7:37 am
24 Jan 2007
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Biodiversivist Posted 9:32 am
24 Jan 2007
In the end, it all comes down to biodiversity. Poison Darts--Protecting the biodiversity of our world
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