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Standing at the Crossroads The Biofuels Industry in Colorado

September 27, 2011

Colorado’s biofuels industry is faring better than elsewhere in the country, thanks to local entrepreneurial spirit, the area’s universities, the National Renewable Energy Lab (NREL) coupled with Governor Ritter’s early leadership in the New Energy Economy. However, bolder and more sustained actions are required if the state’s vision of becoming the cleantech version of Silicon Valley is to be realized. Colorado’s biofuels industry stands very much at a crossroads.

Having just completed a two-month survey of Colorado’s biofuels companies, I heard quite clearly what’s needed to energize the industry’s growth here. This project, commissioned by the Colorado Cleantech Industry Association (CCIA), surveyed almost all of the biofuels players in the state. With 125+ members, CCIA is the leading industry voice for cleantech companies. Face-to-face interviews were conducted with company CEOs using a ten-page standardized questionnaire comprised of open- and closed-end questions. Results were aggregated to uncover the state picture.

Colorado’s biofuels industry is evolving rapidly and has seen its share of challenges such as commodity-price volatility, recession and fast changing technologies. At last count, there are at least 17 different process technologies under development nationally that are aimed at producing end products such as biodiesel, ethanol, butanol and renewable petroleum. Many have a presence in Colorado, although some are in early stages of commercialization.

A number of common themes emerged in the survey that policy makers and investors should be aware of. Four key challenges exist: legislative, workforce, capital market and public awareness.

LEGISLATIVE PRIORITIES

Legislative Priorities Exist at Federal and State Levels
Macro conditions for long-term growth and prosperity are needed at the national level and should be underpinned by appropriate, long-term federal policy. Equally important, however, the business climate and resources present within Colorado must be “best in breed” or we run the risk of losing our early-mover advantage to competing states. In this race to own the New Energy Economy, it’s not enough to be first off the starting line. Sustaining and finishing first is what’s important. That’s what builds jobs and secures ownership of this new and vital economic sector.

Federal Energy Policy Needs to Create a Level Playing Field for Industry
Data from the survey shows Colorado’s biofuels companies want federal energy policy to go beyond simple incentives and mandates. Such policy needs to drive a wholesale rebalancing of the U.S. energy portfolio and it needs to be executed in a thoughtful, coherent and sustained way.

Furthermore, specific national policies and related financial incentives should be underpinned by three over-arching principles: technology neutrality, feedstock neutrality and tax-incentive impartiality. Eighty-three percent of those companies in the survey are simply seeking a level playing field. The myriad of technology pathways currently being pursued make it impossible for policy makers to predict which feedstocks, production technologies, and renewable end-products will ultimately win in the market place.

As an example, consider alternatives to traditional diesel fuel. At last count there were six different feedstock-technology pathways being developed by various companies across the US. How can federal policy makers know with any certainty if transesterification of soy oil, fermentation of sugar/starches, catalysis of starch/sugars, hydrocracking of algal oil, hydrolysis of cellulosic biomass or gasification of biomass will ultimately win the race for a conventional diesel substitute? Maybe one is better in certain climates and geographies while another elsewhere. The federal government should let the marketplace determine who wins this race. Similar complexity exists for ethanol, butanol and other fuel alternatives.

Colorado’s biofuels industry supports all three changes contained within the Environmental Protection Agency’s proposed Renewable Fuels Standard revisions (RFS2). The strongest support, two-thirds of the companies surveyed, is for the new, higher renewable fuel volume standards being proposed since it promises to have the most positive business impact.

Industry wants National Energy Policy to include a sustainability requirement, as is currently proposed, for continued government support-over 80% of the biofuels firms stated so.  This consensus exists despite divergent individual company circumstances which span algae, biomass and multiple renewable fuels/chemicals products.

Even more surprising is the consensus on what sustainability means and how such criteria should be utilized by federal lawmakers. The survey shows local industry feels sustainability should be limited to three notions:

1. Reduction in greenhouse gas emissions
2. Protection and conservation of water
3. Economically feasibility

While economic feasibility is not as easy to apply as either emission reductions or water impact, the message is clear: keep policies (and our scarce tax dollars) grounded in practical solutions, avoiding esoteric concepts which carry low odds of success. Industry wants federal policy to promote pragmatic protection of air and water resources.

State Should Focus on Long-Term Plans with Aggressive Financial Incentives
Shifting the focus from national issues to Colorado, a clear picture exists of what local business leaders require to quickly step their companies from R&D to commercial plants.

Several months ago, the Governor’s Energy Office and the Western Governors Association hosted the Advanced Biofuels Policy Workshop. The objective of this workshop was to develop policy recommendations for the promotion and deployment of advanced biofuels’ production and infrastructure. The companies surveyed strongly endorse many of the recommendations arrived at during this workshop.

Further, the survey suggests Colorado’s biofuels industry wants, and indeed needs, a long-term strategic plan (i.e. a master state plan) for development of the state’s biofuels industry and more aggressive deployment of financial inducements/rewards for doing so. Let’s look at each opportunity.

According to those with whom  I spoke, the strategic master plan should take a holistic view of what’s needed to transform the state’s biofuels competitiveness vis-à-vis other states. It warrants action now. The four-stepped approach should include:

♦ A rigorously-frank assessment of Colorado’s key biofuels’ resources: capital (human and financial), physical assets (e.g. access to feedstocks, transportation) and new technology.

♦ Benchmarking versus best-in-class policies, development programs and approaches successfully used in other states/countries.

♦ An agreed set of strategic actions to be implemented by state officials, industry and academia, as applicable, over the next 5-10 years.

♦ Specific, measurable annual measures of success (i.e. milestones or key performance indicators) to chart strategic progress and flag when course corrections/adjustments will be warranted.

This is neither difficult nor new. Business uses such an approach for their long-range planning activities and Colorado should too.

The Governor’s Policy Office, members of the Colorado General Assembly and the Colorado delegation to the U.S. House of Representatives and Senate are to be applauded for beginning to drive towards such a strategic plan for the state’s biofuels sector. They should now move quickly with full confidence that industry is “ready, willing and able” to do its part.

The second and unanimous message heard is to deploy financial inducements/rewards much more aggressively in three specific areas:

♦ clean-fuel advanced-technology grants
♦ tax credits for alternative fuel production facilities
♦ low-interest, state-backed construction bonds

Perhaps a sign of the current capital squeeze, out of a dozen potential financial initiatives only the above three received significant majority support. Industry is focused on what it needs to expand biofuels in Colorado right now.

The weakest link in the R&D => Bench-Test => Field Trial => Commercial Plant process lies in this very last link. No wonder. NREL and local universities are cranking out new discoveries daily, the pool of Front Range entrepreneurs are quick to test more-promising ideas in the market, but scaling up is proving to be the most challenging step. Think about how many local biofuels companies you know with employment in the five, ten or 15-person range-now do the same for larger biofuels firms with meaningful production and employment here. There’s a multitude of small, local biofuels players but scant few with significant size and scale. Passing this chasm from start-up to established, profitable company is where many stumble.

WORKFORCE NEEDS

A Biofuels and CleanTech Workforce Development Plan is Needed
Two-thirds of biofuels firms in Colorado believe enhancing the availability/supply of skilled employees is needed to build a robust clean-energy sector in the Front Range. Views vary, however, as to which functional areas (e.g. engineers, sales, technical) are most pressing, but expanding the pool of talented managerial staff emerges as the top priority.

Academic offerings, such as the University of Colorado-Denver’s Global Energy Management program, are a great step. This Masters of Science program aims to educate future leaders in global energy management, thereby supporting management succession for the energy industry worldwide-both fossil fuels and renewables. Enrollment’s expanding. As a major energy hub for North America, Denver’s well positioned to respond to leadership gaps in both traditional and alternative energy but much more is required.

Dramatically different knowledge, skills and abilities are needed to lead renewable energy and biofuels firms compared with the established fossil fuels competitors and coal-fired energy providers. Managing new/emerging technologies through the scientific, proof-of-concept and commercialization stages is a key success factor for most of the state’s emerging cleantech entities. This organizational capability, however, is unnecessary for utilities and the petroleum industry.

Colorado University’s Technology Transfer Office has an impressive track record in helping drive such commercialization. In the past five years, they’ve received more than 1,000 invention disclosures, executed 160 exclusive licenses/options and helped create 49 companies based upon C.U. technology.  This places C.U. among the top ten U.S. universities in new-company creation during this period. The fastest growing category of inventions at C.U. is clean energy. In the past three years, six clean-tech companies were started using university intellectual property, including two biofuels companies: Sundrop Fuels and OPX Biotechnologies. Other research universities besides C.U. are also seeking to step up the pace with which they bring scientific discoveries to the marketplace. Such efforts should receive greater support and funding from all constituencies.

Emerging biofuels companies require their CEO to cover many bases, not just knowing how to scale up a particular technology. They must bring a broad suite of skills traditionally delegated to staff departments in larger organizations: corporate governance, managing external stakeholders and accessing capital markets to name just a few. More venues for learning these skills need to exist in Colorado.

A holistic workforce development plan should target professional, skilled and semi-skilled workers and be jointly endorsed by state, industry and academic leaders. It should coordinate diverse types of training accessible through multiple means including university programs, trade association seminars, on-line forums and employer-sponsored events.

CAPITAL MARKET REQUIREMENTS

Capital Market Innovation is Needed to Fill the Funding Gap
Raising growth capital is an urgent challenge in these difficult times. No doubt the young biofuels industry is not alone in this regard. Real estate, biotech, medical and virtually every industry sector needs improved capital access because traditional modes of funding have virtually evaporated. Creativity, innovation and leadership are essential to overcoming today’s funding void.

We’ve all read the headlines on President Obama’s Stimulus Funds, and yet more than 80% of our local firms indicated they want more guidance for understanding and accessing, this type of funding. Don’t misunderstand. Clarity is slowly percolating down from D.C. but, at the same time, rules are shifting, procedures changing and some promised pools of funding get closed before ever being deployed. Opportunities also lie in better connecting potential investors (e.g. Angels, Venture Capitalists) with emerging biofuels firms in the state.

A heightened sense of urgency exists to secure proof-of-concept and scale-up monies. The old ways of the past, such as personal referrals and local pitches at informal gatherings, are just not enough. Newer, high-profile venues such as the Rocky Mountain CleanTech Open are filling some of this need, but easier access to automated databases of non-traditional sources of funds is welcomed by two out three biofuels companies. Even radical ideas such as a “state” venture capital fund for biofuels investment (that perhaps industry co-funds) should be evaluated.

We all appreciate the fact that state finances are under pressure. However, offering new-business grant/loan programs and ongoing resources aimed at ensuring Colorado companies get more than their “fair” share of federal monies is a sound investment for the future and surely costs relatively little.

PUBLIC AWARENESS OPPORTUNITIES

Public Awareness Opportunities Exist for General Information and Skills Development
Local biofuels leaders see opportunities in working closer with policymakers to build and implement an ongoing public awareness plan for biofuels. Headlines grab the general public’s attention in today’s time-compressed lifestyle, but what are the real facts? Which is more sustainable: biodiesel or ethanol? What’s the difference between flex-fuel vehicles, hybrids and alternative-fuel vehicles?  Many more basic biofuels’ questions are on the minds of today’s Coloradans.

Across the globe are some 35 million alternative fuel vehicles-vehicles using a method of powering the engine that doesn’t solely rely upon petroleum fuels. That’s about 5% of the world’s on-road vehicles. How do we stack up in Colorado? Are we behind, ahead or just holding our own? The general level of the public’s knowledge around biofuels and alternative transportation is weak at best.

Tesla, for example, recently opened its first gallery (read showroom) in Colorado. While promising, its $125,000 all-electric sports car will have limited general appeal despite great performance and a workable charging range of 250 miles. We’ll have to wait until 2012 to take delivery of its S-model coupe priced at $50,000. That wait will pay off handsomely but how many of the motoring public even know about this option or the myriad of other new-technology vehicle choices arriving over the next several years?

Enhancing awareness and knowledge of biofuels and next-generation transportation choices is best done through a multi-faceted approach involving all players in cleantech transportation. The public is hungry for relevant, fact-based information. Industry sees the pay-off from raising public awareness and government shows signs of stepping up its leadership in this arena. The time is ripe for coordinated leadership here.

A majority of local firms seek advanced workforce training. Programs such as technical training, educating local entrepreueners to transition skills to cleantech sectors and grooming today’s managers to become tomorrow’s clean energy leaders is not enough. Offering these programs is the first step, but broadcasting their availability and related benefits must follow to get participation and impact. The good news is that delivery and marketing can go hand in hand and ever more attention is being directed here by all parties involved.

STANDING AT THE CROSSROADS

We stand at a defining crossroads in Colorado, a crossroads that will ultimately determine if we have a prosperous, thriving biofuels industry. I’ve highlighted the key steps biofuels’ leaders seek to make their respective contributions towards building Colorado’s New Energy Economy.

Colorado has many of the resources to build a globally-recognized biofuels industry, but other states such as Michigan, Iowa, Oregon, and California do as well. It’s a competitive race. Who will win? This depends upon which road our leaders take.  Down one path, leaders align together with a clear purpose, and our children grow up knowing Colorado leads biofuels development in the nation, thus winning this leg of the New Energy Economy race. Down the other path, a “business-as-usual” approach means the state will cross the finish line behind others –  a mediocre effort yielding low returns.

Lead in a big way or settle for potential mediocrity? For the sake of the generations to come, let’s hope Colorado’s leaders take the right road ahead.

In 2007, Mike Miller took up the challenge of growing a local, integrated biofuels company, serving as its President. He spent the previous  decade, in Europe and Asia, leading large, cross-functional petroleum teams for BP and Castrol. He is an Adjunct Professor with the University of Colorado Denver’s Global Energy Management program, serves on three Denver-based Boards and actively supports many industry associations. Mike holds a MBA from the Harvard Business School and is a passionate fly fisherman.

Reposted with permission from Michael Miller, first published in Colorado Energy News on Feb 1st, 2010


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