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Arctic Leaf

Can exports rescue ethanol?

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As the Renewable Fuels Association’s National Ethanol Conference convened in Dallas last month, the outlook for ethanol appeared grim. The Environmental Protection Agency still hasn’t issued set the Renewable Fuel Standard for 2014, and ethanol manufacturers have been left in limbo.

On top of that, ethanol producers still are dealing with the months-long drop in oil prices. Even though Brent crude has been rising again of late, hovering around $60, it’s a far cry from the $115 it traded at last June. The overall price swoon has driven down ethanol stocks, along with those of oil companies. Warren Buffett has unloaded his ExxonMobil stock, which seemed to have been a bellwether for the market in general. Yet if the oil-price drop increases the consumption of gasoline and the 10 percent ethanol requirement holds, ethanol sales could actually go up while the price remains the same.

No one really knows what’s going to happen as long as the EPA keeps delaying new guidelines for the RFS, which will mandate the total amount of ethanol that should be sold in the coming year. The problem has been that, as demand for gasoline slackened, and the required amount of ethanol blended into the nation’s gas supply steadily rose, the ethanol threshold approached the 10 percent “blend wall.” Government testing has shown that virtually all vehicles model year 2001 and newer can run safely on ethanol blends up to E15, but the impact on older engines is still unclear. Christopher Grundler, director of the EPA’s Office of Air Quality and Transportation, apologized for the delay and said the EPA might be issuing its decision on the RFS in the next couple of months.

Yet no one at NEC seemed terribly bothered by the delay. Why? Because the ethanol industry is starting to boom with demand from abroad. “Who needs the RFS? Who needs the EPA?” Tim Worledge wrote on The Barrel, a blog of the Platts energy-news service. “We’ve already proven we can make the stuff … now it’s time to take it global.”

Ethanol exports are not limited the way oil exports are, so there’s no restriction on what can be sold abroad. Many countries don’t limit ethanol additives to 10 percent of gasoline, so there’s plenty of room for opportunity. “There are some persuasive arguments around this [the export] solution,” Worledge writes. “Bob Dinneen, the near-legendary head of the RFA [Renewable Fuels Association], cited 61 countries globally that have biofuel mandates in place. Target them. Grow the economy at home and target the locations in the world where opportunities remain — the “explosive growth” of China and India is an opportunity, says Dinneen, while Pedro Paranhos, vice president of Eco-Energy, pointed out that the US has already supplanted many of Brazil’s traditional export markets, with the only markets proving immune are those where quality and feedstock issues give Brazilian outflows an advantage.”

The international market is indeed just beginning to show signs of a demand for American ethanol. “The burgeoning firepower that the US ethanol industry can bring to the global market could yet see further pressure heaped upon the rest of the world’s ethanol products,” Worledge continued. The industry, he said, should be “looking to the world’s markets to insulate yourself from these political uncertainties,” i.e. the EPA’s delays on the RFS.

One potential problem is that the U.S. is trying to crack the European market just as the European Union is beginning to worry about whether biofuel production is really all that good for the environment. The debate is raging right now in the European Parliament. But even if Europe decides to set aside some land as off-limits for growing plants to process into biofuels, such restrictions could actually clear the way for the import of American-made ethanol. That would create a huge market opportunity for the U.S. industry.

One way or another, it seems too early to write off the possibility that ethanol will be able to reduce what the countries of the world must buy from oil-producing nations in order to power their transportation.

Arctic Leaf

Is Elon Musk the next Henry Ford?

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Elon Musk doesn’t mind making comparisons between himself and Henry Ford. Others are doing it as well.

In announcing his plans for a “Gigafactory” to manufacture batteries for a fleet of 500,000 Teslas, Musk said it would be like Ford opening his famous River Rouge plant, the move that signaled the birth of mass production.

The founder of PayPal and current titular leader of Silicon Valley (now that Steve Jobs is gone), Musk is not one for small measures. The factory he is now dangling before four western states would produce more lithium-ion batteries than are now being produced in the entire world. And that’s not all. He’s designing his new operation to mesh with another cutting-edge, non-fossil-fuel energy technology – solar storage. His partner will be SolarCity (where Musk sits on the board), run by his cousin Lyndon Rive. Together they are looking beyond mere automobile propulsion and are envisioning a world where all this solar and wind energy stuff comes true.

So, is Musk a modern-day Prometheus, bringing the fire to propel an entirely new transportation system? Or, as many critics charge, is he just conning investors onto a leaky vessel that is eventually going to crash upon the shores of reality? As the saying goes, we report, you decide.

One investor that is already showing some qualms is Panasonic, which already supplies Tesla with all its batteries and would presumably help the company fill the gap between the $2 billion it just raised from a convertible-bond offering and the $5 billion needed to build the plant. “Our approach is to make investments step by step,” Panasonic President Kazuhiro Tsuga told reporters at a briefing in Tokyo last week. “Elon plans to produce more affordable models besides [the] Model S, and I understand his thinking and would like to cooperate as much as we can. But the investment risk is definitely larger.” Of course, this is Japan, where “the nail that sticks out gets hammered down.” Corporate executives are not known for sticking their necks out.

Another possible investor is Apple, which has mountains of cash and, at least under Steve Jobs, was always willing to jump into some new field – music, cell phones – to try to set it straight. This is a little more ambitious than the Lisa or the iPod and Jobs is no longer around to steer the ship, but Apple and Musk officials held a meeting last spring that stirred a lot of talk about a possible merger. A much more likely scenario, according to several commentators, is that Apple would become a major player in the Gigafactory.

And a Gigafactory it will be. Consider this. The three largest battery factories in the country right now are:

1)    The LG Chem factory in Holland, Mich. is 600,000 square feet, employs 125 people and produces 1 gigawatt hour (GWH) of battery output per year.

2)    The Nissan factory in Smyrna, Tenn. is a 475,000 square-foot facility with 300 employees puts out 4.8 GWH per year.

3)    A123 Systems’ battery factory in Livonia, Mich. is 291,000 square feet, employs 400 people and produces 0.6 GWH per year.

Both LG and Nissan received stimulus grants from the Department of Energy, built to overcapacity and are now operating part-time.

Now here’s what Musk is proposing. His Gigafactory would cover 10 million square feet, employ 6,500 people and produce 35 GWH per year of battery power. Basically, Musk’s operation is going to be ten times better anything ever built before, at a time that most of what exists isn’t even running fulltime. Does that sound like something of Henry-Ford proportions? Similar to Ford’s $5 a day wages, perhaps?

There are, of course, people who think all of this is crazy. In the Wall Street Journal blog, “Will Tesla’s $5 Billion Gigafactory Make a Battery Nobody Else Wants?,” columnist Mike Ramsey expresses skepticism over whether Tesla’s strategy of using larger numbers of smaller lithium-ion is the right approach. “Every other carmaker is using far fewer, much larger batteries,” he wrote. “Tesla’s methodology – incorrectly derided in its early days as simply using laptop batteries — has allowed it to get consumer electronics prices for batteries while companies like General Motors Co. and Nissan Motor Co. work to drive down costs without the full benefits of scale. Despite this ability to lower costs, no other company is following Tesla’s lead. Indeed, in speaking with numerous battery experts at the International Battery Seminar and Exhibit in Ft. Lauderdale a few weeks ago, they said that the larger cells would eventually prove to be as cost effective, and have better safety and durability. This offers a reason why other automakers haven’t gone down the same path.

But Musk has managed to produce a car that has a range of 200 miles, while the Leaf has a range of 85 miles and the Chevy Spark barely makes 82. Musk must be doing something right. And with Texas, Arizona, Nevada and New Mexico all vying to be the site of the Gigafactory, it’s more than likely that the winning state will be kicking in something as well. So, the factory seems likely to get built, even on the scheduled 2017 rollout that Tesla has projected.

At that point, Musk will have the capacity to produce batteries to go in 500,000 editions of the Tesla Model E, which he says will sell for $35,000. Sales of the $100,000 Model S were 22,000 last year. Does this guy think big or what?

To date, Silicon Valley doesn’t have a terribly good record on energy projects. Since Kleiner Perkins Caufield & Byers fell under Al Gore’s spell in 2006, its earnings have been virtually flat and the firm is now edging away from solar and wind investments. Venture capitalist Vinod Khosla’s spotty record in renewables was also the subject of a recent 60 Minutes segment. But, as venture capitalists say, it only takes one big success to make up for all the failures.

Will Tesla’s Model E be the revolutionary technology that, at last, starts making a dent in oil’s grip on the transportation sector? At least one investor has faith. “I’d rather leave all my money to Elon Musk that give it to charity,” was the recent evaluation of multi-billionaire Google founder Larry Page.