Taking On Congress' Favorite Biofuel
For a young company, Virent Energy Systems seems to lead a charmed life. The Madison, Wis., biofuels outfit has pulled in more than $30 million from venture capitalists while striking strategic relationships with the likes of Cargill, Honda Motor and Royal Dutch Shell.
Watch Virent Chief Executive Eric Apfelbach's crisp PowerPoint presentation on the company's business, and you'd probably want to get a piece of this action too. Virent has a low-temperature, low-pressure, catalytic process for turning carbohydrates (sugars) into gasoline, diesel and other fuels. Its 70 employees now make a gallon or so daily. Targeting gasoline as its first fuel, Virent hopes within five years to raise that production to 10 million to 15 million gallons annually.
More at Forbes
The jump from several hundred gallons to 15 million will require extraordinary chemical engineering, a feat Apfelbach sounds confident his company can pull off. Engineering a hospitable climate in Washington, D.C., however, could be trickier.
"We have to make sure that we don't get locked out," worries Apfelbach, 47. "We just don't want to get killed by policy."
The policy in question is Congress' approach to biofuels. At first blush, the outlook is bullish. The Energy Independence and Security Act of 2007, signed into law last December, mandates the use of 36 billion gallons of biofuels by 2022. Some 15 billion of those gallons must come from corn-based ethanol. The rest falls under the category of "advanced biofuels."
Within the latter category, 16 billion gallons of the mandate are reserved for fuels derived from cellulosic biomass, such as wood chips, straw and wheat. One billion gallons must be biomass-based diesel.
Virent's products qualify as advanced biofuels, so in theory, the big mandate isn't a bad thing for the company. But the mandate doesn't align exactly with Virent's business plan. As noted, Virent's feedstocks are sugars: sucrose, glucose, glycerol and others. Yes, Virent can make fuel from the sugar pulled from cellulosic biomass (wood chips and so on). But it has no capability to first break down that cellulose into sugars. It would have to develop the technology to do so on its own, or license the technology from someone else.
Another twist: Virent intends to turn sugars into several fuels--gasoline, diesel, jet fuel--but not ethanol. Indeed, Virent's pitch is explicitly anti-ethanol. Why? The process used to produce most ethanol is energy-intensive, meaning, at least for now, heavy use of fossil fuels. Ethanol also requires its own pipelines, gas pumps and other infrastructure. It dissolves easily into water and separates with difficulty, thus posing more environmental difficulty.
By making hydrocarbon fuels directly from sugar, Virent's thermochemical process would save energy required for ethanol production and eliminate the need for separate ethanol infrastructure. The company also claims its fuels would yield half again as much energy per gallon as ethanol, while remaining competitive on price.
That proposition, though, may not play well in certain quarters of Washington. For decades, ethanol has been a D.C. darling, particularly among lawmakers from corn-growing states. "They all want to do the right thing," says Apfelbach. "But it's not always politically expedient, especially in a presidential election year, to say stuff that's anti-corn ethanol."
So Virent must play considerable Washington offense, for a company its size. Apfelbach, a chemical engineer who hardly fits the profile of a Beltway insider, regularly visits Washington to meet with sympathetic trade groups, nongovernmental organizations, and members and staff on Congress' various agriculture and energy committees. Virent's marketing director, Mary Blanchard, has a wonk's grasp of energy and agriculture policy; she visits Capitol Hill so frequently that she's registered as a lobbyist.
Of particular concern is tax policy. As the table below shows, tax credits have been targeted to specific fuels. Virent's sugar-based fuels enjoy no such subsidy, so the company has made it a priority to push for tax "parity" among biofuels.
Apfelbach believes the Beltway legwork is beginning to pay off; Virent's name popped up at a recent Senate hearing. "Now there's somebody on a Senate subcommittee asking about us," he says. "A year ago, they didn't know who we were."
While it stays engaged on the legislative side, Virent plans to wind down its own reliance on federal government funding. The feds helped fund Virent's early research efforts, and the company has won grant money recently. Last October, for example, the Department of Commerce awarded the company $2 million to look into ways to convert cellulose biomass into sugars. That money, along with licensing revenue, added to Virent's $4 million top line for 2007. The company expects sales this year to hit $11 million.
But Virent recently opted against bidding on a Department of Defense research program on biofuels for jets. Reason: The company had already lined up a corporate partner willing to pay for Virent's efforts in jet fuel.
With that kind of corporate support--and $22 million in the bank--Apfelbach says his company is headed for a public offering. If Virent can make it that far, let's hope it fares better than publicly traded ethanol companies have recently. On average, the ones in the table below trade 69% off their 52-week highs.