Garbage, Fuel and Economics: An Interview with BlueFire Ethanol’s Arnold Klann
In recent years, the lofty promise of corn-based ethanol has come crashing down to earth. Once considered a real option for reducing US dependence on foreign oil, corn ethanol is now commonly criticized as a poor replacement for petro-based vehicle fuels, and an environmental and energy washout. Critics go up in arms especially when considering the $5 billion or so spent every year in federal subsidies for corn ethanol.
On the other hand, so-called cellulosic ethanol—made from materials such as wood chips and switchgrass—continues to be championed as the holy grail of biofuels. President Obama is one of its biggest supporters.
To get a better understanding of the current state of the cellulosic ethanol industry, we spoke with Arnold Klann, CEO and co-founder of BlueFire Ethanol. BlueFire uses a patented process in which mixed municipal waste—lingo for green garbage headed toward a landfill—is broken down into sugar and fermented into ethanol. That’s right. BlueFire wants to turn your garbage into America’s next great fuel. But as Klan explained, that dream remains elusive.
Focusing on Garbage
HybridCars.com: What’s the layman’s non-technical explanation of BlueFire’s process for producing ethanol?
Arnold Klann: We have it down to two words basically: acid and a bug. More specifically, it’s acid hydrolysis. We use sulfuric acid to fundamentally dissolve the cellulosic materials into their constituent components—sugars and lignans. And lignans are the glue that holds the sugar molecules together. From there, we separate the acids from the sugars and we ferment the sugars into ethanol. The acids are re-used in the system.
It’s pretty simple. You have to think of it conceptually as you put anything in acid, it will dissolve. In our case, it’s a little more sophisticated, because we don’t have a pot of acid to dump the stuff into—rather we spray it on the material.
Your focus is on garbage and green waste—stuff primarily generated from municipal sources rather than agricultural sources.
It is right now, though our process is probably the most robust out there today. We can handle any of the feedstocks.
Is municipal solid waste the common garbage that ends up in a landfill?
Typically, it’s the green waste—the wood waste that goes into the landfill, cardboard waste, non-recyclable papers, some of the household waste. Any of the organic fraction that was grown by photosynthesis. That’s the material that we’re going after. In many states, they have programs to make sure that stuff is segregated before it gets to the landfill.
Tell me about your partnerships with municipalities and landfill owners.
The reason we went after this type of business relationship is all the [cellulosic ethanol] projects today that need to be financed, they have to have what are called credit-worthy feedstock suppliers. Typically today, agricultural residues are not gathered, and the feedstock suppliers are not credit-worthy. So, we avoided the whole agricultural issue, and the issue of getting the feedstock suppliers credit-worthy so the banks would loan money. We can avoid the issue by working with municipalities and the landfill operators.
The feedstock suppliers that need to be credit-worthy, what are they growing?
They’re not growing. That’s the problem. There are no purpose-grown crops today for energy that I’m aware of. There are test facilities, but that’s about it. The biggest thing that people are trying to focus on now is agricultural residues, but these are left in the field now. Someone has to come in and gather that material after the food crop has been harvested. And today, no one does that commercially because there’s no market for that material.
“On one hand, we’re worried about energy security issues. We’re worried about carbon going into the atmosphere. But we’re not prepared to finance the risks to build facilities to take care of those issues. As a society, we want this, supposedly. But on the flip side, from a business standpoint, the people that control the money don’t want to take the risks. That’s what has slowed down BlueFire.”
Is this why you say that BlueFire is the only viable worldwide cellulose-to-ethanol company? Is it your core strategy?
Definitely. Part of it is just to get financing. The relationship with the municipalities is very critical because clearly municipalities are credit-worthy, because they have to deal with waste day in and day out. The materials are already gathered and distributed to the landfill. Our business is to locate these [facilities] adjacent to or in existing landfill operations, where the material that’s already being trucked there comes right to our facility.
Your competitors in the cellulose to ethanol business, how are they trying to solve the source of the feedstock?
A lot of them are not even far enough along to realize they have a problem. Almost everybody else is just building a test facility, what are called pre-commercial facilities. We’re already passed that stage. Consequently, we’re building commercial plants today. Range Fuels solved the problem by getting a loan guarantee from the Department of Energy. That’s the only way today to get around this credit-worthiness issue on feedstock supply.
Range Fuels, based in Georgia, is producing ethanol using a gasifier technology, commonly known as gas-to-liquids. In their case, they have wood supply. There is one company today, Price BIOstocks that has been set up specifically to supply wood to primarily biomass-fired power plants.
High Costs, No Credit, Shifting Timelines
What’s been the impact of the recession on cellulosic ethanol projects, and specifically on BlueFire?
It’s been the lock-up in the credit markets. There is no money. Even with the loan guarantees out there from USDA and from DOE, the banks are very reluctant to lend the money right now. Even though the Obama Administration is working diligently to free up the credit markets, it’s very difficult right now. I’m not aware of any projects that have been financed since the first of the year. And that’s across all energy projects, whether it’s wind, solar, biomass or cellulosic.
Does that put you in an awkward position having already received $40 million of DOE money? What have you been able to achieve with the DOE dollars?
Timing is everything, right? We’re in the development stage where we’re getting licenses and permits. We got the $40 million grant for the Mecca Project, in Mecca, California outside Palm Springs. We’re in the middle of it, so we’re not financing at the moment. We have sufficient cash with the grant to complete the project development. Our first project, however, which is the Lancaster (California) facility, for which we just received our final permits in February of this year, we are in financing on that right now. Interestingly, the financing is moving ahead, but very slowly. That project is going to take longer to finance, but it will get financed.
The Lancaster project was delayed because of permitting, but also because it’s run over budget, correct?
Over budget is probably not the right term. The capital cost is higher than we had anticipated, mainly because of the tremendous growth in the cost of steel. [Note: The Lancaster Project was originally estimated at $100 million.] Just as the market was peaking from a manufacturing standpoint—the July to September timeframe last year—was the peak of the pricing for steels, and the raw materials that we manufacturer all the equipment out of. We’ve seen this start to come down, but the market is still out of whack.
Are you on track now for the Lancaster project?
I can’t say I’m on track yet, because that would be too strong a word. I see where it’s coming back to being on track. I’m encouraged.
Is there a timeline for starting construction?
We’re still looking to have the project in construction by third quarter this year, with 12 months to complete construction. It’s all dependent on the credit market, if we can get the debt in place, and find a bank that will loan the money. Right now, we’re probably half way.
In September 2006, BlueFire had a goal of constructing 20 biomass-to-ethanol plants by 2012, and to produce 1.5 billion gallons and yield $2.7 billion in gross revenue, all by 2012.
It’s not going to happen. When we did that projection, we felt that we could get projects going in the ground in the beginning of 2007. Quite frankly, the licensing and permitting cycle here in California was much longer than we had anticipated. Right now, we would move that schedule out about five years.
How should the public think about cellulosic ethanol, considering that goals set for 2012 look more like 2017?
First of all, the technology is here. Quite frankly, the plants that we’re building in Lancaster and Mecca and others that we’re developing, the technology hasn’t changed dramatically from when did our first project up in Sacramento using rice straw back in 1999. We’re 10 years out from that project and we haven’t made significant improvements to the technology because it’s ready to go. The problem is that you don’t have a financing market that’s ready to accept these types of projects. That’s the real problem. It’s not because technology isn’t here.
We have a very irrational market in many respects. On one hand, we’re worried about energy security issues. We’re worried about carbon going into the atmosphere because we believe that global warming is happening. But we’re not prepared to finance those risks to build facilities to take care of those issues. As a society, we want this, supposedly. But on the flip side, from a business standpoint, the people that control the money don’t want to take the risks. That’s what has slowed down BlueFire.
Is the trigger the price of oil?
That’s part of it. That helps determine if these technologies get built or not. When we went through the first oil embargo during the Carter Administration, there was a big push for renewables. And there was a tremendous development of technology to be able to build cellulosic ethanol plants. Everything that’s going on today got its start in the late 1970s. But the embargo went away, oil went down, and everybody forgot about it. The first cellulosic ethanol plant was built in 1908. This is not new.
I see the same thing with hybrid and electric cars that were around 100 years ago.
The price of oil is the benchmark. What does it cost us to travel one mile down the road. If gasoline prices are high, then we are willing to buy the cars that are most fuel-efficient and the lowest cost. When oil price goes down, we buy SUVs. As a society, we’re bipolar on this issue.
Or A.D.D. maybe?
Or something. We yell at the car companies for not being smart about building cheaper and more fuel-efficient cars. When, in fact, we as a society are very fickle in our purchasing habits. If you recall, GM had an electric car that got killed, but it was viable car that could be driven on the road, but nobody wanted to buy it. [Note: Many observers believe that GM’s EV1 had a vast untapped market of consumers that the company failed to serve.]
What’s the corollary for ethanol?
Ethanol is here to stay and it’s going to take over more and more of the marketplace over time, particularly E85. If we had a mandate like they did in Brazil…this is what’s it going to take.
So, you think we need mandates. Do you think the new Administration has focused on it enough?
I am a die-hard card-carrying Republican of the most conservative type. The Bush Administration screwed this up. They had the right concept. They passed the right laws, but they could not enact the laws they passed. Obama comes in, and he’s doing it. I am absolutely amazed and very happy at the flexibility and the fact that the DOE and the other governmental agencies responsible for this are actually making it happen. The Bush Administration couldn’t get it done.
What is the Obama Administration doing?
They are unlocking some of the key programs, like the loan guarantee program at DOE. It was non-functional they way it was in the Bush Administration. You have the USDA with the loan program that’s already funded. You have more grants coming out from the Department of Energy. And in fact, you do have a mandated marketplace. The renewable fuel standard mandating 10 percent ethanol, that’s the start. That’s what caused all these grain-based [corn] ethanol plants to be built.
Now, they are talking about E15. [E15 is 15 percent blend of ethanol to gasoline.] In Brazil, every liter of gasoline has 22 percent of ethanol in it. And then they have 100 percent ethanol, which are called “neat” cars.
Two of the biggest advocates of cellulosic ethanol, Vinod Khosla and Amory Lovins, believe that cellulosic ethanol and other biofuels have the potential to serve all the US automobile fuel needs. Do you agree?
I do. There’s enough feedstock out there, between agricultural, purpose-grown crops on non-arable land—we have a lot of land in this country that we pay farmers not to grow on—and we have a lot of feedstock in the landfills that we throw away every day, which is the marketplace we’re going after. So, if you’re forward thinking and you look at it as a systematic approach, and you wanted to offset oil, you can get it done.
100 percent of personal automobiles running on biofuels?
Probably in about 30 years.
Do you think it’s going to happen?
It depends on the economics. Can you get the price of ethanol down where it’s below or equal to the cost of gasoline? If the answer is yes, then you will.