by Lorenz Bauer (Lee Enterprises Consulting), Gerald Kutney (Lee Enterprises Consulting) and Bob Kodrzycki (Encompass Biotech LLC)
Originally published 28 Sep 2017 in Biofuels Digest.
Part 4 of an 11-part Series.
Investors focused on renewable chemicals and fuels are looking for projects with the greatest commercial potential. However, within the plethora of potential projects in which to invest, there is a fog of virtual ventures. How do investors identify the best candidates? The decision process goes deeper than claims of “the best technology” and “high” return on investments.
Whether a project uses an emerging technology or improves an existing process, a detailed competitive and strategic analysis of the project is needed. The evaluation must answer these key questions:
- What market need is being addressed or what new opportunity is being presented?
- Is the improvement a major technical breakthrough or a process upgrade?
- Does the improvement address logistical issues or how the end users interact with the product?
- What are other possible solutions?
- Who is already providing a solution?
- What is the competitive edge for the project?
- What are the short and long term trends in the market?
- What is the cost of implementation?
- Is the technology scalable?
- Is the intellectual property adequately protected?
- How experienced is the management team?
Choosing the Best Technology
Most technology developers are proud of their inventions, as they should be. However, enthusiasm and pride can lead to hyperbole such as “best technology.” Such claims should be avoided because “best” is a relative term that depends on situation. A more appropriate claim is to demonstrate clear and measurable advantages compared to competing technologies or processes. Lower CAPEX or OPEX, higher quality, faster throughput, lower maintenance, etc. are all measurable and compelling reasons to adopt a new technology.
Both investors and technology developers can benefit from an independent, unbiased evaluation of the technology being considered.
Technology developers are often too close to their project and have a vested interest in seeing their technology developed. Outside assistance can provide valuable feedback for comparing to the competition as well as quantifying new technology advantages.
Investors can benefit from a detailed technology review that takes into account an unbiased comparison with competing technologies. Knowing that backing new technology is inherently risky, investors will benefit from an additional step of risk/reward evaluation by having outside experts review projects pre-funding. A review of the project advantages relative to other options will clarify areas that result in the greatest payoffs. Emphasis should be on industry trends that indicate the greatest opportunities or threats. In addition, an analysis of the technical innovations and the experience and capabilities of the people involved with the project is needed to reduce the risk.
The “best technology” is likely only best in a limited number of areas. Any process needs to be thought of as a system and any new technology is only a part of that system, affecting both upstream and downstream processes. New technologies should create little to no disruption of an existing process unless the potential overall improvement or profit can justify the change.
- “Best” is usually relative to local situations and can depend on many factors.
- Enthusiasm is important but not at the expense of solid data and an experienced management team.
- Regardless of how innovative the new technology is, there is always competition, including the option to continue with old technology.
- A realistic comparison of the new technology to existing processes and other new alternatives must be prepared.
- Adoption of new technology must fit into existing processes. If implementing project will cause other problems then it is unlikely to be adopted.
Sizing Up the Market
How the competitive and strategic analysis is carried out will depend on the type of project at hand. Is the project a stand-alone facility that is making a new product? Or is the invention an improvement to an existing process, like retrofitting a biodiesel or ethanol facility with an improved process?
Understanding the renewable industry requires knowledge of the baseline of existing technologies as well as the regulatory landscape. For example, there are many potential sources of biofuels for ocean-going vessels that have the potential to meet new emission regulations and reduce the carbon footprints. How do the renewables compare to existing petrochemical fuels options? How does bio-oil compare to renewable diesel or bio coal? For electrical generation and home heating, biomass derived renewables need to be compared to wind and solar power options. Within the biomass conversion space different technologies need to be compared to existing processes.
It is important to know the key players (the competition) since they will be competing for market share, funding and feedstocks. Who is funding them, why and what is their stage of development? Projects funded by groups controlling the feedstock can freeze out other projects. However, feedstock suppliers and product end users are also potential investors in new technology. Introduction of new technologies can depend on support from both local and national governments for subsidies, but often more importantly, regulatory issues. Projects can be held up by changes in national policy, permitting and waste disposal issues. There is no substitute for experience in these areas. Experts who follow market trends, and monitor industry leaders can provide key intelligence.
It is important to have a grasp of the market and how it is evolving. This is illustrated by the effect the growth of the wood pellet industry had on the price of wood. The cost of suitable wood remained higher than expected by groups working towards commercializing lignocellulose conversion technologies. Construction of a pellet plant in a given area greatly affected the availability of low cost materials. Is there an “off season” effect that can cause production shortfalls due to weather, disease and so on?
For each market, consider the impact of the renewable product on supply and demand. The scale of initial production needs to be appropriate to demonstrate the technology, provide a marketable quantity of material and keep capital costs in line with the potential gain. However, there also must be room to grow the market to fully justify the higher costs of first-of-kind projects. Many recently proposed projects that target high-value renewable chemicals propose making quantities that will disrupt the supply and demand curves for the products. They could unwittingly flood the market with product and lower prices.
To summarize, the key considerations are:
- What is the current market situation and status of the competition?
- Who are the key players and their backers?
- The evolution of the market and possible changes should be evaluated.
- A comprehensive market transformation plan is needed.
Location, Location, Location
One of the critical issues for new facilities is its location and the associated logistics. Thoughtful site selection can greatly lower infrastructure requirements, ease feedstock procurement and provide more efficient access to markets. Many projects are proposed to be located in rural areas close to feedstocks to reduce transport costs of low-value raw material. However, rural locations may create difficulty in finding qualified staff to operate the new facility. Raw material supply and a skilled labor force must be balanced with logistical considerations of product delivery. Is the product destined for local markets through truck delivery or is rail access to a deep port required? Likewise environmental permitting for air and water impact or increased traffic on existing roadways also needs to be considered. Interaction with the local community should happen during the early stages of site selection to address public concerns and to highlight the benefits of the project.
Some considerations are:
- What are current demands on the feedstock supply and how will it be impacted by the project?
- Has the developer considered the opinions of the local population and government?
- Be aware that the smallest practical size of a facility may be the easiest to successfully implement.
The size of investments required to commercialize innovative technologies in the bioeconomy justifies a detailed strategic analysis. An assessment of the company’s critical strengths, weaknesses, opportunities and threats (SWOT analysis) should be carried out. Do they have the required facilities and resources to carry out the project? Why would someone want this technology and products? How will the technology be positioned in the market? What sources of financing are likely to be available? Where should it be located?
The goal of the analysis is to identify key risks and insure that there are appropriate mitigation strategies in place. Relying on the process developer for this information is not a good approach. Developers often tend to minimize these risks and are reluctant to discuss them. The strategic analysis should also identify key gaps in the available information that needs to be addressed in the development plan.
Included in the strategic analysis should be a review of the business plan. What is the goal of the developer, to a technology provider or product? Who are the likely first customers for the plant and have they been approached?
An independent SWOT analysis can identify:
- The risks and benefits of a project
- Key gaps in knowledge
- Whether the business plan is reasonable.
- Do the potential gains justify the risks?
Special Considerations for Renewables
Renewable chemicals and fuels involve some special considerations. As for all products, the costs versus benefits of a project are the major concern. In many applications renewables have proved to have higher costs. However, there are a number of examples where renewable chemicals have equivalent or lower costs including recently introduced bio-based PET and polyurethane replacements.
Market acceptance of renewables is a major issue. In the best case, application research will demonstrate a performance advantage. In the case of bio- and renewable diesel a case for lower maintenance costs in diesel engines can be made to fleet operators justifying the switch to new fuels. The burden of demonstrating these advantages will be on the product developer and the costs and effort required should be included in any strategic planning.
While economics is the major factor, societal concerns about climate change and reducing waste continue to gain in importance. However, only a small segment of the consumer market is willing to pay a premium for “green” products. Government regulations and subsidies play a critical role. For example, subsidies for renewable diesel have recently raised the selling price to over $4 per gallon. Independent life cycle analyses are required to take advantage of these subsidies and to avoid concerns about exaggerated claims of lowering overall carbon use or interfering with food productions.
Biomass as raw materials present some special challenges. Many fossil-based raw materials are inherently more physically and chemically uniform compared to biomass. Thus biomass feedstock preparation can be critical for downstream efficiency. Biomass can also be subject to seasonal availability. For example, corn stover is only available after harvest and must be collected promptly and carefully stored to insure a year-round supply. Woody feedstock, while generally available year-round, may be subject to harvesting restrictions during wet weather leading to seasonal shortages in some regions.
In short, renewable-based projects should clearly address:
- Competitive and strategic analysis should clearly identify who benefits from the new technology in terms of cost and performance.
- A strategy for gaining market acceptance should be in place.
- Biomass feedstock’s unique challenges.
- That consumers like to know they are helping the environment by buying a “clean” product but the amount that they are willing to spend on the clean product varies by demographic. Regardless, it is unlikely that large price differentials will be workable if there are not regulations to mandate adoption.
The independent review of a biomass-based technology should not simply be from an engineering firm doing a Google search. There are many technical and business issues involved that fall outside the experience of traditional chemical and commodity-business consulting groups. A more authoritative outcome originates from experts who already follow the sector closely and have a database of ventures in the technology sector in question.
This review should encompass an interdisciplinary analysis of the industry and competition, an assessment of the market for the potential products and evaluation of the strategic position of the technology. It should clearly identify the strengths and weakness and key gaps in the information available. Such an analysis will allow an investor to best understand the risks and benefits associated with the project.
The next article in this series is Financing Bioeconomy Ventures: 5- Competitive Technology & Market Assessment: IP & Patent Analysis.
About the Authors
Lorenz Bauer, Ph.D., is a chemist with over 30 years of experience in catalysis, oil refining, chemical production and biomass conversion. He is an independent consultant affiliated with Lee Enterprises Consulting. An inventor of 25 patents and author of over 20 publications, he is Six-sigma black belt trained in project management and analytics. Larry’s projects have ranged from food additives, off gas treatment, upgrading unconventional feeds and waste recycling. Most recently he worked on fast pyrolysis of biomass and upgrading products to fuels and chemicals.
Gerald Kutney, Ph.D., is the Executive Vice President of Emerging Technologies, Biomass Power, Biogas/AD, and Investor Services for Lee Enterprises Consulting, and Managing Director of Sixth Element Sustainable Management in Ottawa. He has a Ph.D. in chemistry and over two decades of executive experience with global corporations and entrepreneurial enterprises in the forest bioeconomy.
Bob Kodrzycki, Ph.D., a member of Lee Enterprises Consulting, has over 27 years of experience in industrial R&D and consulting with a focus on commercialization of biotechnology, including renewable energy project development (torrefaction, wood pellets, cellulosic diesel, biomass energy), metabolic engineering for bio-based products, and creating non-destructive testing methods.