Saturday, April 9, 2011

Not So Brave New World

Last week it was brought to my attention that one of Vinod Khosla’s startup companies in the green energy space is in big trouble. The company is Range Fuels that was to convert wood to ethanol. I have previously opined that Vinod is a thermodynamic clown and perhaps the dumbest VC in the energy space. His partner who was home on the range is one David Aldous. Old Dave is the author of a new book titled “Not So Brave New World” and has the nom deplume of David Aldous Huckster. The following are two articles from the online version of the Wall Street Journal. The first is the report on February 10 2011 of the problems at Range Fuels and the second is the letter to the editor of the WSJ from Vinod and David in response to the article. Last week Tesla disliked the BBC report on them this week Vinod dislikes the Wall Street Journal. Again I have to come down on the side of the press.
From the WSJ Online

“President Obama's budget next week is expected to include even more subsidies for renewable energy. Before Congress bellies up to that bar one more time, it ought to dissect the fate of Range Fuels and the wood chips fad.
As taxpayer tragedies go, Broomfield, Colorado-based Range Fuels has all the plot elements—splashy headlines, subsidies and opportunistic venture capitalists. Range got its start in 2006 when George W. Bush used a State of the Union address to extol wood chips as a source for cellulosic ethanol that would break America's "addiction to oil." Mr. Bush pledged that with government funding cellulosic ethanol would be "practical and competitive within six years."
Vinod Khosla stepped in with his hand out. The political venture capitalist founded Range Fuels and in March 2007 it received a $76 million grant from the Department of Energy—one of six cellulosic projects the Bush Administration selected for $385 million in grants. Range said it would build the nation's first commercial cellulosic plant, near Soperton, Georgia, using wood chips to produce 20 million gallons a year in 2008, with a goal of 100 million gallons. Estimated cost: $150 million.
The media and political class swooned. Bush Energy Secretary Samuel Bodman attended the plant's groundbreaking in November 2007, hailing Range as a private-sector "pioneer" that would "reduce our dependence on foreign oil." Range was celebrated in the New York Times and Forbes.
In 2007, Congress doubled down by mandating that the U.S. use 100 million gallons of cellulosic ethanol yearly by 2010, and 250 million gallons by 2011—though not a single commercial facility existed at the time. The Environmental Protection Agency explained in a subsequent report that the bulk of that initial 100 million gallons would come from Range Fuels and another Khosla-funded venture, Cello Energy.
By spring 2008, Range had also attracted $130 million of private funding, the largest venture investment in the nation in the first quarter of that year. Investors included such prominent VC firms as Blue Mountain and Khosla Ventures and California's state pension fund, Calpers. The state of Georgia kicked in a $6 million grant, and all told Range raised $158 million in VC funding in 2008.
The result has not been another Google. By the end of 2008 with no operational plant in sight, Range installed a new CEO, David Aldous. In early 2009, the company said production was not expected until 2010. Undeterred, President Obama's Department of Agriculture provided an $80 million loan. In May 2009, Range's former CEO, Mitch Mandich, explained that the problem was that nobody had figured out how to produce cellulosic ethanol in commercial quantities. Whoops.
In early 2010, the EPA said Range would finally produce some fuel in 2010—but only four million gallons, not 100 million, and of methanol, not cellulosic ethanol. So taxpayers have committed $162 million (along with at least that much in private financing) to produce four million gallons of a biofuel that others have been making in quantity for decades. This politically directed investment might have gone to far more useful purposes.
As a closely held firm, Range Fuels doesn't disclose financial details. But Range technical adviser Bud Klepper told Georgia Public Broadcasting last month that the company would create only one batch of cellulosic ethanol of unspecified size—then shut the Georgia plant and lay off all but four employees as it seeks to raise still more money and work through some technical issues. A Range Fuels spokesman didn't return calls seeking more details.
As for current Range CEO Mr. Aldous, he's blaming this failure on—brace yourself—Washington's failure to impose a tax on carbon via cap and trade. "The critical issue is really that there's no mechanism to price carbon today," he told a Colorado newspaper. He also blamed "public apathy toward green fuels."
Apathy? How many other products get the Presidential seal of approval, taxpayer subsidies, forced-purchase mandates and glowing media attention?
As for Mr. Khosla's other great cellulosic hope, Cello Energy filed for bankruptcy last year. The EPA, which had projected that Cello would create 70 million gallons, has dropped Cello from its list of potential suppliers. More broadly, the EPA last year had no choice but to reduce the government's 100 million gallon target for 2010 to 6.6 million gallons. It is also fiddling with the definition of what qualifies as a "cellulosic" fuel. Perhaps Newt Gingrich will ask EPA to let corn ethanol make the cut.
If there's a silver lining here, it is that the folly of this exercise in corporate welfare has been exposed so quickly. There is no excuse now for throwing more money after bad, or to listen to more self-serving pleas from superrich investors who want taxpayers to finance their politically correct attempts to get even richer.”

Vinod andDavid reply

“Regarding your editorial "The Range Fuels Fiasco" (Feb. 10): I have never publicly uttered the word Cello, nor classified it as a "great cellulosic hope." In fact, I have never owned any shares or options on Cello Energy, or even evaluated the technology directly or indirectly. A fund I invested in paid Cello a small amount for a nonequity relationship to buy blind "insurance," a tiny amount compared to our biofuels portfolio. A paper company called P&W was the principal backer of Cello but the Journal failed to report that. And I have not invested in E3 BioFuels, as others have reported. These facts have been widely misreported in the press.
Also, Range did not receive $76 million from the Department of Energy. Only about half was used to build phase one of the project, roughly as projected in the original grant application. The company voluntarily chose not to take the rest of the money as phase two as originally defined was superseded by new technology developments. The goal was never 100 million gallons for a $150 million project—those numbers would make it less capital intensive than corn ethanol projects—and it was not a figure Range ever planned.
Phase one was completed mostly as planned with 60%-plus equity match by Range, in spite of the financial crisis of 2008-2009, which affected everyone. The DOE project was the only one of the six DOE grants that has been built and met most of its goals in my view. The biggest failure was a wood feed supplier Metso Corp., not the new technology.
The editorial chose to call it a fiasco, but Range is in active discussions with alternative biofuels companies to use their gasification facilities with biochemical syngas catalysis companies and other biofuels technology companies. These combinations pencil out to be economic with good internal rates of return but success is never assured in high-risk projects, contrary to journalistic expectations. The project did let us assess what was economic and what was not and how it compared to other technologies. I would not invest in less economic technologies if better combinations were available but it does not lessen the contribution the DOE program made.
Most of the investment was spent on the Range gasifier, the front end of the biofuels project. This gasifier is valuable and can be used with newer biofermentation-based backend processes, an advancing technology that has superseded the chemical catalysis backend originally planned by Range. We should applaud the continued progress, and that entrepreneurs iterate as superior technology becomes available. This is how innovation happens, but the Journal does not really understand innovation.
The editorial fails to critique the heavily subsidized fossil oil business on its access to sub-market-rate royalties and other direct and indirect subsidies, nor the over $7 trillion spent over 30 years on carrier groups in the Middle East to protect our oil lanes! This is a version of incumbency capitalism, where incumbents and their lobbyists have tilted the playing field away from innovation capitalism. Creating competition for fossil oil through biofuels or alternatives like electric cars should be treated as a vital strategic goal for the country, and in the case of biomass, a critical rural jobs engine.
I believe it is far more important than our efforts in Iraq and deserves resources. We've spent trillions protecting our oil interests, so it seems reasonable to spend a tiny fraction of that on technologies that help end our oil addiction. We cannot achieve that with a 100% guarantee of success, just as we cannot guarantee that our policies in Afghanistan will be successful. We must take risks: That means course corrections and even failures, and we have to be tolerant of that.
Government support aims to fill the commercialization gap in many nascent industries. About $100 billion was used to support the nuclear industry as it was getting started, support that continues through efforts like subsidized loan guarantees, decommissioning funds and subsidized insurance. Government support of nascent industries drives more innovation capitalism, creates competition and ensures global competitiveness. Though most legislation is imperfect, let's not throw the baby out with the bath water and throw out all government efforts. There are abuses, and as an example I have written against continuing corn ethanol, biodiesel and even wind subsidies. There is a balanced position between "support every green thing" and the bigotry of "government shouldn't do anything."
The editorial complains that "the result has not been another Google." Unfortunately, not every venture is a Google and as President Kennedy said, "only those who dare fail greatly can ever achieve greatly." Range's original formulation may not have been successful, but such risk-taking deserves applause, not derision. I invested more in Range than the DOE or anyone else, because I believed in the technology.
I may be wrong often, but over the last 25 years my efforts have generated about $14 billion in profits from under $1 billion from investors. In biofuels we have generated hundreds of millions in profits for our limited partners. I started in this country with less than $300 in my bank account and no other support. I would like to compare this record with your editor's accomplishments before he chooses to trash my efforts and classify me derisively as the superrich. I will keep taking large risks and shoot to solve large problems.
When we first invested in biofuels, I expected up a 70% to 90% chance of failure (and went on record saying so), and today I'm pretty confident that 50% to 60% of the technologies will succeed. Those are better odds than wildcatting for oil. Intelligent dialogue about when government support is for the social good and when it is a gravy train is necessary. But bigotry only shuts down intelligent dialogue.
Vinod Khosla
Palo Alto, Calif.
Solutions to the monumental U.S. energy, environmental and economic challenges will not be solved by small private companies alone. It will take broad private and public collaboration. It requires continuity of policy and strategy to provide a consistent business climate that will attract long-term investment to this capital-intensive industry. It will require a wide range of solutions and technologies across the energy and environmental spectrum.
Range Fuels employees have put heart and soul into trying to change the way America produces energy. Commercializing first of a kind technology is difficult work. Converting wood waste and on-purpose energy crops into high quality syngas on a commercial scale had not been done before Range did it. This syngas can be converted via a number of technologies into methanol, ethanol, other transportation fuels and chemical building blocks. This is a significant step in the advancement of numerous cellulosic biofuels technologies.
Cellulosic biofuels and chemical building blocks will ultimately be successful. As with many other industries, our early production begins at the peak of the cost curve. Economies of scale and operational excellence will dramatically drive down costs in the future. The financial crisis has slowed our industry progress but it continues to move forward. Innovation in energy solutions can either happen in the U.S. or we can wait and import the technology and associated products from China. China already invests more than double the amount of the U.S. each year in renewable energy and energy efficiency.
In the words of Teddy Roosevelt: "It is not the critic who counts . . . the credit belongs to the man in the arena . . . who spends himself for a worthy cause."
When gasoline hits $4.50 per gallon, let's chat again.
David C. Aldous
Range Fuels, Inc.
Broomfield, Colo. “