April 11th, 2006
2006 the Year of Bio-Fuels?
Many IPEG members are interested in bio-fuels are have probably been paying attention to the fast changing landscape of the industry. By the end of this year, for instance, Brazil will become energy self-sufficient with minimum fuss. Driving Brazil’s move away from fossil fuels is its sugarcane-based ethanol industry, nurtured carefully over the last 30 years, which allows ethanol to be sold for considerably less than gasoline. The New York Times had the details.
The use of ethanol in Brazil was greatly accelerated in the last three years with the introduction of “flex fuel” engines, designed to run on ethanol, gasoline or any mixture of the two. (The gasoline sold in Brazil contains about 25 percent alcohol, a practice that has accelerated Brazil’s shift from imported oil.) But Brazilian officials and business executives say the ethanol industry would develop even faster if the United States did not levy a tax of 54 cents a gallon on all imports of Brazilian cane-based ethanol.
With demand for ethanol soaring in Brazil, sugar producers recognize that it is unrealistic to think of exports to the United States now. But Brazilian leaders complain that Washington’s restrictions have inhibited foreign investment, particularly by Americans. As a result, ethanol development has been led by Brazilian companies with limited capital. But with oil prices soaring, the four international giants that control much of the world’s agribusiness — Archer Daniels Midland, Bunge and Born, Cargill and Louis Dreyfuss — have recently begun showing interest.
Brazil says those and other outsiders are welcome. Aware that the United States and other industrialized countries are reluctant to trade their longstanding dependence on oil for a new dependence on renewable fuels, government and industry officials say they are willing to share technology with those interested in following Brazil’s example. “We are not interested in becoming the Saudi Arabia of ethanol,” said Eduardo Carvalho, director of the National Sugarcane Agro-Industry Union, a producer’s group. “It’s not our strategy because it doesn’t produce results. As a large producer and user, I need to have other big buyers and sellers in the international market if ethanol is to become a commodity, which is our real goal.”
The ethanol boom in Brazil, which took off at the start of the decade after a long slump, is not the first. The government introduced its original “Pro-Alcohol” program in 1975, after the first global energy crisis, and by the mid-1980’s, more than three quarters of the 800,000 cars made in Brazil each year could run on cane-based ethanol. But when sugar prices rose sharply in 1989, mill owners stopped making cane available for processing into alcohol, preferring to profit from the hard currency that premium international markets were paying. Brazilian motorists were left in the lurch, as were the automakers who had retooled their production lines to make alcohol-powered cars. Ethanol fell into discredit, for economic rather than technical reasons. Consumers’ suspicions remained high through the 1990’s and were overcome only in 2003, when automakers, beginning with Volkswagen, introduced the “flex fuel” motor in Brazil. Those engines gave consumers the autonomy to buy the cheapest fuel, freeing them from any potential shortages in ethanol’s supply. Also, ethanol-only engines can be slower to start when cold, a problem the flex fuel owners can bypass.
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Brazilian producers estimate that they have an edge over gasoline as long as oil prices do not drop below $30 a barrel. But they have already embarked on technical improvements that promise to lift yields and cut costs even more.
This brings me to an Economist profile of Vinod Khosla a couple of issues back which explained at some length Khosla’s interest in bio-fuels, especially ethanol. Most importantly, it also explained pithily the single biggest problem I’ve seen with ethanol, namely that the economics seem to work only when the price of oil is sky high, which is not something we can take for granted, knowing what we know about OPEC’s control over oil prices.
Mr Khosla concedes that after he made his ethanol pitch at this year’s Davos meeting, a senior Saudi oil official sweetly reminded him that it costs less than a dollar to lift a barrel of Saudi oil out of the ground, adding: “If biofuels start to take off we will drop the price of oil.” Anticipating this problem, Mr Khosla is lobbying politicians in Washington, DC, to impose a tax on crude oil if the price falls below $40 a barrel to safeguard investments in ethanol.
Nonetheless, Khosla remains undeterred by possible OPEC machinations, and he’s just picked up equity in Praj, an Indian ethanol company. I think he’s got himself a really sweet sub-$5 million deal by getting a slice of a company whose technologies are being picked up in other emerging markets including South Africa.
So, what is the downside to the bio-fuels story? Well, there is a real possibility of loss of forest cover as people fell trees to grow more sugarcane, soyabean etc (which makes wasteland-based crops like Jatropha very interesting). The New Scientist has more on the possible price being paid by forests as green fuels gain in popularity.
The main alternative to palm oil is soybean oil. But soya is the largest single cause of rainforest destruction in the Brazilian Amazon. Supporters of biofuels argue that they can be “carbon neutral” because the CO2 released from burning them is taken up again by the next crop. Interest is greatest for diesel engines, which can run unmodified on vegetable oil, and in Germany bio-diesel production has doubled since 2003. There are also plans for burning palm oil in power stations.
Until recently, Europe’s small market in biofuels was dominated by home-grown rapeseed (canola) oil. But surging demand from the food market has raised the price of rapeseed oil too. This has led fuel manufacturers to opt for palm and soya oil instead. Palm oil prices jumped 10 per cent in September alone, and are predicted to rise 20 per cent next year, while global demand for biofuels is now rising at 25 per cent a year. Roger Higman, of Friends of the Earth UK, which backs biofuels, says: “We need to ensure that the crops used to make the fuel have been grown in a sustainable way or we will have rainforests cleared for palm oil plantations to make bio-diesel.”
February 24th, 2006
Vinod Khosla Floats Khosla Ventures
[Via VC Circle] What better way to follow up a post about Kleiner Perkins than with a post on their superstar partner, Vinod Khosla. Khosla, who had reduced his involvement with KPCB, has launched his own VC fund (it’s his personal money, for the time being), called Khosla Ventures, which will invest primarily in alternative energy and clean fuels. As you can see, the website is very much in beta stage, but there are links to some excellent presentations on biofuels and microfinance. Among others papers listed is the Rural Infrastructure Service Commons (RISC) model, which Khosla co-wrote with IPEG member, Dr Atanu Dey.
In the interest of full disclosure, I must mention that I was one of the founding members of Deeshaa Ventures alongwith with Dr Dey, which was set up to implement Dey and Khosla’s RISC model.
February 22nd, 2006
Kleiner Perkins Raises Pandemic Fund
Venture Capital major, Kleiner Perkins has announced that it has raised a $200 million fund to fight global pandemic diseases. Obviously, the interest in such a fund is fueled by the spread of the Avian Flu. Whether KPCB’s definition of pandemic includes HIV/AIDS and Malaria remains to be seen.
“This is a call to action,” Brook Byers, a partner at the firm, said in an interview. He said Kleiner Perkins decided to start a separate fund, called the Pandemic and Bio Defense Fund, rather than make investments through its general funds to call attention to the issue. He said the fund was intended to yield profits, not act as a charity.
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Mr. Byers said private investments could help accelerate the preparations. “A lot of innovative companies are waiting for a grant from the government,” he said. “There’s not time to wait.” The fund would invest in about a dozen companies in the next three years, Mr. Byers said. While Kleiner Perkins, based in Menlo Park, Calif., normally invests in privately held start-up companies, its fund will invest mainly in established companies, including publicly traded ones.“It’s very time-critical,” he said, “so that leads us to want to invest in companies that have management teams and technology platforms already in place.” The first investment, of $15 million, was made in BioCryst Pharmaceuticals. The company, based in Birmingham, Ala., and publicly traded, has a drug entering early clinical trials that could be an alternative to Roche’s Tamiflu, the anti-influenza drug that is being stockpiled by many governments and that has been in short supply.
February 22nd, 2006
Dean Kamen Ties up with Iqbal Quadir
A couple of weeks back, I had posted a link to a Dean Kamen interview on Zoo Station. Now, Erick Schonfeld of Business 2.0 has another update on Kamenworld at CNN Money, and it’s fascinating what he’s up to now, working with Iqbal Quadir, the Harvard prof who founded Grameen Phone.
An estimated 1.1 billion people in the world don’t have access to clean drinking water, and an estimated 1.6 billion don’t have electricity. Those figures add up to a big problem for the world—and an equally big opportunity for entrepreneurs. To solve the problem, he’s invented two devices, each about the size of a washing machine that can provide much-needed power and clean water in rural villages.
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Last year, Quadir took prototypes of Kamen’s power machines to two villages in his home country for a six-month field trial. That trial, which ended last September, sold Quadir on the technology. So much so in fact that Quadir’s startup, Cambridge, Mass.-based Emergence Energy, is negotiating with Kamen’s Deka Research and Development to license the technology. Quadir then hopes to raise $30 million in venture capital to start producing the power machines. The electric generator is powered by an easily-obtained local fuel: cow dung. Each machine continuously outputs a kilowatt of electricity. That may not sound like much, but it is enough to light 70 energy-efficient bulbs. As Kamen puts it, “If you judiciously use a kilowatt, each villager can have a nighttime.”
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During the test in Bangladesh, Kamen’s Stirling machines created three entrepreneurs in each village: one to run the machine and sell the electricity, one to collect dung from local farmers and sell it to the first entrepreneur, and a third to lease out light bulbs (and presumably, in the future, other appliances) to the villagers.Kamen thinks the same approach can work with his water-cleaning machine, which he calls the Slingshot. While the Slingshot wasn’t part of Quadir’s trial in Bangladesh, Kamen thinks it can be distributed the same way. “In the 21st century, water will be delivered by an entrepreneur,” he predicts. The Slingshot works by taking in contaminated water – even raw sewage — and separating out the clean water by vaporizing it. It then shoots the remaining sludge back out a plastic tube. Kamen thinks it could be paired with the power machine and run off the other machine’s waste heat.
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Kamen’s goal is to produce machines that cost $1,000 to $2,000 each. That’s a far cry from the $100,000 that each hand-machined prototype cost to build.Quadir is going to try and see if the machines can be produced economically by a factory in Bangladesh. If the numbers work out, not only does he think that distributing them in a decentralized fashion will be good business — he also thinks it will be good public policy. Instead of putting up a 500-megawatt power plant in a developing country, he argues, it would be much better to place 500,000 one-kilowatt power plants in villages all over the place, because then you would create 500,000 entrepreneurs.
This stuff is very, very interesting, especially if scale economies can drive down the price. If it generates large-scale employment, one could make a strong case for deployment of public money too. If anyone knows people at DEKA, please let me know.