Report: The implosion of cellulosic ethanol

The Atlanta Journal-Constitution reports on the failure of cellulosic ethanol and cheerleader-in-chief, Vinod Khosla.

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Ga. failure not the only ethanol misadventure

Ethanol ventures backed by billionaire entrepreneur Vinod Khosla — including Range 
Fuels, which built a failed factory in Georgia — were given the green light for an estimated $600 million in federal and state subsidies, according to an analysis by The Atlanta Journal- Constitution.

Yet none of the dozen or so companies financed or controlled by Khosla over the last decade has produced commercially viable ethanol. Some failed or, hamstrung by unproven technology and insufficient capital, remain behind schedule. Others bet on new technologies.

To date, the companies have tapped about $250 million of the $600 million. Even though they are now unlikely to ever receive the full amounts, tens of millions have been lost.

Range Fuels was approved for $162 million in grants, loans and loan guarantees for the Georgia venture. Half that amount was disbursed — and lost by taxpayers — for the cellulosic ethanol plant, now idle, in the east Georgia town of Soperton.

This month, the AJC reported that the plant was sold for just $5.1 million to another Khosla-backed company. For this story, the newspaper scoured regulatory filings, government reports, company websites and news articles to arrive at the total figure in federal and state subsidies offered to renewable energy ventures backed by Khosla’s firm.

No one alleges wrongdoing by Khosla or his companies.

Khosla declined to be interviewed for this story. In a 
February 2011 letter to The 
Wall Street Journal, though, Khosla said entrepreneurs 
deserve praise for their search for new, cleaner, safer technologies.

“Range’s original formulation may not have been successful, but such risk-taking deserves applause, not derision,” Khosla, who helped start Sun Microsystems, wrote. “In the end, success is never assured.”

The government subsidy pledges underscore Washington’s rush the past decade to build an industry around cellulosic ethanol — derived from wood, as opposed to the corn used in most ethanol — from scratch. They also point up the power and the promise that savvy entrepreneurs like Khosla hold over the nascent industry upon which great economic hopes ride.

Federal and state officials say they adequately scrutinized Khosla’s plans before public money was pledged. And Khosla himself has plowed tens of millions of dollars from his own venture capital firm into cellulosic ethanol companies scattered from Georgia to California. In addition, a handful of initial stock offerings the past two years have raised hundreds of millions more from investors.

Information included with the stock offerings, though, underscores the risk that investors — and taxpayers — face when bankrolling an unproven industry that hopes to one day wean America from its dependence on imported oil.

In its September 2011 initial public offering, the Mascoma Corp., a Khosla-backed company expecting to build an ethanol plant in Michigan, warned potential investors that “we have a limited operating history, a history of losses and the expectation of continuing losses … and we have no experience in the markets in which we intend to operate.”

Companies are required to list risks in regulatory filings prior to an offering. Mascoma also said government grants comprised 86 percent of its revenue.

Robert Rapier, a chemical engineer whose R-Squared blog is widely read by energy industry watchers, and other critics, including Sam Shelton, who 
directs research at Georgia Tech’s Strategic Energy Institute, liken the Range Fuels fiasco to California solar power company Solyndra. It received $535 million in government-backed loans before closing and filing for bankruptcy last August.

“He’s wasting tax dollars, which I find very offensive,” said Rapier. “More importantly, the whole renewable energy sector is tarred with the failures of Range Fuels and Solyndra. They’ve really given the industry a black eye.”

Matt Hartwig, spokesman for the Renewable Fuels Association in Washington, said the federal and state subsidies for Khosla’s ethanol ventures will end up as money well spent.

“It sure sounds like a lot of money — and it is — particularly to an industry trying to get off the ground and succeed,” he said. “But it’s a pittance compared to what we spend on very mature and very profitable technologies like oil extraction that still benefits from billions of dollars each year in taxpayer largesse. There is absolutely a role for the federal government to play in advancing new technologies.”

In Washington, successive administrations have touted ethanol as an environmentally benign solution for America’s dependence on foreign oil. Most ethanol is produced from corn and blended with gasoline. Its production too is subsidized, as are other forms of energy like coal and oil.

Cellulosic ethanol offers the promise of transforming timber, grasses and other renewable biomass into fuel. Proponents say its production won’t drive up food prices or pollute as much as corn-based ethanol. Georgia, with 24 million wooded acres, jumped at the chance to lead the nation’s cellulosic bandwagon.

But nobody, including Khosla, has yet turned cellulosic’s promise into profit.

Cellulosic dreams

Khosla “grew up dreaming of being an entrepreneur,” according to his bio on the Khosla Ventures website. As a young man, he emigrated from India to the United States, earning a master’s degree from Carnegie Mellon and an MBA from Stanford in 1980. He helped found computer giant Sun Microsystems two years later.

In 1986, Khosla joined venture capital firm Kleiner Perkins Caufield & Byers. In 2004, he started Khosla Ventures in Menlo Park, Calif., which focuses on next-generation energy, new materials, mobility, the Internet and silicon technology. Khosla’s “cleantech” portfolio includes eight renewable energy companies targeting America’s reliance on environmentally damaging hydrocarbons.

Range Fuels, based in Colorado, is no longer on the list.

In February 2007, Khosla announced that Range planned the nation’s first cellulosic ethanol factory in Soperton.

“We need to declare a war on oil,” Khosla said during the groundbreaking ceremony a few months later. “Cellulosic ethanol is the weapon we need.”

Range Fuels hinted at building a dozen cellulosic ethanol factories across Georgia. Then-Gov. Sonny Perdue and other officials were smitten, and the state ponied up $6.2 million for Range.

The Bush administration’s Energy Department kicked in a $76 million grant. The U.S. Department of Agriculture added an $80 million loan guarantee.

In all, taxpayers were on the hook for $162.2 million. Range ultimately tapped, and taxpayers lost, $82 million of that amount after the company went bankrupt last year.

The Range factory was sold earlier this month to LanzaTech, a New Zealand bio-fuel company, for $5.1 million. LanzaTech’s key investor: Khosla. The company has received $7 million from the U.S. departments of energy and transportation to develop alternative jet fuels using cellulosic ethanol.

Khosla said LanzaTech has the right technology to finish what Range started. Whatever the outcome, it’s clear Khosla has perfected the science of raising money, both public and private, for his myriad alternative energy ventures.

The Khosla-backed companies have tapped a variety of public money pools — USDA loan guarantees, Energy Department grants, state-backed bonds and rural development grants — to raise the estimated $600 million available to it 
for research, development 
and construction of ethanol plants.

The energy department, for example, offered as much as $100 million to New Hampshire-based Mascoma for cellulosic ethanol research and development as well as construction of a factory in Michigan. The state of Michigan chipped in another $23.5 million.

The state of New York granted Mascoma as much as $14.8 million for the construction of a biomass demonstration plant in Rochester. And the BioEnergy Science Center in Tennessee chipped in another $6.3 million for Mascoma research.

Coskata, another bio-fuel company whose No. 1 stockholder is Khosla Funds, was originally offered a $250 million (later reduced to $87.5 million) USDA loan guarantee for the construction of a cellulosic ethanol plant in Boligee, Ala.

‘Venture socialists?’

“These, quote, venture capitalists are basically venture socialists,” said Kenneth Green, a resident scholar at the American Enterprise Institute, a conservative think tank in Washington. “They’re getting large amounts of research money and loan guarantees to build pilot plants and other projects. They’re looking to socialize the costs of their efforts, but keep private the profits.”

Washington officials defend subsidies intended to build a new industry.

“Investments in biofuels technologies are supporting cutting-edge research and development projects that can help bring down the cost of bio-fuels production and boost their availability in the marketplace, which is why these types of projects have received broad bipartisan support,” said Jen Stutsman, a spokeswoman for the Energy Department.

Last week, at the AJC’s request, the agency released an accounting of the federal subsidies offered and accepted by Range Fuels and the eight ethanol companies currently listed on Khosla Venture’s ethanol portfolio. In all, the companies have so far received $97.5 million.

The USDA also released a compilation of grants, loans and loan guarantees utilized by Khosla’s companies. They total $41.8 million. Khosla’s companies remain eligible for tens of millions of additional dollars from the agriculture and energy departments.

States including Georgia, Ohio, New York, California and Mississippi have also chipped in at least $130 million in grants, loans and loan guarantees.

Other than Range Fuels, the Khosla-backed companies remain in various stages of operation, though none has produced ethanol for sale. The main stumbling block: scientists have yet to perfect the technology that transforms woody biomass into a gas that can be converted into ethanol.

“Show me one company that’s producing energy commercially. There’s not a one,” said Rapier. “I don’t see any companies in his portfolio … that really have a chance to go head-to-head with oil. And the government should’ve said, ‘Show me this in a lab before I fund all of this.’ ”

Government spokesmen said the science behind Khosla’s companies was vetted and deemed plausible.

“USDA’s loan decisions are based on commercial viability and grant decisions are based on scientific merit,” said spokesman Justin DeJong. 
“USDA is committed to providing oversight on loans and grants to safeguard federal investments.”

Georgia officials hope LanzaTech, which bought the Soperton plant earlier this month, honors the jobs and investment commitments made by Range. Khosla, too, expects LanzaTech to succeed.

“I will keep taking large risks and shoot to solve large problems,” he said in his letter to The Wall Street Journal.

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How we got the story

The AJC scoured SEC filings and government reports to uncover $600 million in federal and state subsidies offered to renewable energy companies backed by Khosla Ventures, run by Vinod Khosla (above). The companies have tapped a variety of money pools for research, development and construction of ethanol plants — yet none has produced any commercial cellulosic ethanol.