Derisking: A strategy for growing the biobased economy

Source: By Jim Lane, Biofuels Digest • Posted: Wednesday, October 26, 2016

The biobased economy or “bioeconomy” has the potential to create new companies, new jobs and even entirely new industries.  In a bioeconomy, renewable biobased materials such as crop residues and dedicated energy crops replace petroleum as a primary source of industrial and energy raw materials.

A growing bioeconomy will create new opportunities for entrepreneurship, technological innovation and rural revitalization.   A bioeconomy can also offer major environmental benefits, as fuels and chemicals made from renewable raw materials replace petroleum-based products.  Recent years have seen several milestone achievements toward a biobased economy, including the initial commercialization of “cellulosic” (from plant fibrous materials) and other advanced biofuels and the introduction of new biobased or “green” chemicals which are produced from sugars rather than petroleum.

Despite its potential benefits and some very real achievements, the biobased economy has overall progressed more slowly than many had hoped.  There are several reasons for this slow progress.   Technological challenges involved in converting biomass (plant material) to sugars and energy have sometimes proven more difficult than expected.  The logistics involved in economically transporting large volumes of biomass have proven challenging.  Many planned large-scale cellulosic ethanol projects did not materialize or were not successful.  Although a handful of cellulosic ethanol facilities are operational in the U.S., most recent industry activity has been in the lower-volume but higher-margin biobased chemicals sector.  The recent low price of petroleum has compounded the challenges for biobased industry, and has reduced the sense of public urgency to develop energy alternatives.  Additionally and significantly, U.S. policy toward biobased industry has often been erratic and unpredictable.  The combination of these factors has discouraged investors, further slowing the progress of the biobased industry.

If the biobased economy is to achieve its full potential, then the focus must be on “derisking” the bioeconomy industry so that investors will once more see the industry as a source of promising new investment.  In order to “derisk” the bioeconomy, policymakers must use limited public resources where they can have the greatest impact and must identify those roles which the public sector can fill more efficiently than the private sector.   This article explores several approaches for derisking the bioeconomy and accelerating its growth.

“Derisking” the Bioeconomy

“Derisking” the bioeconomy requires, among other things, a systematic effort by policymakers to identify unnecessary or unproductive risks or disincentives which discourage investment in biobased economy ventures, and then determining what, if anything the public sector can and should do to minimize these risks.  Some risks, such as the risk that a particular business will succeed, that its business model is viable, that its technology is commercially competitive or that its management team is capable, are inherently roles for the private sector, and are factors that private investors expect to consider in evaluating an investment in any industry.  However, there are many other types of risks which public entities can play a useful and efficient role in mitigating.

A comprehensive strategy to “derisk” the bioeconomy could, at minimum, include the following:

1. Reducing Unproductive Regulatory Impediments.  Any derisking effort should include an effort to identify existing regulations which create unproductive uncertainty or disincentives for investing in biobased industries.

One example of such an item would be the current exclusion of intermediate biomass “pre-processing” facilities (also known as “biomass depots”) from the current Renewable Fuels Standard (RFS) standard.  Biomass depots could compact and stabilize biomass, making it easier and less expensive to transport.  They could fill an important logistical role in the biobased economy.  Biomass depots can also offer an important, comparatively low risk investment opportunity for rural entrepreneurs and rural communities to capture some of the added value from biomass products.   Expanding RFS credits to include biomass depots could open a source of new investment and produce new efficiencies for biomass production.

No doubt there are other unproductive regulatory constraints.   An aggressive “derisking” project would seek to compile a list of laws, regulations and legal ambiguities which unnecessarily, and in some cases unintentionally, inhibit growth of the biobased economy.  This would be followed by a determination of which legal and regulatory obstacles are most significant, which can be resolved within existing legislation, and which require new legislation to fix.

2. Aggressive and On-Going Informational Outreach.  It should be a priority for policymakers to aggressively solicit input – both on problems and potential solutions – from those individuals who are most likely to become a part of new biobased industry ventures.   These individuals include bioenergy and biobased chemical executives, operators of key investment funds, transportation and supply chain companies, potential customers and farmers and members of farm cooperatives.

Officials of the U.S. Department of Energy and USDA have recently co-sponsored several “listening sessions” at industry events where they solicited input from attendees in what were essentially public brainstorming sessions.   This was a worthwhile start, and in addition to these listening sessions, it would be helpful for public policymakers to actively interview private sector officials – and prospective investors – to obtain as many ideas as possible about strategies to encourage new investments.  In order for these outreach efforts to have their greatest impact, it is equally important that policymakers establish an institutional mechanism to evaluate and act upon input received.

3. Identify areas where an increased governmental role can produce a significant return on investment.  There are areas where an increased governmental role could produce a dramatic return on investment in terms of sparking new private sector investment growth in biobased industries.   Identifying these areas, and intensifying governmental activity in these areas, could accelerate the bioeconomy.  Below are some possible such areas:

(a) Basic Scientific Research – There is perhaps no other area of the bioeconomy where increased public spending can spur new private sector activity as in basic scientific research.  Basic scientific research is particularly justified in cases where the overall benefits to society from research are likely to far exceed the costs, but where the results of this research are likely to benefit society as a whole rather than the investor which funded the research.  As a consequence, the private sector is unlikely to fund such research.

Basic scientific research is often necessary to increase the overall level of scientific knowledge to a point where private investment in developing specific products makes business sense.  Without this initial basic research, the costs and time to develop resulting products would be impractical and the investments in such products would be highly speculative and risky.  However, once basic technical questions are resolved, follow-on investment by the private sector to create commercial applications of the research is likely to occur at vastly accelerated levels.

Several areas exist in the biobased economy where well-targeted investment in basic scientific research could produce a dramatic return in terms of subsequent private investment and entrepreneurship.  Examples of such areas include biomass cultivation practices, biomass harvesting and post-harvest handling methods.   In each of these cases, improvements in current practices are critical to the overall logistical efficiency of the industry, but the benefits will probably be spread broadly across the economy and no single investor is likely to capture a return on investment.  As such they are natural areas for public sector research.

Another possible high-priority area for public research may involve technologies for converting biomass to more usable sugars or other more usable form, which are the main raw materials which are used to produce biomass energy and chemicals.  Efficient, low-cost conversion of biomass to sugars or bio-oils has been a major factor limiting the development of the bioeconomy.  While there has been public sector research in this area (as well as significant private research), a more extensive public research effort in prior years might have yielded much more progress toward a biobased economy than has actually occurred.

The economic payoff from basic research advances in biomass logistics and conversion technologies could be enormous. The availability of a predictable and stable supply of low-cost biomass-based sugars and oils, available for conversion into new chemical, energy and industrial products, would almost certainly encourage much larger scale investment in new businesses ready to manufacture and market these “downstream” sectors, creating new jobs all along the supply chain.

It should be noted that the private sector has also invested in technologies for biomass conversion biomass to sugars and oils, which raises legitimate policy questions – as a general rule, it seems undesirable for the public sector to compete with private sector research.   However, much of the private sector research was due to a lack of adequate public sector research to resolve basic technology issues.   The slow progress of many private ventures, and their increasing difficulty in raising new capital, are direct consequences of the limited public effort in basic scientific research.  It is quite possible that several companies which are actively involved in developing biomass technologies for converting biomass to sugars and oils, rather than being displaced by government research, could become primary beneficiaries of new scientific research which allows them to improve the efficiency of their conversion processes and expand the markets for their biomass-derived products.

(b) Facilitating Scale-Up. Scaling up a technology – taking a technology from small-scale laboratory or pilot-scale production to large-scale commercial production – is a major challenge.  Entrepreneurial companies typically must demonstrate that their technologies work at larger scale in order to obtain investment, industry partners or commitments from customers.  However, the costs of establishing a scale-up demonstration facility in the chemical or energy sectors are often prohibitive – few companies are able to build a large-scale facility to test a process or product which may not work.

Here is another excellent opportunity for public involvement.  The public sector, possibly including national federal laboratories, can ease an important bottleneck, by establishing facilities which can be rented for scale-up, demonstration and early-stage commercialization.  Such a program could be supported, significantly if not entirely, by industry users.   It would be much easier to rent a pre-existing facility for scale-up or demonstration testing, or even initial commercial manufacturing, than to build a new facility for each new candidate product.

In fact, the public sector already does fulfill this role to some extent.   Some federal laboratories, such as the Idaho National Laboratory, are capable of performing certain scale-up testing.  An aggressive biobased economy program would, though, significantly increase the capacity of public laboratories to facilitate industrial scale-up of technology.  Eventually, as the industry expands and the volume of scale-up activity increases, private companies might arise which can profitably assume part or all of this role. Until then, this is an area where a greater public role is likely to produce a major return on investment.

A related opportunity might be the establishment of “virtual scale-up teams” which can be made available to companies looking to scale up their technology.  This concept has an analog in the private sector:  some private sector business accelerators have established “virtual management teams” which they make available to their member companies.  Rather than asking each of their companies to incur the expense and difficulty of putting together complete management teams with limited resources, these accelerators use their resources and connections to recruit highly experienced management teams which can be made available as needed to all of the accelerator’s companies.  These virtual management teams allow the member companies to focus on their core skill sets while providing them the other management pieces necessary to grow a successful business.

Just as private sector accelerators offer “virtual management teams,” federal laboratories could establish “virtual scale-up teams” consisting of researchers from the federal national laboratories and perhaps their academic partners which could be made available and customized to fit the needs of individual companies seeking to scale up their technologies.  These virtual scale-up research teams could supplement a company’s own research capabilities and allow the company to use its limited resources to build up the company’s core skill sets.   Equally importantly, the availability of “virtual scale-up teams” could permit companies to avoid the cost of building up a scale-up team which may only be needed temporarily during one phase of the company’s growth.  As an added benefit, the “virtual scale-up team” would undoubtedly build up a great body of knowledge and expertise over time.  While some of this knowledge would be proprietary and specific to individual companies, much of this knowledge would be of general application and could be made available to all participating bioeconomy companies, thereby avoiding the time, cost and risk of failure if each company had to individually develop this knowledge on its own.

The U.S Department of Energy national laboratories are planning the establishment of an “Agile BioFoundry” which would develop and make available scalable, open-source technology for bioproducts companies.  As a component or perhaps a complement to the BioFoundry concept, it may be worthwhile considering virtual scale-up teams.  As an added benefit, it may be possible to establish “virtual scale-up teams” without major new public expenditures – rather, it may be possible to accomplish a great deal by simply repurposing existing resources.

4. Carbon credits.  Biomass-based ventures can provide important environmental benefits to society, but the U.S. marketplace seldom rewards these benefits.  As an example, cellulosic ethanol reduces greenhouse gas emissions by over 80% compared to gasoline, but the only national market reward for such services is a limited allotment for cellulosic ethanol credits in the Renewable Fuel Standard.  Biobased chemicals provide comparable environmental benefits compared with petroleum-based chemicals, but do not receive any market reward for providing these benefits.

In the absence of a carbon pricing system, the environmental costs of fossil fuels are absorbed by society as a whole rather than by the manufacturers and purchasers of fossil-fuel derived products.   The absence of carbon pricing effectively creates an enormous subsidy for producers of fossil fuels, who are able to avoid the costs of the greenhouse gas emissions their products generate.

Several options for creating market incentives for carbon reduction exist, including a “carbon tax” and a “cap-and-trade” system.  In fact the three U.S. west coast states along with several Canadian provinces have enacted or actively considered such systems.  Canadian Prime Minister Justin Trudeau announced in October 2016 a new plan which would require each Canadian province or territory to either establish a price on carbon pollution or adopt a cap-and-trade system by 2018.  The proposed price on carbon pollution under this plan would start at $10 per metric ton in 2018 and increase to $50 per metric ton by 2022, with provinces and territories which elect a cap-and-trade system expected to achieve emissions reductions comparable to those which elect a carbon pricing system.  Revenues generated from such carbon pricing or cap-and-trade systems would remain within the provinces or territories which generated them.

As for the United States, while many economists of different political ideologies have called for a carbon tax to allow the market to more accurately reflect products’ true costs to society, the enactment of any such national carbon tax or cap-and-trade system seems unlikely in the current political environment.  In the absence of a true carbon tax, the establishment of a carbon credit system might be more politically palatable and could create market incentives which encourage carbon reduction technology.  Such credits might dramatically encourage investment in innovative carbon capture technologies.   As a general principle, any legislation which would incorporate the environmental costs of products into their market price will create a dramatic incentive to produce environmentally favorable products as well as to invest in new ventures which generate them.

5. Create Incentives for the “Traditional” Chemical Industry.    The “traditional” organic chemical industry could be a major source of financing and strategic partnerships for biobased chemical companies.  That is how many other sectors of the biotechnology industry evolved:   the pharmaceutical industry has been a major investor and partner with medical biotechnology companies, and the agribusiness industry has played a comparable role with regard to agricultural biotechnology start-ups.

However, at least to this point, the traditional organic chemical industry has been largely absent from the biobased chemical sector.   The reluctance of the chemical industry to invest in biobased chemical companies reflects several factors, including lack of confidence in reliable supplies of biobased raw materials, the current low price of petroleum, as well as a traditional reliance on petroleum-based raw materials.   Furthermore, there have been few incentives for traditional chemical companies to focus on biobased raw materials as a business opportunity.

There are at least a few obvious strategies which could increase incentives for the traditional chemical industry to invest in biobased companies.   First, the RFS, which at present applies only to biofuels, could be expanded to also apply to biobased chemicals.   When the RFS was enacted, the major public and industry focus was on biofuels.   In recent years, however, industry’s focus has turned to biobased chemicals.   Inclusion of biobased chemicals in the RFS program could create an important incentive to invest in biobased chemicals.

In addition, the federal Toxic Substances Control Act (TSCA) could be amended so that it does not impose additional regulatory requirements on biobased chemicals which do not apply to petroleum-based chemicals.   TSCA, which regulates production of most industrial chemicals imposes pre-manufacture notification requirements on many biobased chemicals which in some cases do not apply to a similar product derived from petroleum.   Eliminating disparate regulatory treatment of substantially similar products could help the development of the biobased chemical sector.

Any derisking program should include input from the traditional chemical industry to determine what other public policy actions could increase their participation in the biobased chemical industry.

6.  Adopt Biobased Product Standards. There is little standardization in biomass-based industries.  Biomass can have widely varying properties with respect to such characteristics as heating (BTU) value, moisture content and ash content, depending upon the type of feedstock material as well as cultivation practices and location.  Even within a single class of feedstock, seasonal variations and different cultivation practices can cause variability from one shipment to the next.  The industry lacks generally accepted standards which would allow biomass users to immediately understand the physical or chemical properties of a particular shipment of biomass. This lack of standardization imposes an additional cost and uncertainty upon biomass processors, as there is no commonly understood “language” to communicate the properties of a particular biomass product.

Development of appropriate industry standards can help to make biomass transactions within the industry more efficient and predictable. Development of such biomass standards need not be a governmental activity.   Indeed, non-governmental entities have developed commercial standards in many industries.  What is important is that for the biomass industry to maximize its commercial efficiency, the development and adoption of recognized and accepted industry standards is critical.

 7.   Increase Participation of Rural Communities.  The bioeconomy is often called a virtually unprecedented opportunity for rural communities.  Rural communities possess at least two key building blocks of the bioeconomy: land and biomass. Nonetheless, participation of rural communities as owners and investors in new biobased industries has to date been relatively limited.   The opportunities for rural communities in the bioeconomy will not be fully realized unless farmers and other members of rural communities become owners and investors in new bioeconomy-related ventures, and not merely suppliers of raw materials.

The lack to date of major rural investment in the biobased economy has several causes.  A major factor is the high degree of risk involved in most potential investments:  many ventures involve technology which is expensive and not yet ready for commercialization or which cannot yet be operated at a profit.  Futhermore, the optimal business models for transforming biomass from farm to finished product have not yet been fully worked out.   Other risks include the current low prices of fossil fuels, and the difficulty in raising adequate capital to support a biobased production facility.

Some programs do exist which can help finance rural-owned bioeconomy facilities.  Notably, USDA operates several loan guarantee programs aimed at financing biomass-based ventures or rural industries.  However, these loan guarantee programs still require, among other things, finding a lender which is prepared to risk significant amount of capital on as yet often precommercial or not clearly profitable technology.

Biomass investment opportunities which present comparatively lower risk and lower cost may eventually become available to rural communities.  Among these are the biomass depot preprocessing facilities described above, as well as other biomass handling or conversion facilities which could be located close to farms.  However, even these opportunities may not be fully practical until relevant technologies mature and there are reliable industry consumers available to utilize the partially processed biomass products.

Given the major benefits which rural communities can play in the bioeconomy, and the equally important benefits which the bioeconomy can provide to rural communities, any “derisking” program should actively include rural communities as a key component of its activities.   The outreach activities described above should include outreach to rural communities for new ideas on how farmers, rural entrepreneurs and rural communities can become full participants in the bioeconomy.

Eliminating unproductive legal and regulatory constraints

“Derisking” the biobased economy should be a central focus for policymakers looking to accelerate the growth of new bioeconomy industries and technologies.   Derisking the bioeconomy involves eliminating unproductive legal and regulatory constraints, increasing the public sector’s role where it can have the greatest positive impact on the industry’s growth, creating incentives which can most efficiently encourage private sector investment, and establishing an on-going outreach program to identify each of the above.

The list of ideas for derisking the bioeconomy contained in this paper is not exclusive.  It is this author’s hope that this paper can help to serve as a basis for discussion, and more importantly for action, on how to expand the bioeconomy and accelerate its growth, and to more fully realize the economic, environmental and technological benefits which a biobased economy can provide.

About the author

Neil A. Belson is a life sciences and technology attorney and has been a biomass products entrepreneur. He is Of Counsel at Potomac Law Group, a “new-model” law firm based in Washington, D.C., where he is Chair of the Life Sciences practice and a co-founder of the firm’s Technology Transactions practice.  In addition, Mr. Belson founded and served as President of NewAgriculture, Inc., a Maryland company which produced proteins and co-products from plant biomass.  Mr. Belson is currently a Manager of LeafPro Bioproducts, a North Carolina company which acquired the assets of NewAgriculture in 2015.  Mr. Belson’s career-long interest in the bioeconomy dates back to his service as a Peace Corps Volunteer in the Dominican Republic shortly after college, where he developed a rural energy farm project.  Mr. Belson can be contacted at nbelson@potomaclaw.com or tel: 240-416-7239.

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