Due Diligence: How to Evaluate a Renewable Energy Technology
February 21, 2011 by Robert Rapier
Doing Due Diligence
To people who follow the energy industry closely, it’s a common occurrence to come across announcements from companies proclaiming to have developed the key to the ‘next big thing’ — for solving the world’s energy crisis. Maybe they say they can take any sort of waste biomass and turn it into fuel — ethanol, diesel, pyrolysis oil, mixed alcohols — at very low cost. Or they say they can produce renewable electricity at a price competitive with coal.
The layperson reads the news release and is curious: “Is this real?”
When I am asked to comment on a press release, I try to be cautious with my opinions until I have peeled the onion a bit. There are technologies with real potential, and just because a company hypes their technology doesn’t mean it won’t work. So my opinion on technologies that I haven’t particularly studied will tend to be general and conservative.
But let’s say you are interested in becoming a stakeholder in the process. You could be a private investor, a government entity, or you could be someone from the media who is interested in sorting out hype from reality in order to protect potential stakeholders (such as taxpayers). That requires quite a different level of investigation than rendering an opinion based on a press release, and many people don’t know where to start.
In my own experience, perhaps 90% of the stories you see promoting various technologies are at least exaggerated. So how do you separate fact from fiction and wishful thinking from reality?
Understand the Levels of Scale and the Hurdles that Come With Each Step
It is a huge challenge to take results that were achieved in a laboratory and scale those up through a pilot facility to a demonstration facility to a commercial facility. Each of those steps is a gate, and each of those gates will stop most technologies from advancing through the gate. Skipping steps — for instance jumping from the lab to a demonstration size facility — greatly lowers the probability of success while putting much more money at risk.
There are no hard and fast rules on the borders between these particular facilities; one person’s pilot facility may be another person’s demonstration facility. In general, I think of lab experiments as consisting of one aspect of a technology at scales of ounces or milliliters. Piloting moves up into scales of pounds or liters per day, and will incorporate more pieces of the puzzle into the experiments. Demonstration facilities reach the realm of barrels per day (1 barrel = 42 gallons), and are typically integrated facilities designed to demonstrate that all aspects of the technology work — in conjunction with each other — at that particular scale.
A facility producing 10 barrels a day (150,000 gallons per year) is demonstration size; one that produces 1,000 barrels a day is on the low end of commercial size. To put those numbers into perspective, the average size of a corn ethanol plant is just over 4,000 barrels per day and the average size of an oil refinery in the U.S. is 125,000 barrels per day.
Data Omitted From the Press Release: How and Who to Get it From
Before you even get to ask questions, you may be asked to sign a secrecy agreement. This is a legitimate and necessary step for companies who wish to protect against someone running off with their technology and starting a competing company, or leaking proprietary information to competitors. A secrecy agreement will give you access to information you might never obtain otherwise, and you will often find out very quickly that what companies tell you privately is different from their press releases. On the other hand many companies that are out promoting their technology and trying to get funds will answer many questions before asking for a secrecy agreement — and ideally you want to learn as much as you can before signing an agreement.
Of course if you are a reporter doing an investigative story, you will never sign a secrecy agreement. You are just going to have to dig a little harder to find answers to your questions. In my case, I fall into both categories. I sign secrecy agreements with companies whose technology we may be interested in developing. I do not write about those companies. The technologies I do write on are based on information I have been able to glean through some of the methods I detail below.
As you dig for information, generally the first people you will encounter are those promoting the technology. They will probably be careful and very optimistic with the information they provide. What you really want to do is ultimately talk to an operator or technician who is involved in the day-to-day operation of the process. They will be the ones to tell you about potentially significant issues.
First Questions
The first question to ask is “At what scale has this process been demonstrated?” But that’s just a start, because you will get misleading answers and people will withhold information. They may not tell you that they only simulated some parts of the process. For instance, a biomass gasifier produces synthesis gas (syngas), but there can be problems with the gas quality because of tar formation. If a simulated syngas is used in lab or piloting experiments (e.g., bottled hydrogen and carbon monoxide were mixed together to produce the syngas), that tar issue can be conveniently ignored in the lab and yet be a show-stopper for a commercial plant.
So you have to dig into the details. You want to know the scale of the process that has been demonstrated, but then you also want to know how many consecutive hours it has been run, and you want to know the source of the raw materials and the composition of the final product. Ask about the nature of byproducts and waste products as well. Product quality and waste disposal are both issues that have bankrupted companies attempting to commercialize a process.
Know the Limits of Computer Modeling
Next you have to ask about the assumptions that they are using to model a commercial plant. What is the scale-up factor between what they actually demonstrated and what a commercial plant will be? What are the production volumes in each case? How were the costs estimated for construction of a commercial plant? Have they attempted to skip steps in the scale-up process (e.g., going from lab or small pilot to small commercial scale)? If they are running at lab or small pilot scale and projecting their production costs for a commercial plant, I generally never take those number seriously. There are just too many hurdles between the lab and commercial scale. Small lab scale problems often become much bigger problems at demonstration scale.
You want to clearly distinguish between how much of the process has actually been proven and how much has been simulated with computer models. I saw a recent question posed by a renewable energy developer: Isn’t it true that you can prove a technology through modeling? The answer to that question is ABSOLUTELY NOT! In fact, the reverse is true: You prove a model by actually demonstrating that the process gives results consistent with the model. But some people will present model results as if they represent reality. Models are merely guides; a model won’t tell you whether a process will work or not. It will give you some guidance, but ultimately you have to take the results from the model and actually run the process. That is how you prove a technology (and validate a computer model).
Biomass Feedstock, Economic Assumptions, and Energy Requirements
You need to ask about the presumed source and cost of the biomass that will be used. As I identified in Bad Assumptions, I believe the assumption of a long-term supply of cheap, free, or even negatively-priced biomass is one of the most unrealistic assumptions companies make, and yet the assumption that commonly results in those claims of $1 or $2/gallon biofuel.
So I want to know what the economics look like if the biomass costs are similar to the cost of hay. I want them to tell me about their costs if the biomass is $100 per ton (and I expect elusive or misleading answers). It is true that there is a lot of wood in the U.S. that has been killed by the pine bark beetle, but it still costs money to process those trees and move them to a facility for conversion into fuel.
The energy requirement for the process is a very important issue, but one that is not generally easy to dissect. But you want to know the types of energy used in the process, as well as the energy balance for the process (the energy of the fuel out over the energy it took to produce it). People will omit all sorts of energy inputs when stating an energy balance. The will assume that they will burn waste biomass in the commercial plant and thus assume low external energy inputs. They won’t count the energy that it takes to grow and transport biomass, and they won’t count the energy inputs to move the fuel to the customer. When you see someone claim an energy return of five or ten to one for a renewable process, those are often the kinds of assumptions they are making. (While it is true that the the economics of using coal as a primary energy input for making fuels may be attractive, such a process can’t rightly be labeled renewable).
Competitors and Former Employees Can Be a Source of Valuable Info
I also want to know about predecessors and competitors. Very little is invented from scratch; almost everyone builds off of previous work. So who came before and did similar work? Who is doing similar work now? How is their work better than that of others? Then you ask the same questions of competitors. This is a very effective tool for sniffing out problems. Competitors are always happy to tell you what is wrong with the other company’s process. On the other hand, many will insist that they are so unique they have no competitors. Don’t fall for that.
Talk to former employees. If there are skeletons in the closet, they may tell you where to look (especially if they are disgruntled). The difficulty here is that they may not be willing to go on the record, but they can provide leads. For instance, an employee will likely be bound by a confidentiality agreement, but that doesn’t prevent them from pointing you to a specific bit of information in a patent that doesn’t mesh with the company’s public claims.
Bring up the company in casual conversation and see where it leads. I did this on a recent trip, where a manager relayed to me that many years ago he had worked for a company that was claiming a breakthrough in turning natural gas to gasoline. I mentioned this process, and he said “Yes, it works but the gasoline has a very high aromatic content.” That was the first time I heard that particular revelation, and yet many countries have very low aromatic allowances for their gasoline. Hence, this was a potential show-stopper, or in any case a good bit of information to have as I continued to investigate the company.
Read Between the Lines and Use Common Sense
Claims like “Ideally suited for landfill waste” sometimes mean “Our economics only work if we are getting paid to take the biomass.” A statement like “Perfect for co-locating with a power plant” can mean “We need cheap steam.”
There will often be specific technical claims that may be outside of your particular area of expertise. For instance, someone claims to be able to run a car on water. You may not have the technical foundation to understand why this isn’t what it claims to be, but you can find lots of information on the Internet that breaks the technical issues down. You can also consult with someone who knows the area. Sometimes you can locate a free opinion. You may see a quote from a professor who is skeptical of the process. Contact them for further information.
Beyond the technical questions, there are the obvious signs. Do the company’s claims appear to be grandiose? If yes, this is a warning sign. Most companies making grandiose claims do not deliver. Do they issue press releases for fairly trivial developments? For instance, I saw a recent press release from a company claiming that a university had validated their (seemingly inflated) claims. Yet there was no actual detailing of which claims were being validated, nor exactly what the results of the university study were. It was a press release designed to draw attention without actually conveying any useful information.
Summary
To break this down into a short “cheat sheet”, here is a summary of some important questions that you want to ask. Try to corroborate answers by talking to employees or competitors.
1. At what scale has the process been actually demonstrated?
2. Is the process currently running?
3. What is the source of raw materials for the process?
4. What is being done with the product?
5. What are the primary energy inputs into the process, and what is the energy balance?
6. Will there be intermediate scale-up steps before a commercial facility is built?
7. What are the key assumptions for a commercial facility (e.g., size, cost of production, location)?
8. What is the presumed source and cost of biomass for a commercial facility?
9. Has the technology been proven on that specific biomass?
10. What prior work is most similar to yours, and who are your perceived competitors?
If you manage to get honest answers to those questions, you will be well on your way to burrowing through the hype to understand the true potential of a process.
Bad Assumptions
March 25, 2010
As I have been traveling around New Zealand, I have had a lot of discussions about various renewable energy companies. Inevitably, there is some discussion as to why certain approaches have failed. Occasionally, companies failed simply because they were running a scam and lying about what they were doing. More common, however, are companies that failed due to bad assumptions on their part.
Those discussions have led me to reflect on what some of the bad assumptions – or potentially bad assumptions – companies may be making that will result in failure of their business models. Of course I have to make assumptions as well, and I must constantly evaluate those assumptions in light of new evidence. I would say that there are three primary assumptions that influence the decisions I make. They are:
1). Oil prices will continue to rise over time.
2). Biomass prices will rise over time as competition increases.
3). What the government gives, the government can take away. So government subsidies have no place in my long-term business plans.
I think the assumption around the cost of biomass is going to be one of the worst assumptions some companies are making today. I see many companies claim that they will produce cheap biofuel, but when you take a closer look they are basing that on getting cheap, free, or even negatively valued biomass. Unless one can lock up a long-term supply agreement with someone who has a track record of being able to deliver biomass, I don’t think this assumption will hold up. Further, farmers are going to command the highest price they can get for any purpose-grown biomass. So I think the dreams of cheap switchgrass or miscanthus enabling cheap biofuels will fail to materialize. It won’t cost any less than it costs to buy hay from those same farmers today. In fact, it will probably cost more.
Here are some other assumptions that have doomed, and I believe will continue to doom, prospective renewable energy companies:
Results in the lab can be replicated at a larger scale.
The fact is, the vast majority of energy technologies can’t be scaled at all out of the lab, for a variety of reasons. My own observation has been that most technologies die in the lab, and most that make it to the pilot stage die there. Very few survive all the way to commercialization (but government policies/funding can result in some surviving that shouldn’t have survived).
One or two technical breakthroughs will be achieved.
While they are often taken for granted, even one technical breakthrough is asking a lot. If two are needed, it greatly compounds the difficulty of commercializing a process. If you see a company trying to scale a process out of the lab, and they have more than one technology aspect that has never been run in that particular service or at that particular scale, the odds of success are probably slim.
Reported results are typical.
Reported results are almost always the best results that a technology has ever achieved. When someone says “Up to 100 gallons per ton” I discount that heavily. People who tend to hype their technology don’t report typical results. They report the best results to investors, and present them as typical. But when they build their plant, typical results are what they will get.
Government subsidies will bridge the gap until you “figure it out.”
Government subsidies can go away tomorrow, so if you haven’t figured it out yet, then you should probably go do something else if you are hanging your hopes on government subsidies. The end is likely to be unpleasant for everyone involved.
You will “figure it out.”
There is a very long list of companies who had seemingly promising technologies, but for one sticky technical issue. Those sticky issues don’t always have a happy ending.
As you scale your technology and climb the learning curve, costs will go down.
Sometimes costs go up as you figure out the things you missed. Scale-up can result in additional pollution control requirements, noise control requirements, corrosion mitigation, etc. that just weren’t that much of an issue in the lab.
You have invented the wheel.
Almost every new invention you see is merely a modification on a previous idea. Sometimes, the modifications aren’t even improvements. If the original idea wasn’t commercialized, it is best to have a very good understanding of why that was, as well as a historical perspective on what ideas similar to yours have been tried before – and why they failed.
All biomass is created equally.
When you hear someone claim that their bioenergy process can take “any type of biomass”, you should apply a high degree of skepticism. Different feedstocks behave very differently in different processes. In a gasification process, some high ash or high moisture feedstocks can be problematic. In a cellulosic hydrolysis process, there are certain feedstocks that produce strong enzymatic inhibitors. In general, processes are optimized around specific feedstocks, and they don’t respond favorably to having inconsistent feeds.
In conclusion, all of these assumptions are common among renewable energy companies today. Many of these faulty assumptions have already resulted in bankruptcy for a fair number of companies, and will undoubtedly lead to a few more bankruptcies in the future.
Note: I will be in New Zealand until March 30th, and then my posting and commenting should return to normal. We are still working on optimizing the commenting structure, but are still quite open to what readers would prefer.
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