Biotech is taking on the world’s biggest industry

The rising cost of energy, dependence on volatile foreign suppliers and harmful CO2 emissions mean alternative energy is on the rise.

When Henry Ford designed his Model T Ford in the 1920s he expected that it would run on ethanol. ‘There’s enough alcohol in one year’s yield of an acre of potatoes to drive the machinery necessary to cultivate the fields for a hundred years,’ he said.

Gasoline, on the other hand, had to be extracted from underground and cleaned up in expensive refineries. Even then it had a lower octane rating, was more toxic and more likely to explode.

So what happened next? The oil industry swept all competition before it and became the monster that it is today. But now the pendulum is swinging. Alarmed at the rising cost of energy, at dependence on volatile foreign suppliers and at the consequences of CO2 emissions ‘alternative’ energy producers are fighting back.

Take Audi for example. With its partner Global Bioenergies it has developed a clean-burning and petroleum-free fuel called e-benzin. It is made by fermentation of renewable biomass sugars such as corn-derived glucose.

But, as Global Bioenergies CEO Marc Delcourt explained, “in the medium term, we aim to modify the process so that it requires no biomass, instead requiring just water, hydrogen, CO2 and sunlight.”

Renewables are taking over

According to the latest annual review of the International Energy Agency more than 45% of all new power installations in 2014 generated renewable energy. Bear in mind we are not talking about transport fuel here – I will come to that later. This figure refers to power generation and I was surprised to learn that already 22% of all power comes from renewable sources and this number is expected to hit 26% by 2030.

Here in the UK where we are about to build a distinctly non-renewable nuclear power plant, it is hard to believe that renewables have such a significant market share. But until we harness the Severn Bore we will have precious little hydropower, which is one of the biggest sources of renewable energy worldwide.

We are also unlikely to get much in way of solar power and we have a limited amount of wind power. But overseas where the sun does shine and the wind does blow these two sources are growing fast, partly because costs have been engineered down but also because by offering a source of local power in remote areas they eliminate huge central power stations and expensive grids.

Although biotechnology is a broad church none of the leading types of renewable energy can really be defined as such, with the exception of biomass. Biomass is any type of biological matter that can be used for power production. It includes dead wood, plants and any type of trash that will burn.

Biomass has one particular attraction for environmentalists. While the burning of the material releases CO2 into the atmosphere this does no more than cancel out the CO2 that the plants originally sucked out of the atmosphere as they grew, thus rendering the process carbon neutral.

However because of the difficulty in sourcing a consistent supply of raw materials biomass plants tend to be small. But sawmills might reasonably fuel their own generators with waste wood, while on a larger scale the UK generator Drax is increasingly powering its plants with wood pellets that are imported from North America.

By doing so it claims to be cutting CO2 emissions by 80% and helping the Government to meet its climate change obligations far more cheaply than by building offshore wind farms.

The biggest market for biomass

The biggest market for biomass, though, is transport. There are two types of biofuel – ethanol and biodiesel. The former is mainly produced from plants such as sugar cane or sugar beet which are rich in saccharides, or corn and wheat which are rich in starch. With the help of enzymes these are then turned into sugar which is fermented into alcohol.

Much the largest markets are the United States, where ethanol accounts for about 10% of the nation’s gasoline supply, and Brazil, which has copious supplies of sugar cane (a much more efficient source of energy than corn). In the USA a proportion of 10% ethanol is often considered the limit of the ‘blend wall’ but in February the Brazilian Government raised the permissible percentage within its domestic gasoline fuel blend to 27%.

This is an industry replete with Government initiatives and directives. In the UK for instance, we have the British Renewable Transport Fuel Obligation, while the EU has its own targets for biofuels. Here the main product is biodiesel. This is produced from vegetable oils, such as rape seed, sunflower and soya bean and also used cooking oil retrieved from restaurant fryers.

Crops grown for the production of biodiesel occupy about 3 million hectares of arable land in the EU, and 120 plants situated mainly in Germany, Italy, Austria, France and Sweden produce c.6.1m tonnes of biodiesel annually. Overall the use of biofuels for transport is growing slowly and expected to satisfy 4% of road traffic demand by 2020.

However advances in biotechnology could make the outlook more exciting. Today we use ‘1st Generation’ biofuels, which have the distinct demerit of using food crops. 2nd Generation biofuels use inedible inputs such as wheat straw, wood chips, corn stover and municipal solid waste.

Just as we would find it hard to digest a bamboo stalk, so the manufacture of fuel from these sources requires robust processes. Tough cellulosic stalks and husks are broken down either by thermo-chemical processes or by advanced enzymes.

I’ve been learning about biofuels for years, and there’s one biofuel company in the Breakthrough Biotech Alert portfolio which I’m particularly excited about. If you’d like to learn more about it, click here.

Crossing the valley of death

Beyond these pillars of bioenergy are numerous other technologies which, according to the International Energy Agency’s Adam Brown are ‘in the valley of death’ – the critical time between proving a concept and making it commercial.

Audi’s e-benzin would be an example, as would Farnasene. The latter is a hydrocarbon molecule fermented from sugar with the help of genetically modified yeast. In partnership with Total the Californian company Amyris plans to produce this in Brazil and market it as an approved fuel for blending with conventional jet kerosene.

There are numerous other ideas. Biogas is made by anaerobic digestion, in which microorganisms break down biodegradable material in the absence of oxygen. You don’t have to be fussy about the inputs.

According to a recent study, biogas from human faeces could generate electricity for up to 138 million households and have a value of $9.5bn. In Nevada Sierra Biofuels is planning to convert waste into gas and then, using the Fischer-Tropsch process, catalytically convert this to synthetic jet fuel bound for Cathay Pacific.

Torrefaction heats and dries woody biomass and then converts it into coal-like lumps. Biobutanol is a high energy fuel similar to ethanol, but each of its molecules contains four carbon atoms rather than just two.

Bio Dimethyl Ether (BioDME) is derived from renewable feedstocks. There is algae, which can be grown rapidly in bioreactors and is rich in lipid oil that can be converted into biodiesel; and biohydrogen uses microbes to produce hydrogen from sunlight using photosynthesis.

In summary there is no shortage of ideas, or methods of producing energy from renewable sources. But whether they are cost competitive, especially at $50 oil is a different matter.

A 2013 study by the Chatham House Royal Institute of International Affairs concluded that ‘the current generation of biofuels provides an expensive means of reducing emissions from road transport… if the UK is to meet its EU obligations, the annual cost to UK motorists is likely to rise to around £1.3 billion a year by 2020’.

Another expert recently argued that ‘the price point that would make production of bio-jet fuel a viable value proposition is over $4.5/gallon (it is currently $1.41)…..for all the talk of de-carbonizing aviation, it is just not realistic to build business plans on such assumptions.’

This is the issue for investors. Without government grants or other forms of soft funding few alternative energy projects stack up financially. Until they do we should be excited by the advances in technology but wary of committing our own cash.

Breakthrough Biotech Alert is a regulated product issued by Fleet Street Publications Ltd. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Seek independent financial advice if necessary. Fleet Street Publications Ltd is authorised and regulated by the Financial Conduct Authority. FCA No 115234 https://register.fca.org.uk/.

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