Range Fuels Bankruptcy Harms Biofuels Industry
Recently it was announced that Range Fuels has gone into foreclosure, thus marking the official end of their story. For all practical purposes, the company has been finished since early 2011, but the foreclosure puts an end to the notion that they will yet rise triumphant from the ashes. Last week, Heather Duncan — a reporter for The Telegraph in Macon, Georgia — called me to discuss the Range story. She has just published an excellent summary of what went wrong at Range Fuels, and what lessons might be learned from their failure:
Range Fuels failure raises the question: How much risk should the government take with taxpayer dollars?
Here I want to excerpt some of the highlights from her story, and share what I believe are the lessons to be learned here. There are a lot of nuggets from her report, but this one really highlights the overall problem in a nutshell:
Reviewer [for the USDA] Kevin Hicks predicted that construction costs would be higher than expected and that the scaled-up Soperton refinery “will probably not make ethanol on an economically viable basis. However, lessons learned may allow the next build-out to 100 million gallons to approach viability.”
He said more than half of the refinery design consisted of new technology.
“Building a new manufacturing facility with one of two new processes is a risk,” he wrote. “Building a new facility with 51 percent new processes presents enormous risk.”
Government Failed the ABC’s of Due Diligence
This has been the biggest basis of my criticism all along, and is the reason I fault the government for funding the project. The single most important element of due diligence (See my article Due Diligence: How to Evaluate a Renewable Energy Technology) is to understand exactly where a technology stands; not where proponents hope it ends up, nor where proponents project it will be. You want to know what has actually been demonstrated.
In the case of Range Fuels, they hadn’t even shown conclusively at lab scale that they could do what they were promising to do. Yet amazingly, they were making claims about what their costs were going to be. If I was reviewing this project for the government, the first thing I would have requested was to show this process operating at a laboratory scale. And that would have been the end of the story, because they were not producing ethanol from wood chips. They could produce methanol, or ethanol in a mixed alcohol product — technologies that have been around for a while. But this is not what they were claiming they would do.
Thus the problem becomes exactly as is described by Kevin Hicks above: They were attempting to build a facility with many new pieces of unproven technology, and that is a recipe for failure 99% of the time. And in this case, you have to wonder why the government felt like it was an OK risk of taxpayer dollars. Anyone who didn’t know that there was such a high risk of failure had no business reviewing the technology. Anyone who knew and proceeded anyway should have no business handling taxpayer dollars.
The other nugget from Heather’s report is that the costs of the project appear to have been much higher than advertised. I had heard this privately, but she dug up some documentation that confirms this:
Range Fuels quoted various amounts at different times, but the company’s December 2008 loan application indicated that Range would chip in “a future capital raise of $375 million,” for a total of $531 million (including the Department of Energy grant and USDA loan guarantee). A January 2010 update to the USDA on the project’s commitment guidelines says the borrower is contributing $318 million for a total project cost of $480 million.
Despite these advantages, on Jan. 3, 2011, Range Fuels failed to make its scheduled payment on the USDA guaranteed loan. As a result, the payment was made from a Debt Service Reserve fund, triggering a default when the money wasn’t replenished, according to a timeline provided by the USDA.
She also points out that nobody won on this deal:
Range Fuels lost. Its private investors — including California’s state pension fund — lost.
The Bush and Obama administrations both bet on Range and lost. Environmentalists and national security advocates, both seeking more green fuel options, lost.
And taxpayers lost.
My two biggest concerns about this project — primarily based on the fact that I did not think the technology would work — were that it was a waste of tax dollars, but more importantly it would lead to a loss of confidence in other renewable energy technologies. There is no question that the failures of Solyndra and Range Fuels have done exactly that, and have jeopardized other technologies that may have more promise.
Ironically, one of the engineers on the Range Fuels project responded to my criticisms by writing to Biofuels Digest and telling them that I just didn’t understand the project, adding in a private e-mail “Why you choose to denigrate one of the pioneers of this industry I don’t know. Such articles do only harm to the biofuels industry, despite your misguided intentions.” Yes, he actually suggested that Range wasn’t the problem, it was my criticisms that were doing harm. Of course I don’t have to point out the obvious: This engineer and his firm made a lot of money cheer-leading and engineering this failed project, but they have zero accountability for the money they made at taxpayer expense.
The lesson that many will take away from this debacle is that the government should not be in the business of investing in risky new technologies. But I think that’s the wrong message to take away. I believe that our level of dependence on oil — especially oil imported from unstable parts of the globe — is a risk that we need to actively mitigate against. I believe there is a role for government to play in helping to mitigate this risk by encouraging alternative energy technologies. What I would say that this situation demonstrates is that they don’t necessarily have the correct model with which to do this. To me, this demonstrates that the government lacks the expertise to evaluate the level of risk in these technologies, and the process can be hijacked by those with political connections.
As I have suggested before, there is a better model that would get the government out of the risky side of this business, but could still encourage the development of alternatives. The gist is that the rewards come when the technology actually delivers on the promises, as opposed to doling out rewards when the promises are made. This would place the issue of assessing risk and investing accordingly in the private sector, while still providing funding for those that actually deliver.
Previous Articles on Range Fuels
Broken Promises from Range Fuels (February, 2010)
Range Responds (March, 2010)
Range Fuels’ Number One Critic (June, 2010)
Range Fuels Produces Something (August, 2010)
Cellulosic Ethanol Reality Begins to Set In (December, 2010)
Range Fuels Out of Money? (January, 2011)
Vinod Khosla and the Gasification/Fermentation Debate (January, 2011)
The Media’s Role in the Range Fuels Fiasco (February, 2011)
Link to Original Article: Range Fuels Goes Bust, Harms Biofuels Industry in the Process
Robert Rapier is a chemical engineer with 20 years of international engineering experience in the energy business. He holds several patents related to his work. Robert is the author of Power Plays: Energy Options in the Age of Peak Oil. He is also the author of the R-Squared Energy Column and is Chief Investment Strategist for Investing Daily’s Energy Strategist service. Robert has appeared ...
Other Posts by Robert Rapier
The Energy Collective
- Rod Adams
- Scott Edward Anderson
- Charles Barton
- Barry Brook
- Steven Cohen
- Dick DeBlasio
- Senator Pete Domenici
- Simon Donner
- Big Gav
- Michael Giberson
- Kirsty Gogan
- James Greenberger
- Lou Grinzo
- Tyler Hamilton
- Christine Hertzog
- David Hone
- Gary Hunt
- Jesse Jenkins
- Sonita Lontoh
- Rebecca Lutzy
- Jesse Parent
- Jim Pierobon
- Vicky Portwain
- Willem Post
- Tom Raftery
- Joseph Romm
- Robert Stavins
- Robert Stowe
- Geoffrey Styles
- Alex Trembath
- Gernot Wagner
- Dan Yurman