It's no secret that it's tough to make money in a commodity business. However, that's precisely what most renewable energy companies are attempting to do, by going after some of the biggest, most commoditized markets of all, in fuel and electricity. An article in MIT's Technology Review about a New Zealand biofuels start-up illustrates one path around this trap, by producing specialty products, though there are others, including various branding strategies. Choosing the right strategy may depend as much on where an industry is in its lifecycle as on the actual output of the company's technology.
It wasn't so long ago that even the enormous US gasoline market retained significant non-commodity attributes. Fuel marketers successfully differentiated themselves on service and perceptions of quality, and those that were best at this were able to command an extra penny or two at the pump--a huge uplift in profit margin when gas was under a dollar a gallon. One of the classics in this line was an old Shell marketing campaign focused on "Super Shell with Platformate", implying a unique formulation that delivered more power and more mileage. Only when I started working in the industry did I learn that essentially all gasoline contained Platformate, which was just a brand name for a common gasoline component that had been catalytically reformed to turn straight hydrocarbon molecules into higher-octane ring compounds. Today, with the basic formulation of gasoline set not by refiners but by federal and state environmental agencies, fuel marketers have attempted to differentiate themselves on the basis of infusing branded additives. I'm not sure how successful that has been, outside the niche market of motorists driving high-end vehicles with expensive, high-performance engines.
The New Zealand biofuels company in today's article, LanzaTech, is apparently using tailored bacteria to convert carbon monoxide from steel mill and power plant flue gas into ethanol and useful chemicals. The process is doubly interesting, because although carbon monoxide is not of great concern as a greenhouse gas, it is a major local pollutant, and it can slow the decay of other greenhouse gases and contribute to atmospheric ozone. Producing ethanol puts LanzaTech into direct competition with the rapidly growing output of crop-based biofuels producers, including highly efficient production from sugar cane in the tropics. But by targeting the production of petrochemical intermediates (used to make other chemicals) like butanediol, they can access higher-margin, less-commoditized markets. A facility wouldn't have to produce much of these products, along with the ethanol, to boost its profitability by enough to make a difference.
This strategy could also be beneficial for companies using costly processes for converting cellulosic biomass into fuel, particularly as they scale up from laboratory and demonstration scale, because scale is a key limitation on specialty products. One of the main reasons these products are typically worth a lot more than commodity fuels is that they are produced and used in relatively small quantities, and their markets aren't large enough to attract the biggest competitors. The first industrial-scale gas-to-liquids (GTL) facilities made good margins selling waxes and other specialty products along with the high-quality diesel they produced, but as GTL becomes more mainstream, with plants like Oryx GTL and the giant Pearl GTL in Qatar, that option becomes less valuable.
Biofuel start-ups already face enough technology challenges without focusing all their efforts on making ethanol that can't be differentiated from the output of corn ethanol plants that have been at this game a lot longer and have mastered not only the production process, but also the intricacies of managing their large supply chains--a huge, under-appreciated challenge for cellulosic biofuels. Focusing initially on specialty products, to the degree their technologies allow, would give them time to scale up and work out the kinks, before tackling a market in which cost is everything.