Mascoma’s Plan for Ethanol Plant in Michigan Likely Delayed, CEO Says

5/24/10

Lebanon, NH-based Mascoma has made strides with its process for producing ethanol from non-food plants such as wood chips and grass. Yet the firm is likely to delay the start of production at its first planned commercial facility, in northern Michigan, company CEO Bill Brady says.

Mascoma had been aiming to open a plant in Kinross, MI, by 2012. Now, Brady says, the facility is more likely to open in 2013—and the company has not secured the debt and equity funding it seeks to pay for the project. Though he would not say how much it would cost to build the proposed Kinross plant, Brady says that such facilities typically cost more than $100 million.

To hear Brady tell it, the financial meltdown bears much of the blame for slowing down plans for the Michigan plant. “There’s no doubt that the financial crisis in 2009 was a setback to all of the cleantech world, and so the financing that’s ever so important to this first plant has definitely been delayed,” the CEO says. “So that’s really been the big issue in terms of timing.”

In October 2008, Mascoma said that it had garnered grants of $26 million from the U.S. Department of Energy and $23.5 million in grants from the Michigan Economic Development Corporation to help build and support the facility in Kinross. Brady, who joined the company as CEO in January, says that part of the state grant was to fund research and development of the firm’s technology, and that some of those funds have been spent. Yet the CEO declined to say how much of the state grant remained for building the production plant. The DOE grants also included funding for both research and plant construction.

Mascoma is working on multiple fronts to advance the project in Michigan. One big effort is to prove the commercial viability of Mascoma’s technology—which has the potential to make ethanol at a lower cost than conventional processes that rely on corn or soybeans as feedstock—at its testing facility in Rome, NY. The company also wants to secure debt financing, perhaps in the form of loans guaranteed by the DOE. In addition, the firm seeks a corporate partner, such as a fuel company, that could both buy its ethanol and infuse it with capital though an equity investment.

Mascoma has already found a partner—the Marquette, MI-based forestry company J.M. Longyear—to provide wood chips to feed its ethanol-making process in Kinross. The two companies have formed a joint venture, called Frontier Renewable Resources, to build the facility. Frontier, based in Kinross, is expected to eventually employ 50 full-time workers, and its estimated economic impact would create hundreds of additional jobs in construction, timber, and other industries.

In addition to government grants, Mascoma has attracted more than $100 million from a bevy of investors, which include Atlas Venture, Flagship Ventures, General Catalyst Partners, Khosla Ventures, Kleiner Perkins Caufield & Byers, General Motors, Marathon Oil Co., Pinnacle Financial Partners, and Vantage Point Venture Partners. The big draw has been the company’s potential to streamline cellulosic ethanol production. Conventional methods require enzymes to digest plant materials into sugars, and then a separate step for yeast or bacteria to ferment the sugars into ethanol. In a lab test, one of Mascoma’s engineered microbes enabled digestion and fermentation to make ethanol in one process.

Still, companies can burn through hundreds of millions of dollars before they know whether their new methods of making cellulosic ethanol can work on a commercial scale. Investors’ interest in such technologies can fluctuate with the cost of crude oil, which makes ethanol an enticing alternative fuel when crude prices rise and not so attractive when they fall.

Also, U.S. ethanol production capacity is nearly outstripping domestic demand for the fuel—something the industry calls the “Blend Wall.” The name refers to the fact that the U.S. government caps the amount of ethanol that can be blended into gasoline for automobiles at 10 percent of the overall mixture, limiting demand for domestic supplies of ethanol at 12.5 billion to 13.5 billion gallons, according to the Renewable Fuels Association, an industry group in Washington, DC. The nation’s production capacity has already reached 13.5 billon gallons, meaning that country has enough capacity for gasoline mixed with 10 percent ethanol. The ethanol industry is lobbying on Capital Hill to raise the cap on the amount of ethanol that can be mixed into gasoline from 10 percent to 15 percent, and it is seeking expansion in foreign markets for the fuel.

“Just on corn-based ethanol alone, we’re approaching the limits of what the U.S. vehicle population can consume,” says Mark Bünger, a research director in the bioscience group at Lux Research, a market analysis firm based in Boston. “We don’t need lots and lots and lots of more ethanol for a long time.”

Bünger says that companies like Mascoma should look beyond ethanol and use their technology to make other products. South San Francisco-based Solazyme, he notes, is an example of a biofuel developer that has applied its technology in food and cosmetics markets. At Solazyme, algae are used to convert biomass into algal oils that can be used to make fuels and serve as ingredients in animal feed, nutritional supplements, and skin creams.

Brady says that he expects Mascoma to make progress in finding financing for the Kinross plant by late 2010, enabling the firm to break ground on the facility sometime next year. Mascoma researches uses of its technology to transform plant materials into chemicals for products other than ethanol, but its main emphasis is developing transportation fuels from renewable sources.

“We’ll get the financing for Kinross,” Brady says. “It’s just a matter of time.”

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