The biofuel industry is booming, with more and more players entering the market. But what factors are they considering, and what elements will continue to drive those looking to get into this exciting field? Nicolas Dennis, Andreas Meiser, and Alexander Schwartz take an investor’s look at the industry.
The biofuels industry in the world’s key demand regions – the US, Europe, and Brazil – looks much the same as it did five or so years ago, except that demand has skyrocketed and profits are raining down on those lucky ones.
The emerging biofuels industry is attractive to many companies but fraught with uncertainty. The major factors affecting the profitability of the industry are the cost of feedstock, regulation, and technologies in flux. Despite these uncertainties, waiting to enter can be costly because resources are in short supply. Companies that decide to enter now must reduce risk by hedging their bets and creating relationships that can help reduce uncertainty and volatility.
Development Of Biofuels
All indications indicate that the biofuels industry will undergo a fundamental transformation during the next 5-7 years. The ‘perfect storm’ that currently favors oversized returns and speculative investments should calm down and the industry is likely to experience several changes that will make it more competitive.
Although most of the easy money has already been made, new technologies are likely to support the emergence of biofuels as a key element of the global transport fuel market. Today’s expansion and economically motivated replacement of biofuels will drive global demand and both current and new ethanol production technologies will be commercially viable. The biofuels industry was about eight times its current size by 2020. An industry of this size would have about 80 billion gallons (302 billion liters) of fuel per year – 10% of the estimated total world transportation fuel demand. – and be large enough to have a global reach and significant impact on consuming industries, societies, and governments.
Betting on Biofuels – Beneficial for Investors and Producers
The alternative use of greenhouse gas emitters fossil fuels, biofuels, or fuels processed from plants is attracting attention from producers as well as investors. There are two types of biofuels – ethanol processed from sugarcane or corn, and biodiesel made from biomass.
India’s leading investors Rakesh Jhunjhunwala, and Vinod Khosla are betting on bio-fuels as they can become a viable alternative to the use of natural fuels.
Sun Microsystems founder Vinod Khosla is a major bio-fuels investor and is looking for investments in India and Brazil. India’s biggest deal man C. Siva Sankaran has set up an ethanol producing company in North Carolina. Apart from these, leading research analysts and PE investors have invested in listed and unlisted biofuel companies in India.
Meanwhile, Tata Chemicals has expressed its interest in biodiesel production through the cultivation of Jatropha, a non-edible tree crop grown on barren land. There are also plans to cultivate sorghum to make ethanol.
Availability of natural resources, cost-effective engineering, and high cost of import fuel is added advantage for the development of biofuels in India. About 14% of India’s land is barren land, which is sufficient to meet the requirements of bio-diesel for up to 15% of diesel. Mobile operator Idea Cellular also operates its four mobile base stations of locally produced biofuels. This can be replicated elsewhere as it is an affordable way to increase mobile coverage in rural India.
But biofuels cannot replace fossil fuels, But they can make a difference as seen in Europe where vehicles are mandated to use 6% of the fuel as biodiesel by 2010 and 10% by 2020. But for the Indian specific case, the use of biofuels should be encouraged more. An energy option for electricity to homes, fuel for cooking and running vehicles. This would then bring out the real economic and social benefits of biofuels.
During the transition period, the biofuels industry is likely to remain fragmented. As new technologies are commercialized, subsidies fall and relative positions on the cost curve become increasingly important, there will likely be a certain amount of consolidation among the smaller players. The relative costs and risks of commercializing new technologies – particularly BTL – and expanding into new geographies will increase entry barriers to biofuel production. Each sign indicates that the ‘big oil’ players, many of whom are placing bets today and partnering with existing technology players – will enter the market more significantly and gain access to key elements of the biofuel value chain. do. Integrating the value chain and accessing local and global arbitrage opportunities through ownership or partnership, from sector to retail, will become a key success factor.
Biofuels have tremendous potential to provide the world with efficient and sustainable energy, but much of the industry remains uncertain. Those entering today must bet carefully on geographies and technologies, and establish the right connections at key points along the entire value chain.
– Amrin Ahmed