Guest Post by Dave Juday, commodity market analyst and principal of The Juday Group
“Government mandates like RFS, subsidies, loan guarantees, and investments have not proven any better than the market for developing new energy resources – just much more costly. It is time to let the market sort things out.”
KiOR, once the darling of the renewable energy world, reported in a filing with the Securities and Exchange Commission (SEC), that it has a net deficit of $629.3 million and said it expects to continue incurring losses for the foreseeable future. The details of the filing are not shocking; in March of this year KiOR released a statement that it had “substantial doubts about our ability to continue as a going concern.”
KiOR’s problems have repercussions beyond just shareholders and employees. This isn’t just another high-tech start-up in the renewable fuels world. KiOR was considered the next great thing since sliced bread and in many ways was the cornerstone of advanced renewable fuels policy. Following is short re-cap of the KiOR story.
KiOR’s beginnings were as a company known as BIOeCON, a start-up to create electricity from biomass. BIOeCON received a grant from the Dutch Ministry of Economic Affairs. After some initial research, BIOeCON created a joint venture with Sun Micro System’s founder-turned-renewable-energy-investor Vinod Kholsa, who names it KiOR. The new venture located in Houston, Texas and applied BIOeCON’s technology to create transportation fuel from biomass. The Brazilian state-owned energy company Petrobras also got in on the act by entering into a joint development project to create fuel additives from the same process.
The KiOR venture also attracted financial backing from Alberta Investment Management, which manages money for the Canadian Province of Alberta. After some developmental work in Houston, KiOR received a $75 million interest free loan to locate its production facilities in Georgia. Based on its research, and now demonstrated international political connections, high profile investors put up substantially more capital.
The University of Tennessee’s Center for Renewable Carbon secured a grant from the US Department of Agriculture for $15 million based on its partnership with five renewable energy companies called the Integrated Biomass Supply Systems – of which KiOR was a member. More recently, KiOR was accepted as one of 195 companies to receive funds from the Advanced Biofuel Payment Program – a $60 million program funded in the energy title of the 2008 and 2014 farm bills. On 7 March, USDA announced that a check for $5,794 was in the mail to KiOR.
While the USDA payment was chicken-scratch in the world of federal subsidies, grants and loan guarantees, it shows how risky to the taxpayers such federal programs are. The award was announced less than two weeks before KiOR management announced its doubts about its own viability – and many months after KiOR had been publically known to be floundering. And in the meantime, KiOR had an application for a $1 billion loan guarantee from the Department of Energy.
The KiOR loan guarantee – thank goodness – had not yet been approved. Perhaps because of the sheer size of the request, or perhaps because of the political fall-out in Mississippi over the interest free state loan. In the Magnolia State, people are starting to refer to KiOR as the “Solyndra of the South” – a reference to the solar power company that did receive $536 in loan guarantees from the Department of Energy. One can only speculate on how much private capital KiOR attracted based on its success in getting smaller public grants and investments coupled with its $1 billion request of the Department of Energy, but those programs certainly played some role.
While KiOR did not receive direct loan guarantees from the Department of Energy, consider the tangled web that these federal programs wove in directing capital within the market. Khosla Ventures was a major investor in KiOR, in fact, holding enough shares of KiOR at the time of its IPO that it was considered a “controlled company” by NASDAQ standards; Khosla Ventures also backed Coskata which received a $250 million loan guaranteed from USDA for woody biomass development, and Khosla Ventures had also invested in Range Fuels which was awarded $76 million from the Bush Administration’s Department of Energy (and received $46.3 million) and an $80 million loan guarantee from the Obama USDA (and used about half of that). Despite the federal backing, Range Fuels went under, and ultimately was sold at a huge discount to LanzaTech, a New Zealand-based company that is also financially backed by Khosla Ventures and which has millions in government contracts and grants. Based on this vicious cycle, these programs appear to create nothing more than a vortex in which investment capital seemingly swirls endlessly at great cost to the taxpayer.
Finally, not to be forgotten is the impact KiOR’s tenuous financial situation has on renewable fuels policy related to the biofuel mandates, specifically the cellulosic mandates, under what is known as the Renewable Fuel Standard (RFS). Indeed, KiOR’s projections were a significant factor in the US Environmental Protection Agency’s (EPA’s) calculation of cellulosic fuel volumes for the RFS program.
The final 2013 cellulosic mandate was set by EPA at six million gallons; of that, EPA projected almost all to come from KiOR. It didn’t. EPA set the mandate on 6 August 2013. Two days later, however, on 8 August, KiOR released its financial statement for the second quarter of the fiscal year ended on 30 June revising down its production targets. For the 2014 mandates, EPA has proposed 17 million gallons of cellulosic ethanol – with up to nine million gallons to come from KiOR, which is now again looking highly unlikely.
Government mandates like RFS, subsidies, loan guarantees, and investments have not proven any better than the market for developing new energy resources – just much more costly. It is time to let the market sort things out.