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Enzymatic catalysis: the hidden advantages. Can enzymes be used like a financial derivative?
The production of biofuels at scale requires a process known as enzymatic catalysis. Different enzymes as feedstock create different results, and where there's a difference, there's arbitrage. This article explains how investors can separate feedstock enzyme suppliers from producers' output to hedge or go long on biofuel marketing.
Many in the biorefining industry are touting the advantages of enzymatic catalysis. The use of enzymes to stimulate catalytic reactions has several cost advantages to biofuel producers.
1) Enzymatic catalysis results in higher yield rates, in that, ultimately, more fuel is produced from the biomaterial source. On average, given the same input quantity, a producer using enzymatic catalysis in the biorefining process will return more more saleable biofuel. This quality will ultimately lead to efficiencies of scale for biorefiners using enzymatic catalysis.
2) The purchase of custom enzymes for catalysis is on average more expensive than sourcing a corrosive akaline catalyst like potassium oxide, or sodium hydroxide, and then using water to wash the fuel. The cost ratio of enzymatic catalysis costs to akaline/water based catalysis quoted to me by several biorefineries is from .16-.30 cents higher on average. However, given the higher yields, and the ability of enzymes to be reused for multiple production runs, enzymatic catalysis saves biorefiners in feedstock procurement costs, sometimes as high as 25% to 30%. This is a scalable variable operating cost reduction, which also gives companies the ability to reduce exposure to feedstock price volatility.
3) Enzymatic catalysis eliminates the need for fuel washing with water. Biorefineries use 125 to 250 gallons of water for every 5000 gallons of fuel produced.
I’ll hone in on point #3. Given the increasing global contention over water, (ironically one of the sources of contention is water used in hydraulic fracturing in the natural gas industry, like in this community), it is likely that we will see more of a commodity-type market rationing system emerge globally. The highest bidder will receive rights to contracted amounts of water. A December 2011 article in Forbes alluded to several market water rationing systems being considered, globally. With biorefiners facing tremendous challenges already in predicting feedstock prices at any given time, the outlook for industrial water suggests that, at the very least prices globally for water will rise, and for high-volume users, these price changes may be volatile based on local demand. If higher water prices become a reality, biorefiners locked into akaline/water based catalysis will have yet another volatile raw material price to forecast and manage, on top of feedstock costs.
Similar to fixed-income swaps, futures contracts, and options, enzymes, financially can serve a similar purpose.
Enzymes = a hedge against feedstock and water price and procurement volatility.
But like financial derivatives, enzymatic catalysis comes with substantial risks as well. Biorefining operations must procure new refining equipment, and develop new process flows. This results in a higher fixed-cost and cost structure, which may offset variable cost savings gains for low-volume producers.
Methanol and ethanol, used in the refining process have known qualities that inhibit enzyme-based catalytic reactions in some cases. More research is being done in this area, but some strategies to overcome this inhibition have fixed and operational cost implications, such as switching from a multi-phase alcohol addition strategy to a continuous-addition strategy.
Conclusions:
While enzymatic catalysis appears to have clear cost advantages, the employment of enzymes at a commercial scale for biofuel production is relatively untested. Publicly-traded companies like Novozymes, Codexis, and Amyris are innovators in this area and Novozymes has a healthy non-biofuel enzymatic business, with substantial momentum in the biofuel space. Amyris and Codexis have struggled financially, though major partnerships with Shell, Cosan, and Chevron provide a glimmer of long-term financial support.
Recently, Piedmont Biofuels, a North Carolina biodiesel firm began commercial-scale production using an enzymatic based plant. This plant is the first commercial scale enzymatic-based biodiesel plant to come online in the US.
The widespread adoption of enzymatic catalysis will depend in large part on continued demand for ethanol and biodiesel. If demand remains robust (largely hinged on the US RFS), then large-scale producers will seek a cost advantage in procurement, which should lead them to companies like Novozymes and Codexis.
Sources:
Enzymatic transesterification for biodiesel production: http://nopr.niscair.res.in/bitstream/123456789/3816/1/IBB%2040%286%29%20392-399.pdf
http://www.forbes.com/sites/greggfisher/2011/12/12/water-a-precious-commodity-2/2/
April 24, 2012