Post-Mortem: Range Fuels Sputters to the Auction Block

When last I wrote about Range Fuels at the beginning of 2011, the company had just closed its doors. The US Department of Energy (DOE) had suspended grant payments to the company after it failed to successfully demonstrate the final step in its process—catalytic conversion of the gasifier products to ethanol.  The company also failed to make the January 2011 payment on its government-backed loan.

At that time, the company said it was seeking private investments to replace those federal dollars and would reopen as soon financing was secured. Private investment never materialized, however. As a result, the Range Fuels plant will be put on the auction block on January 3, 2012 (see notice published in the Soperton News).

What happened between January and December?

A statement from Department of Agriculture indicated that it had been working with Range Fuels to find an alternative (more on this later) to prevent liquidation. On October 27, however, it reversed course and notified AgSouth Farm Credit (the originator of Range’s construction loan) of its intent to begin liquidation in order to protect taxpayer investments. In total, investments in Range include:

• $160 million in private investments
• $76 million grant by the Department of Energy in 2007 during the Bush Administration; $43.6 million of this was distributed prior to the plant’s closure
• $80 million construction loan from AgSouth, with a $64 million loan guarantee from the Department of Agriculture; the guarantee was announced in January 16, 2009 (during the Bush Administration) and completed in March 2010 (during the Obama Administration)
• $6.25 million in state grants

What were the alternatives that Range and its investors were working on in the months leading up to the USDA’s decision to pull the plug?

The most viable option appears to have been one that involved transferring Range’s loan guarantee and state grant (along with the attached obligations) to LanzaTech, a small New Zealand based developer of biofuels technologies with US offices in Illinois. To make this transfer possible, LanzaTech formed LanzaTech Freedom Pines LLC in September.

According to S. Heather Duncan of the Macon Telegraph, USDA documents indicate that LanzaTech Freedom Pines “proposed to use some of the initial Range process—gasifying wood chips—then use its own patented biofermentation process” to produce 2 million gallons of ethanol and butanediol (BDO) at the Soperton facility annually. On October 27, however, the USDA informed AgSouth of the liquidation plans, and the LanzoTech plans were scrapped.

Why did the USDA ultimately choose not to support the deal? 

Any combination of the following reasons may have prompted the move:

• The initial stage in the Range process—gasifying wood chips—is something that has been done for decades. In Biofuels Digest, Jim Lane’s The Range Fuels Failure suggests that “effective off-gases for the LanzaTech process can be had, elsewhere, in exchange for a low-cost equity interest.”
• Because the second half of the LanzaTech process shows promise, the government may have had doubts about destroying that promise. As Lane says: “transferring the Range Fuels obligation to LanzaTech would have been ‘more of the same,’ saddling a hot technology with significant obligations – including repaying the loan guarantee and following through on an overall commitment to invest $225 million in the Soperton project.”
• LanzaTech’s primary financing comes from the venture capital investor behind the now bankrupt Range Fuels, Vinod Khosla. In addition to Range Fuels, Khosla’s other biofuels investment—Cello Energy—went bankrupt in 2010. Khosla has a history of being more talk than walk, overpromising on the technology for each of the projects is involved in and under-delivering when it comes time to produce ethanol. (Range, for instance, promised a capacity of 100 million gallons per year of ethanol at one point; in the end, it delivered just 4 million gallons per year of methanol capacity. Only a fraction of that methanol—100,000 gallons—was ever produced.)

What effect will Range’s bankruptcy have on biofuels funding?

The bankruptcy of Range Fuels—the largest cellulosic ethanol announcement and the recipient of the first government loan guarantee for a cellulosic ethanol facility—is now being compared to the other bankrupt renewable energy project in the news these days, Solyndra. While the case here seems to be more one of failed technology rather than out-and-out fraud (as some are suggesting the Solyndra was), there is a chance that Range’s failure could negatively impact biofuels investments. As energy blogger Robert Rapier has written in his R-Squared Energy blog, “Taxpayers will foot the bill. They will become cynical about biofuels as a result of the many broken promises, and ultimately funding will dry up for everyone in the sector.”

In order to avoid this fate, developers must accurately characterize their projects and investors—private and government—must have a firmer grasp on the technology involved in producing cellulosic ethanol. While it does not yet exist, the technology to produce cellulosic ethanol remains possible. Investing in the research to discover these technologies is essential.

As Lane says, “Some projects will fail. Just as there is no “I” in “team,” there is no “risk-free” in “transformation. Playing hanky-panky or hokey-pokey with projects, trying to disguise the nature of risk to the American taxpayer, is bad politics, bad for renewable energy, and bad for all new technologies. Other projects are going to fail—it is the nature of innovation—but the goal has to remain the same.”