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Biofuels

“We will harness the Sun and the winds and soil to fuel our cars and run our factories”

Barack Obama

One of Man’s most pressing challenges in the years to come is to reduce his dependence on fossil fuels such as petroleum, a c.1.6tn litre a year market. In Europe, for example, EU directives on the reduction of greenhouse gases (“GHG”) emissions, dictate that up to 10% of transport fuels need to be biofuels in the relatively near future. It is unsurprising therefore, that the future direction of the biotechnology sector has become, in part, entwined with that of the energy industry. The ability of living organisms to fix carbon from the atmosphere positions them at the centre of many carbon-neutral energy technologies and biofuels, derived from biomass are amongst the most advanced.

However, like the therapeutic-focused biotechnology industry which preceded it, the commercialisation of the science will undoubtedly demand novel new deal structures to match the sector specific challenges faced by these companies. Many of these challenges relate better to the oil and chemicals industries and are less familiar to life sciences investor. However, Elixir is developing novel new deal structures to accommodate these sector-specific challenges:

  • Development of technology can be achieved for relatively little investment, but scale up requires significant capital which quickly takes these companies beyond the venture capital markets.

  • Financial markets have previously supplied credit at reasonable cost. However, capital is now less readily available at a time when first generation and prospective next generation biofuel plants require large amounts of capital to support new technical innovations and remain competitive.

  • Certain (mainly first generation) technologies rely on heavy government subsidies raising issues about the competitive durability of some businesses in the future.

  • Region specific variables such as feedstock and exchange rates dictate that different technical solutions will prevail in different regional locations, possibly at different times. Therefore biofuels companies need to develop new risk management strategies to protect them from adverse cost/price volatility.

  • With oil prices trading at a fraction of their recent highs, prices of other liquid petroleum products have dropped. This lowers the competitiveness of all biofuel plants.

  • Varying technologies will result in widely disparate plant size and performance. It will become increasingly difficult to compare new proposals without standard performance benchmarks.

  • Compared to many of the life sciences sectors, biofuels companies have relatively short development cycles.

 

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