Range Fuels failure raises the question: How much risk should the government take with taxpayer dollars?

hduncan@macon.comDecember 18, 2011 

It’s not as if no one knew.

When the U.S. government doled out millions of dollars to a fledgling company to build America’s first cellulosic ethanol plant in Georgia, it was a gamble. Industry and government experts knew it.

No one had ever commercially produced cellulosic ethanol, a fuel additive made from the woody fibers of plants instead of from food crops such as corn.

Nevertheless, it was treated as a good bet.

The government was trying to encourage the green biofuels industry to increase America’s “energy security,” reducing reliance on Middle Eastern oil. American drivers were supposed to go from using zero to a billion gallons of cellulosic ethanol in five years.

Reports from the Environmental Protection Agency show that the government was counting on the fuel produced by the company, Colorado-based Range Fuels, to enable the U.S. to meet that congressional mandate by 2012.

With taxpayer help, Range was going to build a plant in Soperton, southeast of Dublin, that would turn wood chips into at least 20 million gallons of ethanol a year, more or less.

Turns out, it was a lot less.

Range apparently never produced ethanol. It produced a test batch of methanol -- wood alcohol, which is a lot cheaper and less useful -- before it shut down almost a year ago.

Earlier this month its lender, AgSouth Farm Credit of Statesboro, started advertising the foreclosure sale of the Soperton plant at the requirement of the U.S. Department of Agriculture, which had guaranteed $40 million of the $80 million loan.

By the time the project folded, federal taxpayers had invested about $84 million and gotten $2 million back. Of that total, $44 million was in the form of a U.S. Department of Energy grant (originally approved for $76 million). The rest was the Department of Agriculture loan guarantee, which was originally approved for $64 million.

Officials with Range Fuels and AgSouth, as well as the Agriculture department, did not return phone calls or respond to e-mails requesting further information for this story.

Locally, Georgia taxpayers had upped the ante with $6.25 million in improvements to the Soperton site. Treutlen County and Soperton had offered incentives, and the Treutlen County Development Authority had provided 138 acres of its industrial park for Range to use as collateral. (Technically, until the foreclosure, it was owned by the authority and leased to Range for $10 a year, exempting Range from paying taxes on it.)

Treutlen County, which had an unemployment rate around 13 percent, looked forward to more than 60 new jobs with good pay. Georgia and Treutlen County officials were awed by the federal backing the company had scored, assuming that the federal government had done its due diligence.

Arguably, it did.

It’s not as if its experts were bluffed. USDA and Department of Energy insiders warned that project was risky, and some of them advised against the investment. Prominent industry watchers and scientists saw the debacle coming.

The government invested anyway.

Green fuels were hot. President George W. Bush pitched cellulosic ethanol in his 2006 State of the Union address and sent his energy secretary to Range Fuels’ 2007 groundbreaking in Soperton.

And if green fuels had buzz, the man behind Range Fuels may have had even more. A co-founder of Sun Microsystems, venture capitalist Vinod Khosla was trying to apply the innovation of Silicon Valley -- and its lobbying clout -- to the green energy field.

Robert Rapier, who vets renewable energy technology and writes a prominent industry blog, said Kohsla had cheerleaders within the government who failed to maintain an unbiased view of the project.

“The hype way outran the realities,” said Sam Shelton, a founder of the Georgia Tech Strategic Energy Institute and its current director of research programs. “People just thought there was going to be billions in windfall money like with Facebook and Groupon.

“Energy is a totally different business. It takes about a billion dollars and 10 years to generate energy technology.”

“I think their management probably believed they could get there,” said Rapier, one of Range Fuel’s earliest critics. “I think they believed they were going to come in and show oil and chemical industry how this was done, and then they came up against the laws of chemistry. Taxpayers paid for that learning curve for them.”

The stakes

The high-profile failures of government-funded companies such as Range Fuels and California solar panel producer Solyndra ultimately sours the public on renewable fuels and energy, Shelton and Rapier said.

“For the liquid biofuels, nobody who has gotten these DOE grants are close to being commercially viable,” Rapier said.

“This totally, totally destroys the industry,” Shelton said, saying the same thing happened in the 1970s after the government invested in solar technology that was worth developing but “wasn’t ready for prime time.”

And what’s bad for biofuels is arguably bad for Georgia. The state is seeking to fill the void left by the shrinking forest products industry.

Georgia has a lot of pine trees. Georgia has chipping and pulp mills, which long provided the largest portion of the state’s manufacturing jobs.

So Georgia bet on biofuels.

The jackpot was supposed to pay off outside Soperton. For example, Range’s USDA loan guarantee application indicated that Price Biostock Services, which also operates a Macon plant for Graphic Packaging, would purchase and handle wood chips for Range.

In 2008, Gov. Sonny Perdue predicted that biofuels would be “the cornerstone of the new Georgia.” But one biofuel project after another has folded, with Range Fuels being the biggest.

“It’s a terrible effect for Georgia,” said Shelton, who has developed patents in energy technology and started two companies with venture capital. “Georgia shouldn’t be in the business of picking commercial technology winners. (Its leaders) don’t have the expertise.”

The search for the grail

Cellulosic ethanol traditionally meant breaking down the sugars in the stems of plants to make fuel.

It became the Holy Grail of biofuel for several reasons. Although corn is easy to convert to ethanol and the factories are cheap, corn itself is expensive and must be diverted from an already strained global food chain, Shelton said.

Cellulosic feedstocks such as wood chips and switch grass are far cheaper. But the sugars are much harder to separate, making a cellulosic ethanol plant about eight times more expensive, he said.

But as biofuels gained political traction, the definition of cellulosic ethanol seemed to expand. Range Fuels never proposed to break down the sugars from wood chips. Instead, it was going to burn the chips without much oxygen, which creates a gas that can be converted to methanol or mixed alcohols, Rapier said. Really, any fuel -- natural gas, even trash -- could be used to make the gas.

“They called it cellulosic because of marketing,” Rapier said.

Details about the company’s production methods were marked out of Department of Agriculture documents or withheld by the USDA to protect Range’s “trade secrets.”

But the main new aspect of their technology was apparently the catalyst they would use to convert the gas to ethanol, Rapier and Shelton said. That part still hadn’t been piloted before the plant was built.

“There is no process that can take gasification to ethanol,” Rapier said. Synthesis gas contains carbon monoxide, which has one carbon molecule. “To force it to a two-carbon alcohol without getting a lot of other things -- nobody’s figured out how to do that,” he said.

Shelton visited the Range Fuels lab in Colorado about five years ago and, he said, concluded within six hours that the process was not going to work.

“The lab prototype was running pretty rough,” he said. “We were not impressed with their technology.” A Tech colleague who is an expert on catalysts said the project would make more methanol than ethanol, Shelton said.

Range’s patents show that the company was going to make mixed alcohols all along, Rapier said. But ethanol was where the federal funding was.

Shelton and Greg George, director of the Center for Economic Analysis at Macon State College, questioned the idea of the government’s pushing a particular experimental technology, like cellulosic ethanol.

“I’m skeptical of people chasing after one thing they think is going to work,” George said. “The quest for the Holy Grail is just that. It’s a quest. The whole point of the Holy Grail is that we will never find it.”

Internal warnings

Outsiders weren’t the only skeptics of the Range Fuels project.

In January 2009, on the last day of the Bush administration, the Department of Agriculture announced that it would provide a loan guarantee to AgSouth Farm Credit for the Range Fuels project.

But the loan wasn’t closed for more than a year. In the intervening months, the National Renewable Energy Laboratory had three experts review the project’s technical feasibility and provide the results to the USDA. Although the news wasn’t all good, the loan went forward.

USDA documents provided in response to a Telegraph request should have included all three reviews, but the USDA provided just two and redacted the groups’s general conclusions and recommendations. However, one of the reviewers failed the project on the “technology” criteria.

The two individual reviews that the USDA released both determined that the project had merit and was worth pursuing -- but found it risky.

Reviewer Kevin Hicks predicted that construction costs would be higher than expected and that the scaled-up Soperton refinery “will probably not make ethanol on an economically viable basis. However, lessons learned may allow the next build-out to 100 million gallons to approach viability.”

He said more than half of the refinery design consisted of new technology.

“Building a new manufacturing facility with one of two new processes is a risk,” he wrote. “Building a new facility with 51 percent new processes presents enormous risk.”

Of the system to remove other chemicals and impurities from the ethanol, he said, “This appears to be a work in progress and may be a concern. The original system did not perform at the pilot plant and is being redesigned for Soperton. This is a critical system.”

He said the catalyst produces mostly methanol, which has to be recycled through the system many times to get ethanol.

No operating data

The Range Fuels loan application didn’t provide actual operating data for its test system in Colorado. The company said it would share the information at its development center in Denver in exchange for a nondisclosure agreement. Reviewer Richard Bain said he thought this was unnecessary, but Hicks suggested that at least one reviewer should check it out.

From the documents, it’s unclear whether anyone did.

The USDA’s Office of Energy Policy and New Uses had also reviewed the Range Fuels feasibility study in December 2008, just before the loan guarantee was approved.

“It seems to me that Range Fuels is not sure that increasing production capacity ... is going to work,” wrote senior agricultural economist Hosein Shapouri. “This project is using a new process that may not work for ethanol production. Capital cost per gallon of ethanol and methanol is $63 in phase 2 (scale-up). This data seems to make the proposed plant a high risk venture.”

At the time, ethanol was selling for $1.50 a gallon, and methanol for $1 a gallon.

He also noted discrepancies in what Range Fuels was promising to deliver.

In 2007, when Range Fuels announced its decision to locate in Georgia, its then-CEO Mitch Mandich said the refinery would make at least 10 million gallons of ethanol a year. In a 2007 news release with the Department of Energy, Range Fuels put the number at 40 million gallons of ethanol, plus 9 million gallons of methanol. In the feasibility report Shapouri reviewed, the plant was predicted to produce 12 million gallons of ethanol each a year. In its USDA application of December 2008, the company pegged the amount at 20 million gallons of ethanol a year.

“There is a big difference when one compares the DOE press release and feasibility study report,” Shapouri wrote. “The discrepancy noted here should raise a red flag to any additional federal funding of the project until the discrepancy is resolved.”

In an exhaustive analysis, Anthony Ashby, an energy branch loan analyst for the USDA, said he did not recommend funding the Range Fuels project. His supervisor, energy branch chief William Smith, wrote that he agreed with that opinion.

Ashby noted a series of weaknesses in his undated technical review.

Like Shapouri, he thought the company’s estimates of revenue per gallon were inflated. He also noted that the catalyst would have to be replaced every two years.

Much of the private investment would be raised at some point in the future, which was inconsistent with the usual procedure, Ashby wrote.

He stated that “prudent lending practices dictate all funding sources be available prior to issuance of the loan note guarantee” and “the lack of a majority of the equity creates a high level of risk for the government.”

Ashby noted that AgSouth had categorized Range as a “borrower of minimally acceptable quality” whose collateral was marginally secured, meaning that “a loss could very well occur because the collateral cannot withstand much adversity,” according to the lender.

On the other hand, other USDA offices favored the project. In a January 2009 letter, LeAnn Oliver, deputy administrator of the Georgia state office of USDA Cooperative Programs, said she “strongly recommends” the project.

“The opportunities for (Range) to be successful are strong given the present policy environment and a highly favorable outlook for cellulosic ethanol,” she wrote.

Cashing out

Although taxpayer dollars helped sweeten the pot, the Department of Agriculture did require Range to provide a significant amount of private investment. The amount, however, was blacked out from all USDA documents provided to The Telegraph after an Open Records Request.

Range Fuels quoted various amounts at different times, but the company’s December 2008 loan application indicated that Range would chip in “a future capital raise of $375 million,” for a total of $531 million (including the Department of Energy grant and USDA loan guarantee). A January 2010 update to the USDA on the project’s commitment guidelines says the borrower is contributing $318 million for a total project cost of $480 million.

Originally, the contract said that change orders had to be expressly approved by the USDA. Documents show that Range got the agency to agree that it didn’t have to approve any change orders of less than $1 million.

Despite these advantages, on Jan. 3, 2011, Range Fuels failed to make its scheduled payment on the USDA guaranteed loan. As a result, the payment was made from a Debt Service Reserve fund, triggering a default when the money wasn’t replenished, according to a timeline provided by the USDA.

From March on, AgSouth tried to find another company to take over the site, and a new company was even formed to do so. It also sought to take over the USDA loan guarantee. But it, like Range, was backed by Khosla. And it proposed to produce just 2 million gallons of ethanol.

Instead of allowing the transfer, the USDA decided to cash out at the end of October. When the company failed to perform and stopped production, the Department of Energy stopped its payouts instead of giving Range the full $76 million originally approved, and the USDA released only $40 million of the $64 million in the loan agreement.

Industry watchers say they believe the bad press from the failure of solar panel company Solyndra had an impact on how the USDA handled Range Fuels. Solyndra, which the Obama administration had touted, was allowed to reorganize when it foundered before losing taxpayers a whopping $535 million when it failed.

Know when to walk away

After Range defaulted on its loan, a USDA news release explained: “Developing biofuels from new sources is an inherently risky business. ... It can be difficult to know with certainty that a technology will succeed on a commercial scale without first constructing and operating a facility.”

Rapier argues that the question is not whether there is a risk of failure, but whether the government understands that risk.

“In this business, people lie to you all the time,” he said. “You have to try to corroborate the information. Can I get a sample of the product? Who do you sell to? Who do you buy feedstock from?”

And commercialization is not the government’s job, Shelton maintains.

“The government -- state or federal -- are terrible, terrible selectors of technology,” said Shelton, who has served on Department of Energy panels to evaluate applications and has seen the government invest against his recommendations. “There’s no rationale for the government to take technology that’s only been proved viable in a lab and say it’s ready.”

At the end of the game, nobody won.

Range Fuels lost. Its private investors -- including California’s state pension fund -- lost.

The Bush and Obama administrations both bet on Range and lost. Environmentalists and national security advocates, both seeking more green fuel options, lost.

And taxpayers lost.

But while bank loans remain difficult to acquire, companies continue to look to the government for alternative financing, George said.

“Ultimately, we need to get back to a point where risk is primarily a private venture rather than a public venture,” he said.

To contact writer S. Heather Duncan, call 744-4225.

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