Cellulosic ethanol is at best a long-term niche player in a post internal combustion world. In the long run, fuel cells and electric power will provide power for most transportation and small scale power applications. Ethanol pencils out, but it is likely other technologies will pencil better—especially where population concentration allows for economies of scale in production and network economies in delivery of clean electric power. Ethanol combustion still emits pollutants, although in lower amounts. Further, growing and harvesting feedstocks and producing ethanol is not energy neutral. (Look at the debate over subsidies if you have any doubts.)

Nonetheless, there still will be significant opportunities that remain where woody biomass, corn stalks, sugar cane bagasse and the like create waste feedstocks in rural and isolated areas where provision of grid-based power is expensive and delivery of hydrogen and other new fuels expensive. Further, in the mid-term, there are very attractive opportunities and a lot of money to be made as fuel cells and renewable energy remain costly and have technology development challenges of their own. One way to capture those opportunities for cellulosic ethanol is to speed the time to market.

Leveraging SBIR R&D
The SBIR program funds research and development (R&D) on innovative technologies across the spectrum of energy alternatives. There are two phases of SBIR funding. Phase I makes awards for around $100,000 to establish proof of feasibility for new technologies. Phase II makes awards up to $750,000 for additional R&D driving towards prototype. Only efforts succeeding in Phase I can apply for Phase II money. After that, the awardee would need to seek non-SBIR money to move the technology to market. In ethanol, that means licensing, joint ventures, product sales or other partnering with industry. Foresight Science & Technology has a unique perspective on the market for cellulosic ethanol. The company serves as the commercialization support contractor for the DOE SBIR Program, and in this role has assessed and helped commercialize scores of cellulosic ethanol projects.

Foresight sees three major areas of opportunity for accelerating the use of cellulosic ethanol in the short- and mid-term. In each of these areas, technology is emerging from Phase II that is ready to head to the market.

Emerging Technolgies
The first area of opportunity with emerging technology is enzymes. Our research indicates that new enzymes need to offer around a five-fold reduction in production cost so they can be sold at a fraction of the cost of current enzymes on a per kilogram basis. Emerging from SBIR are novel plant proteins that provide enzymatic hydrolysis to improve performance of cellulases in the conversion of recalcitrant cellulose to sugars.

Related to the research on enzymes themselves are ways to improve their efficiency, such as pretreating with ionic liquids. Current pretreatment methods work to some extent, but in general they are expensive and unproven at production scale. DOE funded work is creating new options here.

A second area is new production methods. A few examples include one approach that uses microbes where the cellulosic conversion process can be performed with high sugar yields at a wide range of pHs and a wide range of temperatures. In this arena DOE SBIR technologies have the immediate goal of making cellulosic ethanol at the same price as grain-based or sugar-based ethanol. Another approach uses a dual bioreactor for small-scale production suitable for cities and major landscaping contractors. A third area of technology R&D addresses filters and membranes.

The final area is feedstocks where SBIR-funded R&D takes several approaches. Work in genetic engineering of plants and trees has focused on making cell walls less of a problem and increasing cellulose production by the plant. Another project is working on crops containing the necessary enzymes within the cell walls that can be easily triggered for processing. Another project is focused on endophyte enhancement of biomass and productivity in grasses, and another is ensiling crops to reduce downstream processing costs. Again, these are just examples.

Interesting subsets of DOE SBIR projects are those that have spin-off use for other technologies, such as fuel cells. For example, one project is creating a specially designed, genetically engineered microorganism with the ability to utilize unprocessed biomass in order to produce ethanol and hydrogen gas for alternative fuels. If successful, these kinds of projects can create long-term solutions for farm- and logging camp-sized biogenerators creating ethanol used in vehicles and hydrogen for fuel cells.

Promoting Options
Such government-funded technology is great, but if it never gets used, there is little benefit to industry or the taxpayer. The solution lies in building partnerships during Phase I that can lead to Phase II collaborations. This way, the proposals small firms submit for Phase II research address issues of concern to industrial partners. The necessary R&D is done under federal funding, reducing the cost and risk for downstream industrial acquirers of technology. Industrial firms interested in SBIR technology can monitor DOE's Phase I awards, which are publically available.

For projects of interest, a downstream right to the technology can be secured by buying a real option. Options cost substantially less than actually buying or licensing the underlying asset. All that is being purchased is the right to buy or license. So unlike traditional discounted cash flow investments, real options can be used by corporations and investors to hedge their technology bets. Options provide industry and venture capitalists a low cost way of capturing the value of strategic positioning. At the same time, the cost is small enough to allow abandoning the option rather than striking or renewing if changing market situations or new technology suggest the technology asset underlying the option will not have commercial legs.

Options for SBIR (or other government-funded technology) give the buyer the right to license an emerging technology on completion of a milestone, such as successful proof of concept (a SBIR Phase I project) or development of working prototype (a SBIR Phase II project). It may also provide the right to buy an additional option to license after test and evaluation. In other words, by selling a linked series of options (called a compound rainbow option) a small firm or other R&D entity provides their investors or downstream partners a way to stage their involvement with a technology. The partner or investor obtains the strategic ability to strike when the iron becomes hot while deferring major investment until justified by the maturity of the technology and the conditions in the market.

Options are especially attractive when the seller agrees that all receipts will be used to mature the technology. The cost of the option in such a model can be viewed as all or part of the cost of the R&D necessary to move to the next milestone, minus the government or foundation subsidy. The actual price represents the value of having the flexibility to buy the technology at or before a specified date in the future. For the seller, the option provides needed cash flow to keep a project alive to the next technical milestone. For the buyer it provides a strategic hedge with limited financial exposure, while, at the same time, the R&D conducted during the option period matures the technology, thereby hopefully increasing the value of the underlying asset—the technology. To make the option sweeter, the seller can make it assignable so if the R&D succeeds, but the owner entity decides its strategic thrust leads in another direction, it can sell the option to a firm interested in obtaining rights to the underlying asset.
When the milestone is reached, the investor can exercise the option and license the technology, buy another option to the next milestone to preserve the strategic position, or walk away. Once this business model is grasped, it is clear that one can sell the same option to a pool of investors to spread the risk. In this case, each option holder receives the right to bid against the other option holders to license, or if none wish to license, to hold an exclusive option until the next technical milestone is reached.

For more information on the SBIR program and how to apply, visit www.er.doe.gov/sbir/. Ethanol producers or manufacturer of enzymes, equipment, or other production resources, or feedstock growers can contact Foresight Science & Technology for help with acquiring SBIR-funded technology. Foresight is a DOE support contractor; there is no charge for its services. EP

Phyl Speser is CEO of Foresight Science & Technology, www.ForesightSt.Com. Reach him at info@ForesightST.com or (401) 273-4844 ext. 10.