Search for the Magic Potion

If somebody argued ethanol is as sexy a business as building spacecraft or sequencing the human genome, you wouldn’t be faulted for suppressing a chuckle. After all, what is there to ethanol? Even the folks from the Neolithic era knew that this intoxicating ingredient in alcoholic beverages could induce a pretty good buzz. But if you indulge the irrepressible Pramod Chaudhary for a moment, he’ll argue passionately why you’ve got it all wrong. He will tell you how he and his company, Praj Industries, hope to make it the fuel of the future.

 

As things turn out, the founder of Praj is ostensibly in the middle of a mad race to change the world we live in. And he hopes to be the first to reach the finish line. At stake is a market estimated at 189 billion litres by 2020 according to a US government study. Chaudhary wants to take a good shot at being remembered by history textbooks as one of the men who weaned the world away from fossil fuels like petrol and diesel. Of course, it is another matter altogether that Praj wasn’t originally built to change the world.

In its earlier avatars, it indulged in more prosaic businesses like digging borewells and growing roses. A series of not-so-happy and happy incidents coupled with generous doses of serendipity pushed Chaudhary and Praj into ethanol.

 

Call it the audacity of an entrepreneur, but Chaudhary is confident he will have the right fuel technology within a few years to potentially replace dirty fuels. “I think we will be unique anywhere in the world. I use the word ‘world’ deliberately. Don’t get me wrong. I’m not boasting,” he says. Around the time Praj got into the business, researchers had figured the chemical holds enough potential to replace rapidly depleting oil reserves. Thanks to this promise, many governments across the world, India included, put incentives in place for anybody using ethanol or building technologies that facilitate its use.

Even as all this was happening, crude prices shot through the roof and the demand for fossil fuel substitutes hit manic proportions. So much so that the X-Prize Foundation — a not-for-profit institute that designs and manages public competitions for the benefit of humanity — announced its intention to put together a $100-million purse that will be disbursed among technocrats who figure out unique ways to break the world’s dependence on oil.

Earlier winners of the X-Prize include Mike Melville for building the first private spaceship and Craig Venter for sequencing the human genome. For the fuel-related honours, of course, Chaudhary is gearing up to be a contender.

 

Vinod Khosla, co-founder at Sun Microsystems and now among the most successful venture capitalists in Silicon Valley, was early to spot the potential of Praj and invested in the company. More recently in March 2008, Tata Sons invested Rs. 343 crore on Chaudhary’s vision. Kishore Chaukar, the Tata pointsman for new businesses, sits on the Praj board.

On the face of it, therefore, Praj seems to have done well for itself. Over the last six years, it built a presence on five continents and accounts for a 50 percent market share in the Indian sub-continent, South and Central America (except Brazil), a quarter of the market in Europe and a fifth in the US. To that extent, the trust investors have reposed in Praj stands vindicated. It would also seem Chaudhary is the kind of man who takes nothing for granted. He has a team of 60 scientists and Rs. 60 crore working on second generation biofuels from ethanol. It is tempting, therefore, to imagine a world Chaudhary and Praj Industries will change. That assumption, however, is a few miles away from truth.

A few years ago, some smart entrepreneurs, Chaudhary included, had figured out how to isolate ethanol from food crops like sugarcane, wheat, soya and palm oil. With a large addressable market, businesses were quick to latch on to the men who ran these businesses and exploited every edible commodity they could to extract ethanol out of it.

 

They were wrong. As demand from the biofuel ndustry accelerated, commodity prices shot through the roof, endangering availability of food to vast populations. Between January 2002 and February 2008, the World Bank Food Price Index went up 140 percent. “The increase was caused by a confluence of factors. But the most important was the large increase in biofuel production…” concluded a World Bank report. Add one more variable to this situation and what emerges is a Molotov cocktail — an explosive, ironically created by lighting petrol in a glass bottle.

 

Ecologists have also made it abundantly clear that reliance on food crops is putting unsustainable pressure on the fragile environment. Then there is the economics itself. Biofuels created using first generation technologies are still not viable enough to compete with fossil fuels. The amount of effort expended in extracting energy out of biofuels is disproportionate to the outcome. If biofuels have to make business sense over the longer run, it ought to make sense even when prices of crude oil are in the region of $50 to the barrel.

 

Caught in these incendiary issues, governments across the world were compelled to place restrictions on how ethanol is isolated. The Indian government, for instance, banned wheat exports while Malaysia clamped down on how palm oil ought to be used.

 

Innovators thought hard for a workaround. Some researchers and entrepreneurs saw the writing on the wall early and started shifting their focus to research on extracting ethanol out of non-food resources like algae, wood chips, redundant corn stalk, and everything else the industry calls biomass. For instance, there are universities in the US and Europe researching simpler and more efficient ways to make ethanol from waste like bagasse — the leftover pulp from sugar cane. The Michigan State University is giving switch grass — a kind of grass that grows abundantly in the wild — a shot. In the United States alone, 23 new companies are tinkering around with second generation technologies to extract ethanol.

 

Says Chris Somerville of the Energy Biosciences Institute, “While quite a few breakthrough claims have been made by companies, it is difficult to ratify them as they are closely guarded industry secrets and results are not available to the public.” If they succeed, everything that is wrong with the ethanol business will stand resolved.

But the Holy Grail remains elusive. The problem is a technical one. It essentially involves breaking down the lignin component in biomass like the wood chips researchers are experimenting with. An excellent source of energy, lignin is a complex chemical compound, integral to wood and the secondary wall in plants. But there seems to be no quick and efficient way to break lignin down. “Everything depends on the ability of companies to effectively and economically break down lignin,” says Sudarshan Ananth of Wipro Ecoenergy.

And this is precisely where Praj finds itself on the horns of a dilemma. To maintain its position as one of the leaders in the ethanol business, it needs the breakthrough by 2010. That will give the company just enough time to demonstrate its capabilities and get into business by 2012 — a deadline, which the American government has set ethanol producers doing business in the US to start making the transition to second generation biofuels. Not meeting the deadline will involve ceding ground to competitors from other parts of the world desperate for a slice of America — potentially, the largest and most lucrative biofuel market.

 

People who have evaulated Praj from close quarters don’t think much about its prospects. Praj hasn’t invented anything, says the representative of a leading corporate, which had once considered an investment in the company. The only reason, he says, Praj has gotten as far as it has in the ethanol business is because it had the good sense to tie up with Vogelbusch, an Austrian company that was a pioneer in this area. “At best, Praj is a project engineering company. But it is definitely not a research and development company,” he says. “I didn’t find that kind of depth,” he adds, even as he insists he remains unnamed.

Kishore Chaukar declined comment and Vinod Khosla did not return calls or emails on Praj. “In any case, Mr. Khosla is not going to be their business development head. I can see intent, but no game plan,” said an investor who had decided against betting on Praj. He too, did not wish to be named. To queer the pitch for Praj further, a few companies in other parts of the world have made significant progress. Verenium, a Massachusetts-based company, is leading the cellulosic biofuels race in North America. It already has a demo plant in place and will begin construction on commercial facilities next year. That is expected to go on-stream in 2011— just in time to meet the 2012 deadline the American government has set itself to start transitioning to second generation biofuels. Verenium has managed to keep production cost down at $2 to the gallon (one gallon equals 3.79 litres). This does not include profits, amortisation and cost of annuity.

“From an American perspective, this is competitive,” says Carlos Riva, president and CEO at Verenium. “To my mind this is a first generation production cost, which has not been fully optimised and is susceptible to subsequent learning curves,” explains Riva. Then there is Sekab in Europe. Until now, it has spent close to a decade researching biofuels. And way back in 2000, it set up an industrial scale pilot plant to demonstrate its technological competence around cellulosic. As things stand, it is in the middle of building a commercial plant that will go live in 2012.

To be fair, the company has had a few breakthroughs — the most recent and notable one being around sweet sorghum, a kind of grass, by squeezing the juice out of it and then fermenting into ethanol. This variant is now sold in 18 countries. Praj is providing this technology for a new ethanol plant being built by Tata Chemicals. “After examining a lot of feedstock options, we realised that with sweet sorghum we were speaking the same language,” says S. Sriram, head of the biofuels division at Tata Chemicals. But that still doesn’t solve the problem on hand.

 

When pressed, he goes defensive, “We have to face up to the propaganda against us,” Chaudhary says. Without saying it in as many words, he also acknowledges he is behind many others in the race. “The ultimate non-food energy crop is sometime away,” he says. He is quick to add, “We are aiming for a commercial demo plant based on lignocellulose by 2010 and we will stick to the deadline.” How he plans to do it though continues to be unclear. He adds mysteriously: “All I am saying is, commercially viable and affordable technology is sometime away.”

Until now Chaudhary has been a lucky man. But he ought to be given credit where it is due. It takes spunk to transition from an engineer working on a day job to an entrepreneur who dabbled in borewells, cut roses, food processing and now ethanol, and lives to tell the tale. This time though, it seems unlikely he’ll make it past the post — unless he finds Praj a partner like Vogelbusch in its earlier days. After all, Chaudhary, is known to be a lucky man.