Critics of renewable fuels say they're far too expensive and boutique for use in defense applications. But industry executives say the alternative -- ethanol, or even the fossil fuels used today -- have significant disadvantages that aren't just a part of the teething process for a young sector.
To get more insight, I called up Honeywell UOP renewables chief Jim Rekoske, who told me from his office in Chicago why sustainability really makes business sense -- and what it will take for renewable biofuels to move past early adoption.
SP: First, tell us a little bit about your company.
JR: Honeywell is a large, $34 billion company. There are four business units: automation control, aerospace, transport and speciality materials.
I work for a company called UOP. We're about a $2 billion company focused on turning crude oil and other forms of fuel into gas. We're a household name in the refining industry. We don't own them or build them, but we invent technology and license it to others.
Our focus has been on renewable fuels for the last five or six years. We look for the unmet needs of our customers, and our customer is really the transportation industry: people who want to be moving goods and people from place to place.
SP: What are the unmet needs?
JR: The first: ethanol has its purposes, but it's cumbersome to use. Separate blending facilities are required, separate blending processes are required...it's inefficient. Our fuels go into jet planes and truck engines and work without modification.
SP: Green sounds nice, but it needs to ring financially true for it to make sense for businesses. Does it?
JR: We would not be in this market if we did not see that the long-term potential is positive in this space. At the end of the day, we know that's what it's going to take. Subsidies eventually run out. The ability to mandate eventually runs out. You can't keep forcing the environmental issue over economics.
SP: What's the state of the industry now?
JR: I've got small kids. Teaching them how to ride a bicycle, you've got to know how much to hold them up, and how much to let them go. If you let go too soon, you'll let them down. If you keep holding on, it's bad practices. We need to be ready to be weaned off these subsidies. The technologies are there. I'm not going to tell you we're cost-competitive. But it's there.
SP: How do you bridge that gap?
JR: That's a really good question. Let's look at the logistics of getting oil from a field to a user in New York City or L.A. or Chicago. There have been 100 years of developing that logistics chain. Getting the oil out of that ground has improved tremendously over the years. We're in the first or second decade, but nowhere near 100 years. As you scale and gain that experience, the costs come down dramatically.
Look at computers, look at anything technology related. I would say that we're at that point now where I think we'll see an inflection maybe in the next year or two.
SP: The iPhone surged into the mainstream through cachet. How do you get renewables there? Can you?
JR: You do that by looking at customer segmentation and see who has a higher willingness to pay than the average customer. You have to find where is that price point, and you have to meet it. That doesn't necessarily mean your fuel is going to displace all the petroleum fuel. All you have to do is find those people who are willing to pay to get your industry started.
I just came back from British Columbia. As far as sustainability is concerned, those people get it. They understand how to have a marketplace-dominated means to be sustainable. They're not doing it through subsidies. In British Columbia, there are certain mandates, carbon taxes. This year, government in B.C. is going to be carbon neutral. You've found a market. They're willing to pay. It's the California of Canada.
SP: Are there enough early adopters?
JR: There are enough to make that technology move up the experience curve. Do we need something in the United States? Subsidies versus mandates -- we've got both right now [in the U.S.]. As a guy who knows the refining industry, the refining industry isn't going to do anything as long as the EPA is willing to say, 'Here's what we think, but we reserve the right to change the mandate.' They're not going to wait for it. The change from diesel to gasoline -- people waited for the teeth to be there in the legislation.
SP: With electric vehicles on the way, is there more need for renewable fuel adoption to come from a mandate?
JR: When you mandate something, you're doing that for industry. We've got electrification, ethanol, biodiesel, renewable diesel -- why should any one of those solutions be given any preference over the other? Why not let the best technology win?
SP: Aren't five different types of gas pumps prohibitively inefficient?
JR: I personally think it is, in terms of infrastructure. Right now we've got $3 trillion to $7 trillion of installed infrastructure in the United States for getting petroleum-based fuels into your gas tank.
We make a solution that fits the infrastructure, and then we put a mandate in place. Mandates come with a private cost, not a public cost.
To me, it comes down to two things: does society want to mandate the use of a renewable fuel for whatever reason? For me, there are three reasons: the environment, energy security and this idea of urbanization, and how improving rural conditions by adding to the breadbasket of people in rural society can slow down the rate of urbanization by creating good living conditions in rural societies. That's really what these bio-based solutions do -- add more money into the rural-based economy. Less people move into the city and that creates less pressure on society.
It does provide that extra influx of income into rural societies. The second thing it does to that is keep people from moving to the cities. That's where you get traffic jams and put more strain on the infrastructure, which has a flywheel effect on our energy consumption.
SP: Where do you see future growth?
JR: In January, the Dept. of Energy made an announcement for a loan guarantee called Valero and Diamond Green using our technology for generating renewable resources. That's our first customer in the United States. The DOE loan is going to help that, but on the commercial side that's a big thing that's going to happen here. We continue to deliver fuel to the government, to a variety of different companies. People who own large bus, truck, jet fleets. Cruise ship lines. They're the people who are approaching us for fuel samples to get qualification.
Some are looking to test right now; they're the ones who came late to the game. The ones who came earlier are negotiating agreements with our customers. There are a lot of drivers for that: there's still a good public relations aspect to using renewable fuels. Another point is that it gives them diversity of supply: it was nearing $100 a barrel. That gets people edgy. Regardless of whether you can substitute a large portion of petroleum-based fuels with biofuels is irrelevant. It's having the potential to do so.
Another industry for a number of years has been using natural alternatives: the detergent industry, the Proctors & Gambles of the world. They use petroleum-derived products when it's cheap enough; they used natural-based products when it's cheap enough. And when oil prices went up, they were able to substitute seamlessly.
The exciting part for me is, I'm personally involved in a renewable energy industry that has a tremendous amount of promise. But it's in the early, chaotic days. The most important thing people have to remember: some things are hyped too much, and some things come out of the woodwork. It's going to take time to work out. The more signals we can give the industry that are business-based, the better it will be. We're in this for the long run. We have a lot at stake at creating a sustainable business structure around these concepts.