Author Archives: Daniel Choi

EPA Increases RFS Blending Mandates for 2013

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The U.S. Environmental Protection Agency (EPA) recently released the proposed Renewable Fuels Standards (RFS) for the 2013 calendar year. Not surprisingly, the blending targets for all four biofuel categories recognized by the EPA (cellulosic biofuel, biomass-based diesel, advanced biofuel, renewable fuel) have increased. However, the new targets for cellulosic biofuel (client registration required) especially have been a major source of controversy.

The EPA issued a $6.8 million penalty on blenders for failing to meet the 6.6 million gallon cellulosic biofuel mandate for the year 2011. This fine was met with considerable resistance by the oil and gas trade group, American Petroleum Institute (API), because the EIA estimated that there were no known commercial production of cellulosics in 2011, making it impossible for refiners to meet those requirements. The 2012 blending mandate for cellulosics was 8.65 million gallons, a number refiners didn’t meet given that the EPA estimated that the total cellulosic biofuel production in 2012 was just 21,000 gallons. In response to the lack of supply, the U.S. Court of Appeals ruled that the EPA cannot fine refiners for not meeting the blending mandates with biofuels that don’t physically exist.

Many cellulosic producers blame the unreliability of RFS mandates for its slow growth. However, in order to ultimately compete in the fuels market, cellulosic producers need to prove that its fuel can compete on a cost basis to first generation ethanol as well as fossil fuels. The U.S. government has already created a $30 billion market for biofuels through its blending mandates, an enormous opportunity that cellulosic producers have yet to penetrate thus far, because capital and operating costs are too high.

After the ruling, it is not surprising that API was unhappy with the subsequent proposed cellulosic biofuel blending mandate of 14 million gallons for 2013. Cellulosic biofuel production is beginning to ramp up, and if producers such as Kior and Abengoa progress on schedule, blenders should have the ability to meet the RFS. However, delays are expected, and it is likely that the supply will again not meet the regulated demand (client registration required). Cellulosic biofuels producers are on the clock for the next two years, and the outcome of these first production facilities will set the tone for possibly more permanent cellulosic blending regulations in the future.

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Hutchinson Water Acquires Kinrot Ventures

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Israel-based venture capital firm and technology incubator Kinrot Ventures (client registration required) recently announced it was acquired by the Hong Kong-based engineering firm Hutchinson Water. Kinrot provides seed capital between $500,000 and $1 million for water-related ventures, and also provides laboratories and operational/administrative assistance. Israel is well known as one of the primary innovation hubs for water technologies. Situated in a water-scarce region, the Israeli government invested resources into water technologies to secure its freshwater supply but also to stimulate economic growth. Israeli government as well as private entities provided capital for Kinrot. Hutchinson announced that it may invest up to $25 million into Kinrot within the next eight years.

Lux actively follows several of Kinrot’s portfolio companies, including Hydrospin (client registration required) and Diffusaire (client registration required). Despite Kinrot’s diverse water technology portfolio and the hands-on support given to each company, there have been none of the lucrative exits that investors of venture funds expect. When we last spoke with the Kinrot Ventures CEO Assaf Barne, in January 2011, Lux estimated that Kinrot had about $7.5 million in assets remaining. It’s possible that investors became impatient with the lack of return or that the fund was simply out of cash. Regardless, it is not surprising that a Chinese company acquired the technology incubator. Of the $5 billion of trade between Israel and China, about half is water- and agriculture-related (client registration required). For Kinrot’s portfolio companies, Hutchinson provides a gateway to the large and growing Chinese water markets. Expect to see one or more of these portfolio companies expedited to commercialization specifically in the Chinese market.

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Hydrocosm Investments Rebound: A Look at Global Value of Private Placements by Application

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Investments in water treatment and conservation technologies have been funded by $3.1 billion in private investments since 2007, and the innovation sector is a fraction of water activity overall. While outsiders see the water industry as monolithic, it is a highly fragmented industry. Each sector is unique, with different timelines for venture funding, growth equity, and exit windows.

In a recent report (Client registration required), Lux Research dissected the water sector by technology type and application to gain insight into how investors approach it. In terms of technologies, the report analyzes advanced oxidation, biological, chemical, thermal, mechanical, membranes, and monitoring and efficiency. But this week’s graphic looks at how private placements since 2007 were distributed across applications, specifically exploration and production (E&P), potable water, process water, infrastructure, and wastewater.

After raising only $37 million in 2008, annual investments into E&P have steadily grown to $62 million by 2011. This year is no exception, with E&P having already secured $34.2 million in the first four months of 2012. The emergence of start-ups in this sector is due to the recent shale gas disruption (see our report “Risk and Reward in the Frack Water Market.” Client registration required). The oversupply of natural gas in the U.S. insures only companies already well-positioned in the market will survive.

Infrastructure has attracted nearly $1 billion in investments since 2007, making it the most heavily invested of the group – even excluding pure play infrastructure providers, which are not reflected in the graphic. Private placements to upgrade infrastructure rapidly grew from $134.9 million in 2007 to $398 million in 2010. After stalling in 2011, investments bounced back in 2012, with $95 million in private investments recorded for the first four months of this year. Buyers have also been active in this space, with $1.3 billion worth of merger and acquisition (M&A) activity since 2007.

Companies that treat water to potable quality raise small but consistent levels of investments. Since 2007, potable water companies have raised $355 million in private investments and attracted $411 million in M&A activity. One particular point-of-use potable water treatment company, Quench, raised five rounds of funding since 2008, draining a total of $98 million from its investors. With this much capital infused, only an IPO will satisfy its investors.

Multinationals pay for high priced process water technologies. This sector contains the most highly valued M&A transactions. Among them are Ecolab’s $8.2 billion merger with Nalco, and Pentair’s acquisition of both Porous Media ($225 million) and Norit’s Clean Process Technologies division ($713 million). This sudden spike in large scale consolidation activity derives from cash accumulated during the economic downturn, so transactions of this scale will likely slow.

Wastewater treatment is a highly energy-intensive process. Consequently, innovations here are driven technologies that seek to recover energy or nutrients. Many companies specializing in nutrient recovery from wastewater are based in or have ongoing projects in northern Europe. Europe also leads the way in nitrogen and phosphorous removal from wastewater for eutrophication prevention. Companies in wastewater treatment typically require large funding rounds, and acquisitions have slowed.

Source: Lux Research report “Big Cleantech: Investing in Water Innovations.”

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