Dec 27 - Business Week

On Dec. 19, President George W. Bush signed into law the Energy Independence & Security Act of 2007, a bill that, among other things, raised fuel economy standards for the first time in 32 years and set a Renewable Fuel Standard that will mandate the use of renewable biofuels by energy producers. He defined it as "a significant step" towards energy independence. And indeed, it is progress if you compare it to this Administration's previous laissez-faire approach to fuel economy standards. But what of energy innovation?

The bill's support of renewable fuels -- specifically, a mandate that fuel producers use 36 billion gallons of renewables by 2022 -- should have sparked innovation in the energy sector. But instead of laying out a vision -- ending U.S. dependence on foreign oil and shifting to cleaner fuels -- and letting inventors and entrepreneurs develop the technologies that would realize that vision, Washington's policymakers threw their weight behind one specific alternative fuel: ethanol.

Ethanol, and especially the corn-based ethanol that is predominant in the U.S. today, has long been controversial, with critics pointing out that turning corn into fuel requires too much energy to be environmentally efficient. Other criticisms are that it drives up food prices, risks depleting aquifers, and intensifies farm-field runoff that causes dead zones in the sea.

Largely overlooked Setting aside these worrisome issues, many have argued that the biofuel requirements mandated by the new bill will be impossible to meet using ethanol, even the cellulosic variety derived from woody plant materials. Yet the bill largely overlooked other alternative energy sources, from solar and hydroelectric to the newer fuels being produced by companies like LS9, the San Carlos [Calif.] developer of "renewable petroleum." LS9, which was recently selected as one of the World Economic Forum's 39 Technology Pioneers for 2008, says its fuel will be commercially available by 2010.

After the energy bill was passed, senior writer Jessie Scanlon spoke with David Berry, a principal at Flagship Ventures, the VC firm behind LS9. Berry -- who at 29 holds an MD, a PhD, and was recently named Innovator of the Year by MIT's Technology Review magazine -- spoke about the good, the bad, and the missing elements of the new energy bill. An edited transcript of their conversation follows.

The White House described the Energy Independence & Security Act as landmark. The Union of Concerned Scientists called it a "significant, concrete, and long overdue step forward." How would you characterize the new energy bill?

The best part about it is that we've done something. It's great that the government is starting to mandate things. But it left a lot to be desired. It's great for certain industries that exist, but short-sighted in terms of emerging technologies.

By "certain industries" you mean ethanol?

Clearly the ethanol industry got preferential treatment. The bill also includes a $25 billion subsidy to help out our auto industry. Besides that $25 billion, I didn't see a single amount more than $25 million to encourage the development of the emerging technologies that will drive us to be a more environmentally friendly economy.

Such as?

There was minimal touching on the solar and solar-thermal areas. The whole geothermal areas were glossed over. Other sorts of technologies that aren't mature enough, like tidal, didn't even get the glossing that would help their development.

Your portfolio company LS9 makes "renewable petroleum." Can you explain?

It's a molecule that looks like, acts like, and frankly is chemically identical to a derivative of petroleum. But instead of being something that you have to dig up from the ground and put through a complex process of refining, it's the result of a bacterium we've genetically engineered so that it takes glucose, in any form, and turns it into petroleum.

What do I mean by glucose? The company can adapt any source of glucose. If cellulosic [materials such as switchgrass] are reliable, we can use them. In Brazil they make ethanol from sugar. We could use that. Our system is flexible. The value, at the end of the day, is that the feedstocks that are used to ultimately produce our petroleum create their biomass from CO2. Therefore, since the CO2 that would be released through the combustion of fuel ultimately comes from CO2 taken from the air, there is a smaller environmental impact than if you just dug something up from the ground and burned it. The petroleum molecule that you're making comes from a renewable source. And in terms of our dependence on foreign oil, we can make renewable petroleum in the U.S.

If it's chemically the same as petroleum, won't it have the same polluting side-effects?

If you burn a gallon of renewable petroleum and a gallon of ground-derived equivalent, the emissions would be roughly equivalent. Although because our manufactured petroleum doesn't have traces of sulfur and other compounds found in natural petroleum, it would be somewhat cleaner. But if you take the life-cycle approach and look at how much energy is used in the extraction and refining of oil, then our renewable petroleum has a much smaller environmental impact.

The LS9 vision is that its renewable petroleum could be used in our existing transportation infrastructure, sent through existing pipelines, burned in today's cars. Has that been proven?

Since the molecule is identical, there's no reason we shouldn't be able to do all those things. But we haven't done the tests yet. That's something we'll do as we get the process more efficient. So far we've validated that this can be done, but it needs to be more efficient. We see it as something that can be very competitive against oil prices, say, the equivalent of less than $50 a barrel.

How does it compare to ethanol in terms of environmental impact and fuel efficiency?

In terms of fuel efficiency, thermodynamically, if you take a gallon of ethanol and a gallon of gasoline, the gallon of ethanol has two-thirds less energy. So the molecules that we're producing, which are chemically identical to petroleum, have more energy than ethanol. In terms of a net CO2 benefit, that's hard to quantify, in part because we haven't picked an input yet. Remember, our petroleum can be made from any number of forms of glucose. You'd have a different net impact if you started with corn compared to cellulose.

So what does the bill mean for a company like LS9?

That's in part where I thought the bill was limited. When you read the biofuel portion, it requires any future fuel to be of a cellulosic source. While I understand the motivation of that, the costs on cellulosics have not come down the way that people had hoped they would. When technologies lag, it's not uncommon for other technologies to emerge and take the lead. But emerging technologies like ours didn't get much support in this bill.

So you think Washington shouldn't be in the business of mandating specific technologies.

What I'd like to see is an understanding of where we want to go -- an end to our dependence on foreign oil and the use of more environmentally friendly fuels. Ethanol is one way to get there. But there are other ways.

The Washington wordsmiths named this bill the "Energy Independence & Security Act." What would an Energy Innovation Act look like?

Well, hopefully it wouldn't be 800 pages long and include a page and a half specifying the circumstances under which the U.S. Coast Guard can use incandescent lights, as there is in this bill!

Look, I do like the fact that in this bill we started to move the needle in terms of fuel efficiency. But we need to start figuring out where we need to go as a country, and what are the technologies that can help us get there. From a federal standpoint, some of these cutting-edge technologies haven't been getting the treatment they should.