Khosla On Biofuels  

The SF Chronicle has an interview with Vinod Khosla, mostly talking about biofuels, with Vinod still defending his corn ethanol investments but mostly talking about next generation fuels. He makes some interesting points, so its worth a read (audio here).

Flush with money and determined to save the world, the green-tech industry stands in full flower of its giddy youth. Venture capitalists are pumping billions into startups trying to create new fuels or energy sources. Politicians are looking to the industry for ways to fight climate change without wrecking the world's economy.

It's a heady time. Yet great uncertainty remains about which of the new technologies will work. And biofuels, one of the industry's main obsessions, have come under fierce attack lately as a possible cause of food shortages. Enter Vinod Khosla, one of green tech's most prominent investors. He has funded entrepreneurs building solar power plants that will dwarf football fields and companies that will make ethanol from wood chips.

Q: Do you feel there's a natural selection process involved in that, too, when you have a possible over-investment in a number of companies in one field? Does that help seed a larger array of products, and then the best rise to the top?

A: That absolutely happens. Lots of experiments get seeded, and most fail. There were hundreds if not thousands of PC companies in the '80s. A few made it big. There were lots of Internet bubble companies, but Google, eBay and Yahoo all did well in the end, even after the crash. So the important thing I like to say is that most investments will fail, but more money will be made than was invested.

The experimentation is very important because without that funding, a Facebook would never have emerged. It would never have shown up on the product plans of a big company, because big companies don't innovate.

I like to take a classic example of a company like Amyris. Instead of doing biodiesel from soybeans, they're trying to go to other feed stocks. They're producing diesel by fermentation, in a completely different process, and the goal is to go to nonfood crops.

Here was a company with a grant from the Gates Foundation to work on malaria drugs. It used the same technology to produce fuels and diesel. No large company would ever allow that kind of a radical shift. But small innovative companies that turn on a dime? Heck, let's do it.

Q: We've seen a lot of stories in the past couple of weeks about food prices going through the roof around the world, to the point where we had riots in Haiti, and demonstrations in Bangladesh and in Egypt. The focus has been placed on biofuel as a possible culprit. Do you think that connection's overblown?

A: The connection is overblown. First, long term, we can't solve our fuel problem by making fuel from food. It doesn't work. Two, we don't need to because there are much better alternatives. Much better in that not only are they more desirable, they're much cheaper. Why would anyone use corn when you can make fuel from forest waste?

I have no question that in 10 years, there's no way oil will be able to compete with biofuels. Even in five years. Now it will take a long time to scale biofuels, but I'm the only one in the world forecasting oil dropping in price to $35 a barrel by 2030. I'll put it on the record: Oil will not be able to compete with cellulosic biofuels. If you do it from food, the food will get so expensive you can't make fuel out of it.

Food prices have been going up. Biofuels are a very minor contributor to that. But there are massive PR campaigns trying to ascribe most of the blame to biofuels. The fact is, by far the largest contributor to food-price inflation is oil prices. Biofuels are less than 15 percent of it.

Q: Oil for transportation?

A: Transportation and fertilizer. Fertilizer comes from the petrochemical industry. Oil would be 15 percent higher if there were no biofuels and food would cost more.

The second piece is this: There is a dramatic increase in the worldwide demand for food. In places like India and China, when you get 9 or 10 percent economic growth, among poor people the biggest increase in the allocation of the family budget goes to food. We (also) have seen in the last year or two dramatic droughts.

If corn ethanol was a large part of the worldwide food crisis, we would have seen corn exports from this country decline. Not so. In 2006, 2007, they have actually increased.

Q: You mentioned a PR campaign to blame corn for the food problems. Who's behind the campaign?

A: Well, lots of people. Clearly, the American Petroleum Institute has been very, very concerned about food prices, and you wonder why.

I'll mention another thing. For the last 10 years, poor countries like India and Brazil have been trying to get higher food prices. In fact, the subsidies to food in this country reduce the price of food to the point where their farmers can't stay in business.

I'm concerned about the people making less than a dollar a day, three-quarters of them live in rural areas, make their income off of subsistence farming or farm-related labor in villages. And they would benefit dramatically from higher food prices, because their incomes would go up.

Now, there's one-quarter of the population which lives in urban slums in developing countries whose food prices will go up without their income going up. That's why this issue is so complex.

Q: It sounds like you're critical of the food-based biofuels, while there are other kinds of biofuels that you're supporting and investing in. Could you give us a sense of the different directions that that research is going in?

A: Calling everything biofuels and asking "Are they good or bad?" is like asking me "Are drugs good or bad?" I have to ask you whether you're talking about cocaine or aspirin.

Certain food-based biofuels like biodiesel have always been a bad idea. Others like corn ethanol have served a useful purpose and essentially are obsoleting themselves. We have eight or nine companies producing alternatives to corn ethanol that will be dramatically cheaper. And I just don't see how corn ethanol producers stay in business. So why worry about it?

Let's focus our energy on the research and development and innovation that allows us to produce a $1-a-gallon fuel. There's no question about it, we can produce it for $1 a gallon and retail it at Wal-Mart for $1.99 a gallon and create a competitor for oil. Oil is a monopoly. It leads to an energy crisis, it leads to a terrorism crisis and it leads to an environmental crisis. So we have to replace it. ...

Q: When you talk about price and market penetration, you're really getting to one of the most basic questions I think everybody has about climate change and the energy problem. Namely, can we solve this without significantly changing our lifestyle, the way we live?

A: This is where the environmental community goes wrong. They say, "No matter what the cost, we've got to do this." Or, even worse, "Let's get people out of their SUVs. Or let's not have them drive."

Anything that requires people to change their habits has a low probability of success. It's been proven over and over again that people don't inconvenience themselves. You know, it's not like GM just wants to make big cars. People want to buy big cars, so GM makes them. And some people have genuine reasons. I've got four kids and two dogs, and wherever I go on a weekend, I need a car to take all of them.

So it's really important that we find solutions that have a high probability of effecting change and making a difference at scale. I don't think hybrids make a difference at scale. Hydrogen has very little chance of making a difference in the next 20 years. We should stop spending public money on it.

Having said that, the other assumption that we have to pay more for green or change our lifestyles is also wrong. And the answer lies in innovation.

The other big area is coal and natural gas for power generation. People have assumed coal is cheapest. Coal is no longer the cheapest. Coal was the cheapest when we ignored the environmental damage it caused.

For large-scale, utility grade power, you need a different technology called solar thermal. We're building a 175 megawatt power plant for PG&E in the Carrizo Plain in Central California. It will not be more expensive than a natural gas plant, which is their alternative.