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Originally published December 10, 2006 at 12:00 AM | Page modified February 14, 2007 at 12:00 PM

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Can biodiesel compete on price?

A Seattle startup hopes to be one of the industry's biggest players. Though its plant is now more expensive than planned, it aims to sell an affordable alternative fuel.

Seattle Times business reporter

Some people like biodiesel because it is renewable and pollutes less than regular diesel fuel. Others are intrigued by its potential to reduce America's dependence on foreign oil. That political and environmental allure has generated plenty of buzz this year.

What no one has demonstrated yet is whether biodiesel, as a business, can compete on the key factor for many consumers — price.

Imperium Renewables, a Seattle-based startup, has been obsessing over a business model it believes can beat regular diesel at the pump. The company says biodiesel can win at what it calls the "triple bottom line" of environmental, political and economic benefits.

The strategy relies on economies of scale. Imperium is building the nation's largest biodiesel refinery at the Port of Grays Harbor on the Washington coast, capable of supplying 100 million gallons a year — one-tenth of all the diesel burned in the state.

Once finished in June, the plant will depend on varied raw materials, technical know-how and efficient transportation to make biodiesel priced on par with diesel. Imperium says it can compete as long as crude oil stays above $43 a barrel.

But many uncertainties lie ahead.

Imperium Renewables

Located: Seattle and Grays Harbor

Founded: Late 2003

Status: Privately held

CEO: Martin Tobias

Founder and President: John Plaza

Employees: Currently 40, growing to 95 by June.

What it does: It is the Northwest's first commercial-scale producer of biodiesel, a cleaner-burning alternative to petroleum-based diesel fuel.

Capital raised to date: More than $50 million

Investors: Nth Power, Technology Partners, Vulcan Capital, Odyssey Biofuels IOA

— Source: Imperium Renewables

It announced the big refinery when oil was at $72 a barrel; now it's around $62. And the project's initial $40 million budget jumped to $55 million, then $65 million, after soft soil on the Grays Harbor site added to construction costs.

Imperium, which previously attracted $10 million in venture capital, is in the midst of raising up to $75 million more for its expansion. It had collected $43 million toward that goal by mid-November, according to a filing with state financial regulators.

Imperium founder and President John Plaza said he expects the company to turn profitable by 2008, with margins "as high as I can get them."

"You have to be competitive on a cost basis, not just for the environmental or social play," said Plaza. "Otherwise, this would never grow the way we want it to grow."

Competing on price would have sounded absurd three years ago, when the company started.

Diesel was selling for $1.60 a gallon and biodiesel was around $2.80. But during the past 18 months, as Imperium honed its methods while making biodiesel at a 5 million gallon-per-year plant in Seattle, the economic landscape shifted.

Hurricanes damaged Gulf Coast petroleum refineries, and tensions flared in the Middle East. In August, diesel in Seattle cost more than biodiesel, averaging about $3.42 a gallon versus $3.29.

It is no coincidence that around the same time, some of the world's largest fleet operators — Wal-Mart, FedEx and UPS — started sniffing around the Seattle startup to learn more about biodiesel.

Lately, the price advantage has flipped back to diesel, but it's slim — $3.03 a gallon versus about $3.29 for biodiesel in the Seattle area.

If Imperium can continue to squeeze costs, it could morph from a cottage-industry leader into a player in a U.S. market that burns 63 billion gallons of diesel a year.

Nationally, there are several companies trying to prove biodiesel isn't just for altruists anymore. One competitor, Bioselect Fuels of Galveston, Texas, has oil-industry veterans in management, and investment capital from Chevron. It says it is pursuing a strategy similar to Imperium's, using large-scale refineries, cheap ocean transportation and diverse sources of vegetable oil.

"This is far beyond a cottage industry at this point," said Jenny Ligums, Bioselect's vice president of business development. "It comes down to quality and price."

In 2005, Americans consumed about 75 million gallons of biodiesel, according to the National Biodiesel Board. This year, that figure is expected to roughly triple. New refineries are being announced almost on a weekly basis, bringing refinery capacity up to 1.4 billion gallons a year.

Eric Bowen, an energy expert with Sigma Capital in San Francisco, said that among the 100 biodiesel business plans he's reviewed there are three types of companies: agribusiness giants like Archer Daniels Midland with lots of cash and talent; old hippies working on small projects that will mostly fail; and a new breed of "pure-play" venture-backed companies focused on making large volumes of biodiesel.

Imperium, he said, is in the third camp. Bowen said he's not sure the company has "a secret sauce" for success, but Chief Executive Martin Tobias, who took Seattle-based Loudeye public in the dot-com heyday, has to be taken seriously.

"Whether these guys are riding a bubble of biodiesel or building a business for the long term is a fair and open question," Bowen said. "But Martin and his team certainly know what they are doing."

From seeds to fuel

The biodiesel business hinges, in part, on raw material, so-called "feedstock." It starts with seed crops that are harvested and crushed into vegetable oils — think soybean, canola, palm.

Refiners like Imperium run the vegetable oil through a refinery to make fuel that can run in any diesel engine. Imperium sells the fuel to distributors, who haul it to fleet pumps and retail stations.

The business model is logistically daunting because there are no abundant oil seed crops near the West Coast. Imperium buys bulk soy oil from Iowa for about $2.70 a gallon, including about 25 cents per gallon for transportation by rail car, Plaza said. Taken together, raw materials and transportation account for more than 80 percent of Imperium's costs.

Since raw oil is crucial, Plaza said, the company wants to be sure it does not depend on a single source. That's partly why Imperium chose Grays Harbor. With an ocean port, it can import Malaysian palm oil for $2.07 a gallon, about 60 cents a gallon cheaper than Midwestern soy oil.

Palm oil has its drawbacks. Biodiesel made from palm oil clumps in cold weather, meaning only customers with engine heaters can use it. Rainforests in developing countries are sometimes clear-cut to plant palm — which angers environmentally minded customers.

Plaza tries to downplay palm's shortcomings. The Grays Harbor refinery will use palm oil for only 30 percent of production, with the rest coming from the Midwest, he said.

Palm-derived biodiesel will not stall engines, he said, because Imperium's distributors will sell it only to customers with heaters. Plaza says Imperium's contract provides palm oil exclusively from sustainable farms, and it plans to perform audits to make sure that proviso is honored.

There's been talk of Eastern Washington farmers growing canola seeds as a local source of vegetable oil, but the idea has sputtered due to a lack of processing facilities.

Imperium also is competing on technical know-how. The company is building the refinery itself, rather than using an established firm for engineering and design. Such a company would guarantee all equipment will work but would charge 50 to 60 percent extra, Plaza said.

Instead, Imperium has hired engineers and consultants to design a proprietary refining technique. Plaza will say only that the plant will have fewer moving parts, and will be one-third the size of comparable refineries.

Though the cost has risen to $65 million, Plaza said the refinery will still be competitive, because it is a one-time expense.

Transportation links

Besides cheap land, supportive local officials and available labor, Plaza said Grays Harbor's edge lies in transportation.

The port will allow Imperium to barge some of its refined biodiesel to California at 3 cents a gallon, while rail would cost four times as much.

It is technically feasible to ship biodiesel through oil pipelines. But Plaza said the oil companies aren't interested in helping out a rival.

Government has certainly helped biodiesel compete. Imperium does not receive direct subsidies for making it, but distributors get a $1 a gallon discount on the fuel's federal excise tax, a savings that can be passed to consumers.

Last year, Washington became the second state to mandate that 2 percent of all diesel in the state be biodiesel by November 2008. That created a guaranteed demand for 20 million gallons a year. Local governments like King County Metro and the city of Seattle are also among Imperium's best customers. Plaza says he's gotten a lot of support from elected officials and travels once a month to Washington, D.C., to lobby for their help.

But he bristles at critics who say biodiesel can't live without subsidies. Like the ethanol lobby has said for years, Plaza notes oil companies get billions in tax breaks and subsidies for domestic drilling, plus national defense to protect oil shipping routes — costs that don't show up at the pump.

The risks

Of course, plenty could go wrong for the industry, or for Imperium. If refiners cut corners and make low-quality fuel that damages engines, biodiesel would get a bad name.

An explosion or accident could damage equipment. Droughts or a surge in demand could drive up the cost of the feedstock, or some of America's agribusiness giants could get a stranglehold on the supply and dominate the biodiesel market.

It's also possible that oil producers could boost output, lowering gas prices and causing Americans to lose interest in alternatives.

But there are positive signs. Big biodiesel customers say they are happy and want more.

Jim Boon, manager of vehicle maintenance for King County Metro, said the bus fleet burns about 1 million gallons of biodiesel a year, with plans to double by May.

Boon said there was a "teething" phase when Metro made the switch, because the fuel's cleansing effect dislodged engine gunk and clogged fuel filters, which can slow or stall engines. Once the filters are cleaned, the fuel performs as well as regular diesel, he said.

Metro started buying biodiesel after a May 2004 directive from King County Executive Ron Sims, who wants to reduce carbon emissions. But because of wild swings in diesel prices, Boon said, biodiesel is making more sense financially.

"If you graph it out, biodiesel's price is a pretty flat line," he said.

It's unlikely biodiesel will show up at most corner pumps anytime soon. Only 3 percent of passenger cars and trucks in the U.S. burn diesel. Most diesel customers operate commercial trucks and heavy machinery, and it can be difficult to make them switch from what they know.

Case in point: Next door to Imperium's South Seattle refinery, diesel-powered cement trucks from Glacier Northwest roll by day after day. Imperium has tried to sell them biodiesel.

So far, Glacier hasn't bought a drop. A manager said he will consider it when biodiesel beats regular diesel on price.

Luke Timmerman: 206-515-5644 or

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