It’s been awhile since I gathered my thoughts with an update on biodiesel, the business, and some personal things, so I’d like to take some time and put it down. Topics include my taking a job out of state, the price of biodiesel, the effect of unethical competition on good people, a potential get together in the spring, and more. Hope you’ll read through with me.
The Good: Lower prices!
The Bad: The usual ups and downs in the biodiesel world
The Ugly: Fuel theft, oil theft, dirty competitors
As some of you know, I recently took a job in Seattle. I’d like to explain my decision, what it means to DieselGreen, and to our customers. Anyone who has been a customer for long knows that it has been a struggle in many ways since the beginning. Whether it is TCEQ’s Morris Brown saying that biodiesel is bad for the environment (all links open in new window), or the World Bank falsely claiming (then quietly retracting years later) that biodiesel causes world famine, our attempt at making renewable fuel from local waste has been one of the most challenging endeavors of my life.
I could write a book (and still might) about the lessons learned. I’ll share a few here:
- Don’t start a business with people you don’t know.
- Having the right employees, partners, and vendors in places is just as important as having the right idea.
- Everything costs twice as much and takes twice as long as you think it will.
- The right tools for the job can save the day, and even a life.
First, I’ll talk about people. When we started as a cooperative, we had a mix of passionate people, hobbyists, and people just chatting about biodiesel. We wound up with three of us who were serious about trying to eventually do it full time, and we made a business out of it. We kept our day jobs, with no salaries, just working nights and weekends. After two years together, and a lot of time and money (mostly debt in my name), I demanded a larger role and one partner decided to leave. After six months with the one remaining partner, I had very strong feelings that it was time to part ways and forced the issue – legally taking over the loans we had, still no salary, and giving the other partner the veggie conversion side of the business. It was unfortunate that two people that had become friends were no longer going to be a part of my life. I wasn’t close with either of them before, but it is definitely a lesson learned in many ways. I could go into detail about the personality conflicts that led to me taking full ownership, but the last straw was when my former partner forged a legal document to a trailer we had bought and broke off the serial number, all to avoid having to deal with the original owner who had not properly registered it. This put our business in legal jeopardy, and I was not willing to do business that way. I basically fired him, paid him off, took over his debt, and gave him the conversion business to get him out of my life.
Regarding financing – when the three core members of the Austin Biodiesel Cooperative started DieselGreen Fuels in 2006, we used mostly my own good credit and name to get started. We spent almost $200k to buy equipment and other resources, and figure out what we were going to do. We must have built every system and process three or four times, and along the way, carried around two or three versions of each one. After all those years, I was recently able to cut loose all of our old baggage. At the end of 2010, we are lean and mean. We own little more than our collection vacuum truck and our delivery fuel truck.
The truth is, DieselGreen makes no money. I haven’t taken a salary since we started. My projections show that most of our “profit” will go to pay down our debt until 2013 or so. Everything else keeps the lights on and pays our two employees – Laurie King (my mother), who answers the phones, and Steve Baribeau, our driver – both of whom live in the Austin area. Our web host is Austin-based Source Spring, owned by the fabulous Mellie Price, and supported by the awesome Jesse Jack. Our software, Biodiesel Control Center, was written for us by Austin-based developer Chris Continanza. Our biodiesel is produced by Pacific Biodiesel Texas, a joint venture with Willie Nelson, among other investors. Sure, it’s partially owned by people living in Hawaii, but that’s ok with me. They happen to employ people living in Hillsboro, have been making ASTM-spec biodiesel commercially longer than anyone else in the United States (seriously!), and are a major part of the Sustainable Biodiesel Alliance. I’m on the board of the Biodiesel Coalition of Texas, and have been asked to stay on. Since I’m still active in the Texas biodiesel community, apparently I’m still considered an asset.
Also, this isn’t the first time I’ve taken a job outside Austin. Although I’ve considered Austin home for most of the past 15 years, I chased a couple of startups to Silicon Valley in the early 2000’s, each time returning to Austin to where most of my family lives. Now that I’m married, and both mine and my wife’s extended family is in the central Texas area, we’ll return at some point. Since we own a house in a great neighborhood where we have plans to raise our son (who is now 2 years old), that eventuality will probably be when he’s ready to start kindergarten at Maplewood Elementary.
I should also mention that I didn’t start DieselGreen to spend my nights, weekends and holidays working for free! I did it in the hopes that it would be a full time job that could provide a living wage for my employees, and eventually for me. Although it seemed like we were headed in that direction in 2008, the biodiesel industry faltered with the rest of the economy, and we’ve had to push back our hopes for that possibility several years. If things go as planned, I will leave my long-time technology career in the next five years, run DieselGreen full time, and be back in Austin, in the house that we had a 3.4KW grid-tie custom solar system with battery backup, built to support a biodiesel-powered generator in our basement! Until that happens, I will continue to have a full time job managing data storage networks, and count on my employees to handle the day to day work. Hope to see you all when we are in town, and looking forward to serving your biodiesel needs for the long term.
Now, I’d like to talk about the price of biodiesel. Since DieselGreen started, we’ve seen the price of fuel go from as low as $2.65 to as high as $4.95. The seemingly random fuel pricing has been a constant source of frustration for us and our customers, and has led to speculation that we are “price gouging” when the price of diesel is high. I could write at length about the various factors at play – the intersection of the agricultural commodity market and the energy commodity market (diesel fuel and vegetable oil), the tax subsidies, the get rich quick schemes implored by “splash and dash” tankers, and a lot more. The short answer is that it’s a lot more complicated than it should be.
The good news is that there IS something we can do and have done about this. Having some control over the supply chain from end to end – raw materials to manufacturing to distribution to retail – is the only way that you can truly control the cost of biodiesel to the consumer. Of course, if the price of diesel goes to $10 a gallon, and the retailer charges $2 for biodiesel, every diesel owner within 100 miles is going to drive there until it’s gone, leaving no fuel for regular customers. Since there isn’t an unlimited amount, we have to decide on a single policy – price it so that we sell every drop at the absolute highest price, or sell it at the lowest possible commodity value to compete with diesel and get the volume up. My belief is that the best thing we can do is be honest about our pricing and tell you where the price is coming from and where the money is going – and let you make your own decision from there.
That leads me to where the cost of biodiesel comes from. It is generally accepted that to produce a gallon of biodiesel from used cooking oil, a biodiesel producer expends about $1 on chemicals, labor, and other costs (including their profit margin). It is also generally accepted that it costs about $1 per gallon to collect used oil from restaurants. So you could safely assume it costs us about $2 per gallon to collect and process a gallon of oil into biodiesel. Since about 20% of the raw oil you collect is water or sludge (french fries, wontons, etc), and 10% is lost to by-products, that raises our cost to $2.60. Road tax is 25 cents, and transportation is about 10 cents. So now we are in the $3 per gallon range. Let’s just say biodiesel costs $3 per gallon to collect, make, transport, and sell (wholesale), fully loaded, irrespective of any government subsidies or incentives. Diesel at the pump is $3 per gallon right now, so how much should biodiesel cost? Well luckily, the $1 per gallon Federal Excise Tax credit was just reinstated. Then, add in a credit for “RINs”, which have been as high as 60 cents per gallon, and it’s getting better. Unfortunately, you can’t bank on that credit year after year, and the RIN system comes with some real baggage (not every producer offers them, nor is obligated to pass them on, and the regulatory overhead to report them is many thousands of dollars per year). So you have this crazy, up and down system that you sort of have to count on not being there to pay your bills with, and rely on the basics of your cost plus margin, minus your expenses to be in business. Any subsidies that come through might allow expansion or help you stay in business when times get tough.
Now, to all of this, tack on the fact that some oil collection companies are talking about paying the restaurants for their old dirty grease, on the idea that there is a commodity value for their product. We’ve seen this in the past, when the market was really high – desperate people started fledgling businesses going after our accounts by promising to pay up to a dollar a gallon, then went bust when the market dropped to a level where that was a ridiculously high amount (it was stupid to begin with). My goal is that once DieselGreen is a profitable company, and I have begun to earn a living at it, then I would be happy to offer a dividend back to our oil sources – so long as my biodiesel customers are still able to buy fuel at a reasonable price. We just dropped our price again, after hitting an important milestone with our producer – collecting enough oil to not only make into our own fuel, but to sell to pay for the chemicals and labor. So now our overhead is lower, and we’ve passed that savings straight to the end user. This was followed by the extension of the tax credit, which I expect to NOT be renewed beyond 2011. The conclusion to this pricing talk is that biodiesel in Austin has come down from our historic high into the mid $3 range, where we hope it will stay for the long term.
Another subject is WVO, aka SVO. For reasons I will discuss in detail below, we are unable to sell filtered, dewatered vegetable oil. We don’t have it, won’t have it, and can’t tell you where to buy it. I wish I had a better answer about this, and hope that eventually there is a better answer. A group of WVO users should really consider banding together and setting up a coop of sorts to filter and dewater in bulk. I would be happy to work some very favorable pricing out with you for raw oil. I just can’t do the processing. If this is something you’d like to explore, please contact me. If you are one of the customers we did a conversion for, thinking we would have oil for you for many years to come, I must humbly apologize. It is very unlikely that we will every have the kind of clean, dewatered vegetable oil that we used to have on our Tuesday nights and at Ecowise. One reason is because the City of Austin fire marshall said that even though vegetable oil is not flammable, the International Fire Code changed in 2009 to treat combustibles as flammables – and therefore we would have to have a mountain of fire safety tanks and equipment that would be impossible to afford with our volumes. This is something we could have never predicted in 2007. The second reason has to do with the legality of the rendering license, and more details are below.
Finally, I have something very ugly to talk about. I have avoided speaking publicly about this, but I feel I have no choice at this point.
First, the prelude. In 2006-2007, DieselGreen had what is known as a Texas Rendering License. We took used cooking oil and filtered it so that we could sell it as WVO for fuel, based on our IRS permit – which we were one of only a handful in the entire country to have. We were also in the business of buying and reselling biodiesel. Over time we started collecting so much oil that we had enough oil for the WVO customers, and started taking the extra oil to Pacific Biodiesel to be “tolled” into biodiesel. This lowered our cost substantially, which was a big step towards being competitive with diesel.
One fateful day in 2007, a certain partner of mine failed to show up to help me receive a biodiesel delivery, and we didn’t have a person to hold the 100 gallon per minute hose into our holding tank. Wouldn’t you know it, it popped off, leaving me with a very big mess to clean up. This left us with a bunch of oily rags, which were piled up by our well-meaning interns. The next day, they spontaneously combusted (actually just smoldered), and got us kicked out of the property we had worked so hard to get licensed in – and we lost our site-specific rendering license. We moved to another property, and in the 18 months in between, so many people had gotten into biodiesel, the state decided to raise the bar for compliance and we were told there was no way we could get the same license without a huge financial investment.
Because of losing this critical license, we subcontracted a one man operation out of Natalia, run by a guy who lives on the property of his rendering plant. He was charging us an outrageous amount per gallon to contract render, but was the only game in town – and even that was 140 miles south, so it was killing our bottom line. We were spending almost $4000 per month paying him to do little more than pump from our truck into a holding tank, remove the water and sediment, then pump into another truck for shipment to Pacific. He refused to negotiate a lower price when our volume increased, and the quality of the WVO we received went from good to bad – as reported by our customers, and reflected by our own experiences running the stuff in our vehicles. The FFA was high, water content was high, and there was nothing we could do about it. Having nowhere else to turn for rendered oil, I started considering options in the summer of 2009. We sold some raw oil directly to renderers, entertained the possibility of selling the company completely, and made another run at getting our rendering license again.
In December of 2009, I made a personal decision that the biodiesel business was more important to me than the oil collection. The renderer and I came to an agreement whereby he would purchase the oil collection side of the business, and I would continue to operate the biodiesel business. At an agreed upon monthly payment over a period of time, the buyer would collect all the oil from our 200 accounts, get to use the DieselGreen name, and get our vacuum truck and a set of tanks and other equipment. I provided hard copies of all our restaurant agreements, and access to our web-based software so that he could verify all of our historical collection data. After running the oil collection business for about four months, payments stopped coming in. Meanwhile, all the oil was still being taken away, and I was buying biodiesel from Pacific at market price, which had crept up and up over time. When asked, Pacific told me the price went up because my buyer had raised the price of the oil to them to a level above market. (This fact will become important later). After a couple of months of non-payment, and failed attempts to collect, I eventually repossessed the business and re-established control in July 2010.
In August 2010, my good friend Moya Hallstein, of Piedmont Biofuels, flew down and spent a week in the vac truck with me, collecting almost 10,000 gallons of oil and literally saving the business from ruin. During the months that my buyer was operating the business, Pacific had been hard at work getting their own rendering license, and we were able to take that oil directly to Pacific, cutting out the middleman and their high contract rendering charge, and saving 280 mile per load driving!
Things were great at first; then a series of events happened – best laid out in list format:
- The bank that we used to borrow money from years ago called to say that my co-borrower had just declared bankruptcy. No effect to the account, since I legally removed him from our books in 2008, but interesting.
- The next week, I see a press release announcing a new company promising to pay restaurants for oil and make biodiesel out of it in Austin. I find a similarly named company in San Antonio. Research finds no registration with state agencies (State Comptroller and Secretary of State), and not even a properly filed DBA with Travis County. Phone number is my former co-borrower. Internet research finds a connection to my former delinquent buyer.
- One of my customers calls to say that my former partner walked in and said “I am taking over for Jason in Austin.” They send me the contract via email. At the bottom is my former buyer’s business name. Now I have learned that my former partner and former buyer have found each other and are working together to go after all the customers that the buyer was collecting from while operating my collection business.
- My buyer had approached our biodiesel customer, offering their own biodiesel at a lower price – which was easy to do considering they were responsible for the high price of oil to Pacific, and therefore the high price of biodiesel we had been charging.
- I researched the former buyer to find that membership with National Biodiesel Board (a requirement to produce and sell fuel in the United States) from years earlier has long since expired. There has been no inspection for RFS2, therefore no RINs can be generated, and no legal fuel can be sold. I am advised that any fuel sold by that entity is not legal for sale for on road use. I also research with Texas State Comptroller to determine that they do not have a Motor Fuels Tax License and is not legally allowed to haul bulk motor fuel when they started doing it. They come into compliance after I complain, which has the side effect of tipping them off that I am onto them for their illegal operation. Oh well, small price to pay.
- The new grease hauling subsidiary takes over a longtime restaurant that my former partner helped me get, and our container disappears within days of their container appearing. Police report filed. Former partner tells police they didn’t take it. In 4 years, we’ve never had theft of a container, and we don’t own a pickup truck, so we didn’t take it. Where’s the tank? Did it grow legs and walk away?
- This new company takes over another longtime restaurant that my former partner dropped off our container at in 2008. Our container disappears within days of their container being placed. Police report filed, and investigating. Our sticker was covered up with grease, and our contact had left the company, so customer didn’t know who to call. Customer didn’t know whose tank it was, didn’t know who to call, and stumbled on former partner using google. Instead of telling customer “oh, that’s DieselGreen’s tank, here’s their number”, he takes all the oil (350 gallons), as witnessed by customer. We go to collect our container, and it’s gone. Second container missing in 4 years. Second police report. This one is in Lakeway, 28 miles from our shop, up a very steep hill. Nobody goes there to pick up a dirty greasy tank without really wanting to. We’ll see how that investigation goes.
- Same week, City of Austin watershed protection calls and says someone is going to our collection containers in middle of night, stealing oil, spilling it, then calling in to their number anonymously saying there is a spill. These containers are ones placed by my former partner, large containers that are out of visibility from the public’s eye, and the spills were not enough to matter, just drips. City tells me they never get calls like that, and that we seem to be being set up.
- The next week, someone steals 265 gallons of biodiesel from our fuel truck. Gate was locked with combination lock. Same combo on gate lock that we have had for years, never thought to change the combo. It was not broken, but our truck was broken into with the gate combo lock still locked. Only people that have that combo are me, my driver, and my former partner. Research finds that former partner just acquired 1 ton pickup – same size truck that holds 275 gallon plastic totes so commonly used to hold fuel in our industry. $1000 in fuel lost, $300 in truck repairs needed. Former partner also selling biodiesel now, too – and to my own customer, by offering them a lower price. I wonder where he is getting it?
It’s clear to me that these two individuals, with whom I have chosen to not do business with, have decided to team up and work against me, and they are trying to wage some kind of personal war against me. I have no problem with fair competition. If they have a superior product with a value proposition that people find compelling above DieselGreen’s, that is the American Way. DieselGreen has over four years of a proven track record, a partnership with the industry’s longest running biodiesel producer, and an owner who is a leader in the alternative fuel industry – even if I am residing in Seattle.
But let’s talk about what these “other guys” do with their oil. According to the National Renderer’s Association, most of it goes into animal feed. I don’t know about you, but I would rather cows destined for dinner eat grass and grains, not grease. And, an increasing amount of that grease is being shipped overseas, to China and India – even to make pet food! These rendering companies do sometimes sell to biodiesel companies – when they are the highest bidder. The difference between them and us is the contract we have with our customers – that 100% of our material goes to Pacific Biodiesel Texas for recycling into biodiesel. The only time in the past 4 years that this has not happened is when PB Texas was not operational. Even when there is more money selling dog food to China, we are making biodiesel in Texas.
And, if this other party of two does decide to make some biodiesel in the back field of the acreage behind the rendering plant using their unlicensed equipment, there is no telling what quality fuel will result. Excess methanol, unreacted oil, unwashed fuel, water in fuel, the list goes on. Small scale fuel CAN be made to high standards – it’s unfortunately often not. The reason for this is pretty simple – the high cost, on a per gallon basis, of testing. A full suite of ASTM testing costs in the neighborhood of $1,000. If you’re making 5,000 gallon batches, like Pacific, and coalescing 4 batches, your test cost is about a nickel a gallon – and you can test EVERY batch that leaves the plant. But if you’re making batches in the 2,000 gallon size, which is common at the small scale, the temptation to test only occasionally is very high. Early on, in 2007, we made the mistake of letting a load go through without adequate testing that was severely under-reacted, that was made by a small producer. We learned the hard way that quality is, as Nissan used to say, Job #1. Once PB Texas came online and we established a relationship, we have bought from them 100% of the time fuel has been available. Unlike the trillion dollar petroleum industry, every drop of biodiesel is not created equal. Know your producer and know your fuel. Regardless of where it comes from, as long as every load has a laboratory test result attached to it, you can be sure that you are getting what you paid for. The latest load of fuel we are selling was tested and the results can be found here.
In other news, I am planning a trip to Austin this spring, and would like to have a biodiesel get together of some kind. We had a GreaseUp a couple of years ago for the WVO’ers, and in years past, Austin Biofuels had the Biodiesel Bash. So I want to do something like that this year. Just want to mention it early, and that it would hopefully be in the March or April time frame. Be thinking about it – if you would like to volunteer, have a place in mind, or any ideas about it, please contact me to help out!
I also invite you to ask me any questions you may have. As you can see from my 4000 words here, I am more than willing to discuss biodiesel and these related issues. This has been a labor of love for over five years now. I won’t sit by and let others destroy it. That doesn’t mean that I own it – it just means that I have a stake in it, and feel strongly that I have invested the time to know what’s right. Consider these words a starting point, and call me directly at 512-992-8677 or email me at email@example.com.
As always, thank you for your support. I always appreciate the emails I get – we would be nothing without you. Please look us up on Facebook and join in the conversation there.
PS It’s getting cold in Austin right now! The lab report from Pacific says the cloud point of our latest batch is about 40F. Please top off with diesel – maybe 20-30% this tank – to ensure you don’t have problems starting the next few mornings. If you are driving, and feel a loss of power, consider pulling over and letting the car idle for 5-10 min. When sitting still, with no wind, the heat from the engine sits in the engine bay and melts the waxy crystals that form. That lets the warmed fuel recirculate through the system and can get you going again. Also consider having an extra fuel filter on hand, and a bottle of Diesel 911 or other diesel fuel additive. If you have to replace your filter, fill it up with the diesel additive when you replace it. That will help dissolve whatever may be in the lines, and is good to do occasionally anyway.
Thanks, and Happy New Year!
Owner, DieselGreen Fuels