[Terrapreta] 200 tons per day Dynamotive plant in Missouri

[MMBTUPR at aol.com]

          from    Lewis L Smith

This is a comment on   SKB's comment on Dynamotive's current product-line 
policy.

Over several decades, I did the economics for the appraisals of at least 
eleven   [ that I can remember ] multi-input, multi-output bioenergy projects, 
which involved not only an appraisals of somebody's project but in most cases, 
optimization of the project parameters as well. Some of them were very large. 
For example, 180 mWe gross generating capacity and $283 million initial 
investment.

Out of that experience, I came to realize that regardless of the economic, 
political or social system, the form of business organization or who are the 
owners, the typical enterprise should try to maximize the difference between 
revenues and expenditures over its planning horizon or at least, the next five 
years.   My reasoning is as follows >

[1]     Like Alice in Wonderland, most people prefer "jam today" over "jam 
tomorrow".   So if you borrow some of my "jam" for your project, at a later 
date, when hopefully I get my "jam" back, you should give me some "extra jam" as 
well, just for my forbearance. 

[2]     So the cost of capital exists, at least as an opportunity cost, 
whether or not market prices and/or planning prices exist and whether or not they 
are fair or rational.

["Prices" here include returns to capital, where debt or equity. ]

Unfortunately they have seldom been both in any society at any time, 
Classical, market based or Marxist !   

For enterprise planning purposes, note that the cost of capital is an 
estimate of future outcomes, so it will vary from project to project, especially 
where new types of technologies and risk are concerned. The average cost of 
capital to the enterprise in the past may not be relevant !

[3]     Contrary to conventional [ Neoclassical ] economics, this difference 
does not belong exclusively to the suppliers of equity capital. It should not 
be considered purely return on equity investment, this profit. Instead it 
should be considered exactly what it is, a difference, and after allowing for the 
cost of capital, the balance should be divided equitably and rationally among 
all the stakeholders in the enterprise, with the future needs of the business 
considered as a stakeholder. For example, if an enterprise which depends 
heavily on merchandising has a good year and does not reward its best marketing 
people with hefty bonuses, it may not have such a good year, next year !

[4]     If the enterprise does not try to "beat" its economic budget, 
including the cost of capital, Murphy's law, human error and human limitations will 
get it, and it will fall short of this budget. In other words, being in 
business can be dangerous to ones financial health, unless you try harder !   

Note that in many "high tech" enterprises, Murphy's law is a reality. Life 
really is unfair !
The problem is that this Law cannot be quantified, even probabilistically. 
There are too many "hidden paths to failure" with small probabilities of 
occurring but large consequences if they do, as happened at Three Mile Island. So no 
one has the imagination, the money or the time to conceive of them, test for 
them and take preventive measures, at least not for most of them.

[5]     Those enterprises with multiple products in which some of the costs 
shared by several products are variable [ joint variable costs ] should not be 
optimized by the conventional rule for finding the most profitable combination 
of price and volume. Examples of such enterprises are bioenergy projects, 
olefins plants, oil   refineries and slaughterhouses. Also manufacturers of broad 
lines of parts, whether automotive, electrical or electronic.

With such enterprises, equating the price and incremental [ marginal ] cost   
in a competitive market of a single product is a sure road to bankruptcy, as 
any employee thereof with only a high-school education will be glad to tell 
you. In brief, do NOT sell gasoline at the incremental cost per barrel, 
hamburger at the incremental cost per pound   or bio-oil at the incremental cost per 
BTU !

[5]     Instead one must optimize the collective net contribution of all 
products [ after allowing for product-specific costs ] to incremental joint 
variable costs, again taken collectively, if there is more than one category of the 
latter.

So it sounds like Dynamotive is doing things right for its long-term 
survival, even though this may not favor terra preta at the present time. 

I have a paper on this. If you are interested, send me a snail-mail address.

Cordially.   ###





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