Turning garbage into gold

November 11, 2013: 9:22 AM ET

Canadian company Enerkem is harnessing trash into energy.

By Brian Dumaine, senior editor-at-large

131108101716-garbage-620xaFORTUNE -- It just might be time to redefine the word "trash."  That's because if a Canadian startup has its way, trash will no longer be worthless. Enerkem, a company backed by giants such as Waste Management and Valero Energy, has a patented process that converts wood, plants, plastics, textiles, and other materials—just about anything except metal, glass and stone—into fuel that we can use to power our cars. The process can also convert garbage into feedstock for industrial chemicals.

Enerkem takes unrecyclable waste from dumps and converts it into a syngas and then converts the gas through multiple chemical steps into methanol or ethanol. For the last decade, scientists and entrepreneurs have been trying to master the alchemy of turning waste into fuel. The rub has been the process can be very expensive, and often the fuel can't compete with conventional gasoline or with ethanol made from corn.  The other problem with some waste to energy technologies is that incineration can be polluting. Also, gasification can require lots of energy, making the process not worth the effort.

By contrast, Enerkem says its process—which occurs in a contained vessel—minimizes pollution and uses very low temperatures and thus energy to chemically convert the waste to syngas. Says Marie-Hélène Labrie a Vice President at Enerkem: "We think our economics quite are attractive, and at full capacity our fuel will be competitive with corn ethanol and gasoline."

MORE: All Energy Revolution coverage

One appeal of the company's business model is that the potential market is huge. Enerkem estimates that North America produces enough garbage each year to generate the equivalent of about 14 billion gallons of fuel a year—or about 10% of U.S. gasoline demand. On top of that, with dumping fees rising, municipalities are happy to pay to take trash away—negating the company's feedstock costs.

Another advantage is that Enerkem is locating its plants next to urban landfills, which gives it a huge economic advantage over other biofuel makers. "Transport costs can add 50% to 100% to production costs for other biofuel companies who have to truck  corn and other feed stocks to a plant in the countryside and then truck the finished fuel sometimes hundreds of miles back to a market," explains Mark Bunger, research director at Lux Research. "Enerkem has a tremendous advantage because it doesn't have to do that." In Enerkem's case, the city's garbage trucks are already hauling the trash right to where its facilities are. Plus Enerkem can sell the fuel right back to the city which can use it for their buses and trucks.

The Montreal firm, which has been running pilot and demo plants in Canada for a decade now, is scheduled to open its first commercial scale plant in Edmonton, Alberta, by the end of the year. After that it plans to build at least two others: one in Montreal and the other in Pontotoc, Mississippi, which is backed by $130 million in taxpayer funds from the U.S. Department of Agriculture and Department of Energy.

The plants will each produce only about 10 million gallons a year—a pittance compared to gasoline demand. But if the plants work, Enerkem will have proven that the technology is viable on a commercial scale—a major tripping point for startups in the fuel business.

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