Reality of Biofuels and the new DC we are living in now

Two-part series, we look at the new DC in a $14 trillion debt environment: what’s up with loan guarantees, tax policy, the Renewable Fuel Standard, and the Defense Production Act.

In part I today, we look at the latest on loan guarantees and at the Klobuchar-Thune-Feinstein compromise on ethanol tax policy. Monday, we look at the future of the RFS and a fresh look at opportunities in the Defense Production Act.

Summer is just two weeks old, and already its been a tough season of budget and debt negotiations in Washington DC. But, amidst the stall-out on the budget, there is action and opportunity.

Yesterday, POET received a conditional commitment for a $105 million loan guarantee to support the development of Project LIBERTY, its 25 million gallon cellulosic ethanol project in Emmetsburg, Iowa.

At the same time, Senators Amy Klobuchar (D-MN), John Thune (R-SD), and Dianne Feinstein (D-CA) announced a compromise on legislation to end the current ethanol tax incentive, known as VEETC, and use the funds for debt reduction, infrastructure investment, and cellulosic ethanol investment.

So it was a good day in DC for biofuels, but its not quite time yet to roll out the bands and bunting for celebration. A conditional commitment is not a closed loan, and a compromise that it not yet inserted into legislation is not law. And there are some devils in the details of what are. largely, good chunks of news in what has been a down year for biofuels in the debt-ridden US capital.

The POET loan guarantee

Reasons for celebration: Project LIBERTY will use corncobs, leaves and husks – sources provided by local farmers – that do not compete with feed grains. The project uses enzymatic hydrolysis to convert waste into ethanol and will produce enough biogas to power both Project LIBERTY and POET’s adjacent grain-based ethanol plant.

POET plans to replicate their process at 27 of their other corn ethanol facilities, which would have a projected combined annual capacity of one billion gallons per year of cellulosic ethanol.

POET estimates the project will generate approximately 200 jobs during construction and 40 permanent jobs at the plant. POET estimates the project will also bring approximately $14 million in new revenue to area farmers.

Reasons for caution: The conditional commitment is that – more than a term sheet, less than a closed loan. To date, no biofuels project has closed a loan backed by a US loan guarantee, though several companies such as Coskata have been progressing towards that goal.

Coskata’s story is a cautionary tale. Originally, the company received a $250 million conditional commitment from the USDA, but the Office of Management & Budget has signed off only on a smaller, $125 million amount, according to Digest sources. The plant’s feasibility declines off at the smaller size that a $125 million loan guarantee would cover, and the cost of capital increases substantially should a $125 million portion not be covered by a loan guarantee.

Not to mention the prospect of a US government default on its debt – which has been floated by senior Republicans as a tactical move in US budget negotiations – may increase the cost of capital for loans backed by US guarantees, in any case.

The Klobuchar-Thune-Feinstein compromise

VEETC and tariff. Under the compromise, the 45-cent per gallon VEETC ethanol tax credit would be discontinued and $1.33 billion would be put directly to debt reduction. The tariff on imported ethanol would also end.

AFV-RPC. The compromise would also reform and extend what’s known as the Alternative Fuel Vehicle Refueling Property Credit through December 31, 2014. The current AFVR PC allows fuel retailers to take a 30% credit for the installation of alternative fuel infrastructure, up to $30,000, including E85 infrastructure. The compromise reduces the credit to a cap of 20%, or $20,000, but allows the entire cost of dual-use blender pump to qualify (rather than the incremental cost), and allows a broader range of ethanol blends between E15 and E85.

Cellulosic biofuels credit. Additionally, the compromise would extend the existing $1.01 per gallon tax credit for cellulosic biofuels through 2015, capped at $50 million, $100 million, and $155 million in 2013, 2014, and 2015.

Small Producer Tax Credit. The compromise also includes a 1-year extension of the Small Ethanol Producer Tax Credit through 2012, but reduces the value from 10 cents to 7 cents. It would also extend the depreciation allowance of 50% for cellulosic biofuel plant property through 2015.

Reaction

Brooke Coleman, Executive Director of the Advanced Ethanol Council commented: “This agreement has enough of the right ingredients to move the conversation forward. While we appreciate the ambition to lengthen the duration of the tax credits, the last minute switch from a yearly credit to a gallon-based, capped credit adds artificial and unnecessary layers of uncertainty and risk for the financing community.”

The concern? Primarily at this stage, the cap on the cellulosic biofuels credit, which does not precisely spell out how credits would be applied if US capacity were to exceed, say, 150 million gallons by 2015. Presumably the credit would be shared, and diluted – and that creates uncertainty in financing for the projects involved.

“This is new reality that we are living in,” commented Mike McAdams, president of the Advanced Biofuels Association. “There’s unhappiness about the cellulosic biofuels cap, because once you hit the cap, you are done. But in a $14 trillion debt environment, the buck stops at OMB, not with the guys working on policy. Look at the Recovery Act tax credits – the 48c, it was capped. (the Advanced Energy Manufacturing Tax Credit (48C). The Section 45 credit, was capped. Capacity was built, credits were issued, things happened.

“The paradigm has shifted since 2009,” said McAdams, “and the mood in Washington isn’t nice – all programs are going to be under pressure. The BCAP, the VEETC, the biodiesel tax credit, loan guarantees. The sooner we all get used to the new reality, the faster the industry will progress.”


In part II, on Monday we look at the future of the RFS and a fresh look at opportunities in the Defense Production Act.