The Obama plan for cost-competitive, military biofuels: The 10-Minute Guide

Domestic, diversified military fuels or affordable fuels? “False choice!” says Obama.

Want to know all about the Administration’s ambitious, multi-agency program for cost-competitive military biofuels, but haven’t the time to plow through the mountain of documents?

The Digest’s 10-Minute Guide gives you the news you can use.

It’s finally here. The Obama Administration has laid out an integrated strategy for commercializing advanced biofuels, with a focus in this phase on military advanced biofuels at cost-competitive prices with conventional fuels.

The vehicle is a joint program between the DOE, USDA and the Department of Defense (principally, starring the US Navy, though, as we’ll see, critically including other elements).

In his Blueprint for a Secure Energy Future released in March 2011, President Obama set a goal of reducing oil imports by one-third by 2025 and laid out an all-of-the-above energy plan to achieve that goal by developing domestic oil and gas energy resources, increasing energy efficiency, and speeding development of biofuels and other alternatives.

It’s a huge step in the journey toward those goals – a multi-step, integrated program that we’ll investigate in today’s Digest, and provide to you in a convenient 10-Minute Guide with links to the full funding announcements.

The program

On June 27, the Air Force announced a funding opportunity announcement (FOA) for $30 million under its Defense Production Act authority. Because the desired fuels will be for military operational use, they must be approved and certified JP-5, JP-8, and/or F-76 equivalents by the time the commercial-scale biofuel production facility would become operational.

The funding

The Defense Department is committing $210 million between two phases.

The first phase is expected to include five awards at up to $6 million each. Only those applicants selected for Phase 1 can compete for the Phase 2 awards. Up to three Phase 2 awards are expected at approximately $70 million each ($180 million total). Only $100 million is allocated for Fiscal Year 2012, so total Phase 2 funding depends on future appropriations.

The Big However

No more than $70M funding may be available for Phase 2, as FY13 and future years are not yet appropriated. “The funding profile is an estimate only and will not be a contractual obligation for funding as all funding is subject to change due to Government discretion and availability,” the FOA states.

But as Navy Secretary Mabus notes, “we’re still early in the appropriations process.”

The phases

Phase 1 will involve the planning and preliminary design for a domestic Integrated Biofuels Production Enterprise (IBPE) that meets a target of at least 10 million gallons per year neat biofuel production capacity. Performance is expected within one year. Phase 2 involves the construction, commissioning, and performance testing of such a facility. Performance is expected to be completed within three years of the Phase 2 award.

Additionally, the total enterprise envisioned in this effort must include a capability to blend the neat biofuel product with petroleum-based equivalent fuels in order to meet approved certifications and specifications, which must include blends of up to a maximum 50/50 ratio.  Capabilities and/or facilities to store and transport the resulting product must also be an element of the project.

The location

From the FOA: “The proposed refinery must be located within the United States or Canada and use a domestically-produced acceptable feedstock.  To qualify as a domestic source under Title III of the Defense Production Act, the IBPE must be located within the United States or Canada (territories and protectorates are not considered domestic).  Supply chains that will import feedstock from outside the United States or Canada (including sugars used for microbial conversion processes) will not be considered.

The feedstocks

1. Renewable biomass. Materials, pre-commercial thinning, or invasive species from National Forest System land and public lands (with significant caveats – see the full FOA). Trees; algae and other microorganisms (grown non-heterotrophic for biomass or direct products); Crop residue (including cobs, stover, bagasse and other residues); vegetative waste, wood waste and wood residues; Animal waste and byproducts (including fats, oils, greases, and manure); and Food waste and yard waste.

2. MSW and sludge. The organic fraction therein can be used.

3. Other “transitional feedstocks”, e.g. Corn starch, cane, beet or sorghum sugars, or oils derived from soybean, canola, sunflower, corn, peanut or DDGS can be used, but must offer “a credible “transition plan” that demonstrates how subsequent commercial production facilities (built after the one built under the DPA Title III Program) could be economically designed and constructed utilizing “renewable biomass” materials.”

The Cost-share

Awardees selected for phases 1 and 2 will be required to share at least 50% of the cost.

The due dates

Responses are due to the DPA Title III executive agent by August 13, 2012. The Air Force expects to announce awards by March 1, 2013. This is for the “Phase I” portion of the DPA program, $30 million  to go to awardees for architectural and engineering expenses for integrated supply chains.

Phase II would apply the balance of the $240 million ($100 million of which has been appropriated to date) from the Navy and DOE toward physical construction, shakedown, and operation.

The DPA as a funding authority

The Defense Production Act is an authority that dates back to 1950 and has been used to boost industries such as steel, aluminum, titanium, semiconductors, beryllium, and radiation-hardened electronics.

Title III of the Defense Production Act (DPA) provides unique authorities, under which the Government may provide appropriate incentives to create, maintain, protect, expand, or restore the productive capacities of domestic sources for critical components, critical technology items, and industrial resources essential for the execution of the national security strategy of the United States, including energy.

Why is the Air Force managing this program?

As the Executive Agent for DoD’s DPA Title III Program, the Air Force is responsible for executing programs that ensure domestic production capability for technology items that are essential to national defense.

More on the FOA

The complete funding announcement is here.

Future funding

Agencies participating in this initiative will make additional funding requests to Congress to support the initiative, including President Obama’s FY 2013 budget request of $110 million.

Parallel USDA support

USDA’s additional $170 million in commodity credit corporation funds can also be used by Phase II awardees but will be administered directly through the USDA program. Neither CCC funds nor Defense Logistics Agency Offtake Agreements will be awarded as part of the DPA Title III Advanced Drop-In Biofuels Production Project.

Parallel DOE announcements

The Energy Department is also announcing $32 million in new investments in earlier stage biofuels research that complement the commercial-scale efforts announced today by the Navy and USDA.

The funding announced by DOE includes $20 million to support innovative pilot-scale and demonstration-scale biorefineries that could produce renewable biofuels that meet military specifications for jet fuel and shipboard diesel using a variety of non-food biomass feedstocks, waste-based materials and algae. These projects may support new plant construction, retrofits on existing U.S. biorefineries or operation at plants ready to begin production at the pilot- or pre-commercial scale.

The funding annoucnement is here.

In addition, the Energy Department also announced $12 million to support up to eight projects focused on researching ways to develop biobased transportation fuels and products using synthetic biological processing.

The funding announcement is here.

Comments and industry reaction

Heather Zichal, Deputy Assistant to the President for Energy and Climate Change

“Since the President unveiled the Administrations “all of the above” energy strategy, we have more oil, gas, biofuels, solar, wind and other sources than at any time in our history, with domestic oil production at its highest point in decades, and more natural gas than any time in our history, while doubling the production of renewable energy. More home grown biofuels will mean high-pay jobs for thousands of workers, plus cleaner safer, more affordable choices for consumers, while making the US the global leader in new energy.”

Navy Secretary Ray Mabus

“This is about creating competitively-priced, drop in fuels, that reduce dependence on imported oil,
enhance national security, and fosters the creation of a defense-critical industry.

“Since 1950, the DPA has been used to support industrialization of defense-critical industries, including steel, aluminum, titanium, and radiation-hardened electronics. Energy is specifically called out in DPA and, as the US Navy prepares for our maritime-centric strategy in the Pacific and the Gulf, based on innovative, low-cost, light footprint engagements, energy security has to be at the top of agenda.

“Every time the price of oil goes up $1 per barrel, it costs the Navy $30M per year, and the spikes this year have cost hundreds of millions of dollars; we don’t want to trade readiness for fuel. It’s a vulnerability we have got to address and diversity of supply is one of the keys to energy security.

Secretary of Agriculture Tom Vilsack

“It’s not only a matter of national security, it is good news for rural America. It opens up great promise for new cash crops for farmers based on non-food feedstock, and the refineries are likely to be located in rural areas.

The USDA will use CCC resources to make sure the fuels are cost competitive, and we are grateful with the Navy’s decision to move this forward. Today, consumers are spending between 20 cents and  to $1.30 less per gallon for fuels because of biofuels, and the industry now has created 400,000 jobs directly or indirectly.

“With the CCC (Commodity Credit Corporation) funds, we have authority at any time to use them, and we will use CCC resources to buy down the cost of the feedstock to the producers, which is an appropriate and authorized use of CCC funds.”

Secretary of Energy Steve Chu

“Advanced biofuels are an important part of President Obama’s all-of-the-above strategy to reduce America’s dependence on foreign oil and support American industries and American jobs. By pursuing new processes and technologies for producing next-generation biofuels, we are working to accelerate innovation in a critical and growing sector that will help to improve U.S. energy security and protect our air and water.”

Brent Erickson, executive vice president of BIO’s Industrial & Environmental Section

“The domestic advanced biofuel industry can play a huge part in promoting energy security, which is critical for military readiness and national security. Ensuring the reliability and affordability of fuel supplies through diversification to advanced drop-in alternative fuels is essential to sustain the U.S. military’s readiness, since oil price volatility has already negatively impacted military readiness. This year alone, the $30 increase in oil prices resulted in more than $3 billion in additional, unplanned costs to DoD.”

The bottom line

It has all the hallmarks of what President Obama believes that government-led programs should have.

1. A commitment to building a new industry that creates jobs and exports, through new fuels that are cost-competitive with conventional fuels.
2. Focused on bold steps to change the the US strategic position, in this case by addressing its liquid energy dependence;
3. Addressing Valley of Death issues that impede the creation of nationally significant industries;
4. Synchronizing project timelines to delivering on material national goals.
5. A commitment to innovative research, both in style and substance;
6. Using existing authorities where possible, yet in bold ways that change outcomes;
7. Establishing limits on federal exposure through phasing, cost-share and relying on the market to supply affordable project debt;
8. Using the government’s role as a customer where possible;
9. Portfolio-style investments by the Federal Government that reduce risk and thereby leverage private investment;
10. Finally, a coordinated, multi-department funding and oversight system that crosses traditional barriers between government units.

Also, it features an exceedingly clever use of CCC funds to assure feedstock costs that lead to a cost-competitive fuel for the military. That’s the assurance of an end, we hope, to the specter of $26 per gallon fuels. WE’ll all have to become closer students of CCC market operations, which are managed  by a CCC board and through the Farm Service Agency.

Ultimately, it creates what are generally termed “smart goals”: specific, measurable, attainable, realistic and time sensitive. And its an elegant instrument that deserves of more bi-partisan support than it is likely to receive in this fractious US political cycle.

Note: Any project developer even thinking about proposing a non cost-competitive advanced military biofuel shall report immediately to the Digest for disciplinary action.