Rain dancing on Wall Street, Main Street and Elm Street

As drought, recession, and capital starvation form a perfect storm, will advanced biofuels be thrown under the bus?

Industry leaders say that dropping biofuels production targets will not reverse impacts of the 2012 drought. Instead, it may extend a devastating drought in project capital markets.

It’s been a tough, tough year for farmers and ranchers, facing drought in the US, Argentina and elsewhere around the world. If it feels a little like the early 1930s of late – when a devastating economic crisis was quickly followed by a devastating global weather crisis and drought – that’s understandable.

But is the most severe drought in the skies, or in the capital markets? Biotechnology industry leaders are pointing to capital formation woes as a cause of a lot of the trouble.

Consider, however, say advanced biofuels industry leaders, the drought that still continues in project investment capital, that was born in the 2008-09 Great Recession. A flight from risk, they say, has slowed the development of alternatives to food-based fuels and the deployment of advanced biofuels capacity that would ease fuel prices.

As political leaders weigh the possibilities of attempting to ease the impact of a physical drought – and persistent concerns over food security in the EU – by waving or eliminating biofuel targets – key industry association heads are warning that the impact will be felt, instead, by the very growers and consumers that such waivers are intended to protect. Growers, by devastating the long-term confidence in a new and growing market for their crops and land-based products; consumers, by devastating long-term confidence needed to aggregate capital to build alternative fuels capacity that will use residues instead of food crops, and renewables instead of fossil fuels.

US, EU, biofuels mandates and targets crisis reaches a crescendo.

“Now is the time for a call to arms for the renewable energy industry to support and protect America’s Renewable Fuel Standard”, Jim Greenwood, BIO’s President & CEO told attendees of RETECH 2012 this morning during a keynote speech.

Three dozen advanced biorefineries in operation; US leadership in advanced biofuels at stake

“Today, there are more than three dozen pilot and demonstration biorefineries in operation, each testing and developing a different technological approach. The first commercial biorefineries are opening too, bringing years of research and development to fruition. They range from advanced and cellulosic biofuels, to algae production, to biobased products and renewable chemicals.

Protect 400,000 jobs at a time when good jobs are more important than ever

“So this is not the time to kick the legs out from under renewable fuels. And we should not turn our backs on the 400,000 Americans whose jobs are supported by the biofuels industry. As the advanced biofuel industry grows, good employment opportunities will be within reach for many more Americans. By 2022, the advanced biofuel sector could add 800,000 new jobs.

The risk of extending a drought in investment capital

“The RFS is one of the most successful energy policies ever, because it does what it was intended to do. The RFS has made the U.S. the world’s leader in renewable fuel innovation,” Greenwood told RETECH delegates.

Regarding the current requests that EPA waive the RFS for one year, Greenwood said, “The impact of an RFS waiver on advanced biofuels would be devastating. In fact, it could extend by several years the drought that has endured in investment capital for new advanced biofuels technology.”

“Almost two-thirds of future RFS volumes are allocated for advanced renewable fuels. To sustain our momentum and reach our goal, we need a stable, predictable policy. We must have federal leadership and policy stability to assure investors that if they make those investments, they can rely on an open market for advanced biofuels.”

In the EU, a devastating reduction in biofuels targets

Over in the EU, the European Commission has now proposed to reduce biofuel targets from 10 percent to 5 percent, introduce indirect land use change into calculations on acceptable feedstocks, phase out the use of certain arable crops altogether, and provide “multiple counting” benefits that they say will accelerate advanced biofuels adoption by providing huge incentives for their development.

“Given the EU’s existing 10% biofuels target for 2020 – which is not changing – the new policy means that the increase from 5% to 10% will have to come from non-food feedstocks,” noted Raymond James energy analyst Pavel Molchanov. “Put another way, what is currently a ~$22 billion annual biofuel market in the EU would have to double entirely via non-food feedstocks.”

Hostile reaction from EU producers

“The EU farmers and biofuels industries remains steadfastly opposed to the European Commission’s proposal to limit biofuels made from certain arable crops and to add indirect land use change to the renewable energy and fuel quality directives,” said the ePure ethanol industry association, in a statement released yesterday.

“A proposal based on unfounded and immature ILUC science and a 5% cap in 2020 would destroy the biofuels industries and related sectors such as crushing and sugar facilities. It would also cut off European farmers from a key market, reducing the crops diversification.”

Problems with “immature” ILUC science

“It is totally unacceptable to use a International Food Policy Research Institute report which has not been peer reviewed, as a basis to introduce iLUC values. The model used for the report is not suitable for precisely estimating the extent of land use change and the resulting greenhouse gas emissions, due to critical data errors and important methodical problems,” ePure said.

ePure also blasted a clause intended to review ILUC in 2017, saying that the clause only increased regulatory uncertainty and would discourage investments.

The review clause in 2017 leads to more regulatory uncertainty, discouraging investments in advanced biofuels plants.

The EU’s proposed 5 percent targets: who wins

“The new EU policy will not exclusively benefit energy crop companies such as Ceres,” said Raymond James’ Molchanov. “Waste biomass and algae can also serve as non-food feedstocks that would meet the new EU criteria – in fact, the Commission specifically identifies them as good options – but there is no question that the new policy would meaningfully support the adoption of energy crops.

“First, we would expect to see actual cultivation of energy crops in EU members with large agricultural sectors (such as France and Poland). Second, in countries where population density or other factors result in small agricultural sectors, imports of energy crops (from say, Brazil or North America) would be the realistic solution. Either way, this policy shift stands to create a very large addressable market for energy crops.

A corner of happy: European Algae Association welcomes new EU targets

“Algae based biofuels will count quadruple towards EU biofuels and GHG emission reduction targets under the new proposal for revising the EU biofuels policy and ILUC that the EC Commission is expected to publish later today,” said the European Algae Biomass Association in a statement.

“This is a unique opportunity of growth for the overall EU algae biomass sector, which can become a provider of revolutionary new generation protein, feed, nutriceuticals and innovative bio-materials for the future,” the Association added.

Next steps in the EU

This is a Commission proposal that will now undergo negotiations in the European Parliament and in the Council of the EU for the next 18 months, before final approval.

Free download

The complete text of the proposed EU directive can be downloaded here.