Inspector-General says DOE behind on integrated Biorefinery goals; projects funded were not ready for prime-time

September 18, 2013 |

DOElogoThe Inspector-General says money was properly spent, but not always well-spent, as the DOE allocated $600 million to biofuels commercialization over 7 years yet fell short of RFS targets?

Long audit reports leave you with watering eyes? Try our 3-Minute Guide.

In Washington, the DOE’s Inspector General published a 24-page Follow-up Audit of the Department of Energy’s Financial Assistance for Integrated Biorefinery Projects”, which found that “despite over 7 years of effort and the expenditure of about $603 million, the Department had not yet achieved its biorefinery development and production goals.”

Our 3-Minute Guide

Here follows a 3-minute guide to the background, findings, and the DOE’s response.

The Energy Policy Act of 2005 (EPAct) directed the Department to carry out a program to demonstrate the commercial application of integrated biorefineries. Subsequently, the Energy Independence and Security Act of 2007 established additional goals involving advanced biofuel production.

In response, the Program issued three Funding Opportunity Announcements (FOAs) in 2006, 2007 and 2009, resulting in the selection of 29 projects.

DOE not on target for RFS targets

As of March 2013, the Department had obligated over $929 million, including $561 million from the American Recovery and Reinvestment Act of 2009, for the 29 projects, and had expended approximately $603 million (65 percent) of those funds. Each recipient was required to contribute an agreed upon cost-share that ranged from 50 to 60 percent of the total project cost.

The Department’s goal was to demonstrate operation of three integrated biorefineries by 2012, and validate annual production capacity of 100 million gallons of advanced biofuels by 2014. The annual production capacity was to be derived from 10 demonstration-scale and commercial-scale projects funded by the Program.

While the Program reported meeting its goal to demonstrate the successful operation of three integrated biorefineries by 2012, we noted that none of these refineries were at the commercial scale. Rather, these biorefineries were primarily much smaller pilot projects.

The Department had not successfully achieved commercial-scale operations even though the FOAs issued in 2006 and 2007 indicated that the proposed projects should be operational at the commercial scale within 3 to 4 years.

6 of the 15 (40 percent) demonstration-scale and commercial-scale projects selected from the FOAs were mutually terminated by the Department and the recipients after expending more than $75 million in Government funds, including one recipient that had spent $44 million before losing its primary investor. The nine remaining projects have experienced technical and/or financial problems.

Additionally, we found that the Department was not on target for achieving its 2014 production capacity goal of 100 million gallons of advanced biofuels. More than half of the projects specifically identified to contribute to the goal were terminated. As a result, in November 2012, the Program reduced its 2014 goal to 80 million gallons. Officials stated that one demonstration project achieved ethanol production in July 2013 and that two other projects expected to contribute to the goal were nearing completion and are slated to be operational by the end of 2014.

Not at required technical readiness level

The Program’s inability to achieve the EPAct mandate and the original 2014 production capacity goal occurred because selected projects were not at the level of technical readiness needed for commercial development, and, because of poor market and financial conditions.

“The Program awarded funding for commercial-scale projects even though the proposed technology had not been fully validated at pilot-scale or demonstration-scale facilities. The Merit Review Committee for the 2006 FOA noted that none of the projects fully met the selection criteria and that each of the proposed projects possessed high-risk elements. Program officials acknowledged the projects selected were not fully ready for commercial-scale operations and that the projects were high-risk.

“However, they indicated that the EPAct required them to move forward with commercial-scale projects and the experience gained from the projects would enable them to accelerate development and commercialization efforts by increasing their knowledge of feedstock systems, process operations, and providing a better understanding of scale-up issues for future facilities.

Validating technology?

“In our opinion, if the Department had validated the technology at the pilot and/or demonstration scales, it would have had greater assurance that the projects were ready to move to commercial scale. This would have strengthened the likelihood for success by reducing project scale-up risks. We noted that the Department had planned to award up to three commercial-scale projects in the 2006 FOA. However, the Department moved forward with negotiations with six applicants, ultimately awarding funding for four projects.”

“Program officials also attributed project shortfalls to deteriorating market and financial conditions beyond their control, which significantly reduced recipients’ revenue streams, negatively affected their ability to attract and maintain private sector investors, and prevented them from meeting their cost share requirements. Program officials remarked that the world-wide financial collapse beginning in 2008 was a significantly greater factor to Program performance than normal competitive forces.

Implementing peer review recommendations

“We also determined that the Program had not fully addressed recommendations to improve operations that had been made by a 2011 integrated biorefinery peer review conducted by a panel of external experts. In particular, the Program had not formalized lessons learned and best practices from ongoing and terminated projects or conducted a “Blue Ribbon” review of the pertinent aspects of a terminated project.”

No material issues with payments made

We did not identify any material issues with payments made to three recipients that we selected for detailed review. We reviewed the allowability of approximately $6.1 million in costs claimed by the three recipients. Our work identified $12,000 in costs claimed by one recipient that were incurred and paid outside the authorized grant period. We notified the Department and it subsequently recovered nearly all of these costs.

Positive steps taken by DOE

During the course of our audit, we identified positive steps that the Program had taken to reduce risk. For example, the Program implemented budget phases and released funding to recipients only after specific project milestones and performance metrics had been validated.

As a result, the Department had released only 56 percent of the obligated funds for commercial-scale and demonstration-scale projects as of March 2013, an improvement since our 2001 audit revealed that, despite a significant lack of progress, the Department had released all available funding to its financial assistance recipients.

Additionally, the Program’s action to obtain the assistance of independent engineers and its implementation of annual Comprehensive Project Reviews strengthened its project monitoring, review and oversight. We also found that subsequent to the 2006 FOA, the Department reduced its risk by issuing FOAs at demonstration and pilot scales instead of commercial scale. Finally, the Department modified the requirements in these subsequent FOAs to request more specific information to include credible, validated data and clearly defined success factors.

Further delays ahead

As a result of the challenges we noted, the Department is likely to be further delayed in the successful implementation of a commercial-scale integrated biorefinery, negatively affecting achievement of the Department’s Strategic Plan goal to promote energy security and the Energy Independence and Security Act of 2007 national goal of increasing the supply of advanced biofuels to 21 billion gallons by 2022.

The complete review is here.

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