What next? Biofuels Industry leaders contemplate future moves, after Obama shift in biofuels policy

In Washington, the Biotechnology Industry Organization followed up on a shift in US biofuels policy with a call for four new steps it said would increase the pace of biofuels commercialization.

BIO called for:

• Revising the risk assessment process for advanced biofuels projects in the current Department of Energy loan guarantee program;
• Double funding for U.S. Department of Agriculture programs to deploy cellulosic feedstocks; include eligibility for value-added biobased materials, products and chemicals;
• Funding the reverse auction for cellulosic biofuels already incorporated in law;
• Funding development and deployment programs for biobased products and renewable specialty chemicals.

“The Obama administration correctly recognizes that large-scale production of advanced biofuels can be a significant driver of green job creation, energy security and greenhouse gas reductions,” said BIO executive VP Brent Erickson. “We applaud the policy initiatives announced yesterday, which call for federal coordination of programs to help integrate the complete biofuel value chain. This is a good first step in helping to stimulate the private investment needed to build new biorefineries. However, more needs to be done to de-risk investment in new technologies so that they can scale up to meet national goals. Congress can take action to ensure that these programs are adequately funded and targeted so that the effort will stimulate additional private capital investment.”

BIO recently projected that development of advanced biorefineries could create as many as 29,000 jobs over the next few years. The report, U.S. Economic Impact of Advanced Biofuels Production, is available for download here.

Meanwhile, in Colorado, ZeaChem CEO Jim Imbler repeated his call for national governments to adopt a more sophisticated subsidy program, where subsidies would be linked to a floor price for oil, and the industry would be eligible for subsidies only if the price of oil dropped below a target price in the $70-$75 per barrel range, at which point many developing, advanced biofuels companies would become uncompetitive (Note: ZeaChem’s fuels is modeled on a break-even in the $50 per barrel range).

“The fact is that what the industry really needs is not protection from the market, but protection from oil price volatility,” Imbler said. He noted that the price of oil had swung between highs of $145 per barrel and lows of $35 per barrel in the past two years, and added, “those conditions make investors highly nervous, and a floor price subsidy has worked in other industries to provide protection against that kind of risk.”

He added that what the industry needed, primarily, was long-term price stability, or a floor price subsidy that would assist in generating stability if the market itself could not provide it. “If you can’t make money on $100 oil, then there’s something wrong with your business model, and there’s no need to provide a subsidy when oil is at that price.” Imbler agreed that, with inflation over time, the floor price subsidy would eventually become obsolete — for example, if a floor price had been set in the 1970s it might have been in the $15-$20 per barrel range, a price floor that would not be reached and trigger subsidy payments today.

“Just having the floor price,” noted Imbler, “you might not even have to make subsidy payments, and still you would be giving certainty to investors against downside market risk that the [biofuels] industry has no control over.” Imbler said that financing was a major challenge for the industry, given the economic conditions, and financing demonstration and commercial-scale plants required operators to de-risk the investment by securing long-term feedstock contracts with dedicated energy crops and proving their technologies at scale. But downstream end-user market price risk, which depended on oil price volatility, was of great concern to investors.

Asked if his team was celebrating after the news of a shift in Obama Administration biofuels policy, Imbler said “We’re not going to do any celebrating until we have completed our new plant construction later this year, and demonstrated our technology at scale.”

In California, biobutanol pioneer Cobalt Technologies’ CEO, Rick Wilson, welcomed the shift in biofuels policy, saying that “it validates the fuel route for butanol. He said that the policy shift would help make more believers in the investment community and called the announcements “a great day for biobutanol,” yet expressed surprise over thaw announcements because, although the USDA had expressed enthusiasm for biobutanol in meetings during 2009, the DOE had told Cobalt as late as November that they didn’t believe in biobutanol as a transport fuel. “It’s great to see, and reflects a growing belief that biobutanol is real, and here now.”

Wilson cautioned that the industry would need to develop more sophisticated hedging strategies for itself in the months and years to come.

Wilson said that, because there was not a futures market for certain advanced feedstocks and fuels that enabled the execution of sophisticated hedging strategies, the industry should tie its pricing to oil so that oil futures could be used as a proxy for hedging against downside risk. “If you peg a fuel contract to the price of oil, say RBOB plus 10 or RBOB minus 10 or whatever your commercial deal needs to be, then you have the tools to begin to develop a hedging strategy using some of the techniques used by major fuel traders such as BP.”

Commenting on the news that the US federal government would developing a program offering up to $40 billion in loan guarantees, Wilson said, “What we really need at this stage are grants. If someone builds a small project and it works, then the market can take it from there. What investors need is to be convinced that the technology risk has gone away.”