Out from Solyndra’s Shadow

Federal loan guarantees may be scuttled after the Solyndra affair – but should the baby really be thrown out with the bathwater?

By Brent Erickson, Executive VP, BIO, Industrial Biotechnology & Environment Section

Federal loan guarantee programs for bioenergy may be headed for demise – death by 1.2 trillion cuts. The recent Solyndra scandal is tailor-made to be the final nail in their coffin. But the programs’ untimely end may coincide with the first commercial successes for advanced biofuel projects, as several large-scale projects have begun to actually put steel in the ground. While the Solyndra situation shows how isolated political considerations can make a mess of any program, successful projects backed by the loan guarantees demonstrate why policymakers should keep a stable funding policy in place.

It is important for Congress, the media and the public to remember there is measurable progress from advanced biofuel companies that received federal loan guarantees. Four projects supported by the programs are currently under construction, including Abengoa Bioenergy in Kansas, INEOS Bio New Planet Energy in Florida, POET Project Liberty in Iowa, and Sapphire Energy in New Mexico.

These four projects by themselves will generate $450 million in investment activity and create 1,500 jobs in construction, engineering and ongoing research in the next two years. These are high-quality jobs and economic opportunity that also contribute to our nation’s energy security. But the projects may never have secured the necessary commercial debt financing without federal assurances to back stop the loans. Federal support for loan guarantees is important, as is support for research and development.

Overall, since April 2009, the view that “government investment is necessary” to get renewable energy off the ground has declined, as more believe that “business will produce the technology we need without government investment.” It is often the incumbent fossil fuel industry trying to rally the media and public around the cry of “let the market decide.” What is at stake is the speed at which innovation is commercialized. The free market is an important source of impetus to be sure. But if we left advanced biofuels development to the free market alone it would occur much more slowly than is desirable from a national, economic and energy security point of view.

The loan guarantee programs only began to work for commercial biofuel projects in 2010. The USDA finalized the first Biorefinery Assistance Program loan guarantee in March that year. Meanwhile, the DOE program had requirements for long-term off-take agreements that biofuel projects could not meet. The first loan guarantee was only completed in September 2011.

These projects have, in most cases, been in planning stages for years. They have moved through pilot and demonstration stages to test the scale-up of the technology. Building commercial-scale facilities requires large amounts of capital. To raise it, the companies need access to debt financing. But commercial lenders, traditionally wary of new technology ventures, have become far more risk-averse since the recent recession. So, obtaining this type of financing for innovative technology is virtually impossible without federal loan guarantees.

Under the USDA’s program, the lenders request the loan guarantees for each project, which the bank and a third-party both thoroughly vet. Companies are required to invest a substantial amount of their own funds. Large commercial lenders have said in the past that once the first few projects demonstrate success, they will be more likely to help build new ones. But instability in worldwide financial markets could still be an obstacle.

There are additional projects that have completed the demonstration and pilot stages and are seeking to scale to commercial size. Lenders may still require federal loan guarantees to partner in the projects. That’s why it is imperative that these loan guarantee programs remain in place, particularly the USDA’s Biorefinery Assistance Program originated in Section 9003 of the 2008 Farm Bill.

The House and Senate Agriculture Committees are trying to work out a reauthorization of the Farm Bill and include it in the draft legislation of the Joint Committee on Deficit Reduction – the “Super Committee.” Continuation of the Energy Title programs should be a priority. They are vital to the continued success of the first few commercial-scale advanced biofuel projects and for opening the door to additional projects.

These initial projects are making real progress, meeting benchmarks and creating high-quality jobs. None of the projects is guaranteed success, not even by the federal government backing the loan. But their success can be undermined by a mid-course shift in policy. To achieve energy security, the U.S. needs to pursue a long-term, stable policy for developing new sources of energy and alternatives. We live in a complicated and volatile world and leaving our fate and our energy future solely to the free market is probably imprudent.