6 Treacherous Biofuels Crevasses, 6 Guides to Steer You

October 10, 2012 |

6 major policy decisions and issues await the US elections.

What are the chasms to be crossed, how might it change the path of your technology, grant, company or crop

And, who can show you the way?

OK, maybe you feel pretty secure, and that’s a good thing.

Maybe your grant is locked in for three years. Or, you’ve completed your series B, and there’s money in the bank through next year. Or, your technology is hurtling towards a successful demonstration, and commercial success. Or, you’ve gone public and now are building capacity.

But then it occurs to you. “Just when I thought I was out… they pull me back in,” you think, in your best Michael Corleone impression.

Those momentum killers. Company wreckers. The investor flight-inducing crevasses along the route to the top – that take away a level playing field, remove your access to markets, delay a counted-on early-stage customer, or frighten the bejeezus out of your expected strategic partner.

What are they? 6 policy crevasses. Fall into one, could affect your fortunes materially. Fall into all 6 – who could bear such a load?

Issue #1: RFS2 waivers and restructuring.

Why a Crevasse and not a no-brainer: The Renewable Fuel Standard (also, RFS or, more simply, “Rufus”) has a group of determined enemies. Libertarians who resent anything shaped like a government mandate. Cattle, poultry and dairy interests who blame RFS2 for rising feed prices (or would simply like to see them fall). Food manufacturers who see a convenient scapegoat when raising consumer prices. Some environmental interests who worry about monoculture agriculture, or NGOs concerned about grain prices for developing countries. Oil refiners who see biofuels mandates cutting into their business. Boat and small-machine owners who dislike ethanol.

These groups have banded together on, currently, a two-pronged strategy. 1. Use the 2012 US drought as a catalyst for waiving some or all of the 2013 biofuels blending requirements. 2. Repealing or watering down the RFS in the 2013-14 legislative session.

What’s the strategy for the crossing? Unity, data and delay. The biofuels trade associations, as part of a larger coalition including defense, aviation and farm interests, have banded together in super groups like Fuels America to promote the “three e’s” of energy independence, economic development and emission reductions. Their message? Broadly put, “don’t mess with the RFS” – it’s working – and they are tapping data from farm economists at places like Purdue and FAPRI to prove their case. Overall, they hope to delay consideration of RFS changes until a time when its benefits can be better seen and drought is an increasingly distant memory.

Issue #2: Tax credits.

Why a Crevasse and not a no-brainer: Federal tax credits can trip up legislators pledged to a “no new taxes” policy, and can get expensive if popular (as the investment tax credit for wind proved to be, or the “son of black liquor” tax credits tapped by pulp & paper interests when they qualified their boiler fuels as “renewables”.)

Plus, besides the opposition to biofuels tax credits in principle, from some – others disagree on whether the industry needs production tax credits or investment tax credits. And, the extent to which they can be monetized early by transferring them from early-stage companies that generally pay not much tax anyways, to companies that have tax obligations.

Plus, the industry struggles with PAYGO rules that require tax credits to be offset, at birth, with spending cuts – making long-term credit programs (that bring investor certainty) very, very tough to pay for.

What’s the strategy for the crossing? Generally, the industry is gathering around investment tax credits – that reward capacity building.

The biodiesel production tax credit is also on the docket for extension – and industry is hoping that Congress can bundle this into a tax extenders package that could be passed, post-election, in a lame-duck session.

The cellulosic tax credit and biodiesel tax credit are high on that list.

And, a hot one that has gained currency – accelerated depreciation. It exists in the world of fossil fuels – so, goes under the rubric of “tax credit parity”. Biofuels developers seek access to the same depreciation advantages as developers of fossil fuels capacity enjoy.

Issue #3: E15, ATJ and new fuels certification.

Why a Crevasse and not a no-brainer: Though it is the most-tested new fuel spec in history, 15 percent ethanol blends (E15) have faced a storm of opposition. Primarily from the same opponents of the RFS who see in E15 a way for more ethanol to be blended -, which of course, E15 would facilitate in extending the “blend wall” past the 13 billion gallons or so of ethanol that can be blended in the US when the limit is E10.

But, there’s more than just E15 on the docket. There’s a 100 percent drop-in aviation fuel spec, and an alcohol to jet fuel certification program. There is work underway to expand biodiesel blends. Also, one day, to qualify new fuel molecules such as Incitor’s Alestron.

What’s the strategy for the crossing? Focus and data. Generally, the industry has focused on E15 – there, primarily groups like Growth Energy and RFA – while most of the rest of the attention has been focused on aviation fuels certification. On the data side, there’s been a substantial effort underway to get auto=motive companies to embrace higher ethanol and biodiesel blends. Recent news that Ford and GM have embraced E15 for newer models show progress in that effort.

Issue #4: Tax Code and Farm Bill Parity.

Why a Crevasse and not a no-brainer: Here, it is the newer molecules and feedstocks that are generally shut out in a lot of legislation that didn’t contemplate the opportunities in renewable chemicals, or algae. As supporters point out – it doesn’t really matter whether you start with fuels or chemicals, replacing oil is replacing oil – so why are the tax credits and mandates generally written in support of fuels?

What’s the strategy for the crossing? Pursue parity in new legislation only, for now. Although there have been numerous amendments offered to support a level-playing field for algae, for example – generally, the industry is more concerned about “opening up the RFS” than the imbalances facing a single feedstock, or small grouping of them. As new legislation comes along – for investment tax credits, for example – there’s broader support for making the playing field level.

One mantra – give the biofuels industry the same tax treatment as the oil industry.

Issue #5: Aviation and military markets.

Why a Crevasse and not a no-brainer: Though aviation and military interests are crying out for advanced biofuels — primarily, for locally-produced and carbon-friendly jet fuel — it has been tough to raise money to serve these markets owing to technology risk and, critically, the risk of financing capacity construction over 15 year terms when fuel contracts are less than a year long.

To help, the Obama Administration invoked the Defense Production Act in a $500M capacity-building program partly funded by the Federal Government – but has been stymied by Republican opposition to the Navy’s plans to deploy biofuels at scale. It hasn’t helped that the Navy has been certifying fuels, via small fuel buys from sub-scale producers that have been charging $15+ dollars per gallon.

What’s the strategy for the crossing? Post-election, get DPA funding into the DOE, USDA and USN budgets. The USDA’s funds are already generally secured. Right now, fiends of biofuels are hoping to get a floor vote overturning a a Senate Armed Services budget bill forbidding Navy investment in biofuels in F’13.

Issue #6: The Farm Bill.

Why a Crevasse and not a no-brainer: The Senate passed its version of the 5-year legislation which covers everything from biofuels to nutrition programs. There are material differences between theirs and the House Ag Committee’s version. Then, the House refused to take up the Farm Bill at all – making it impossible for the Senate and House to work out a compromise in conference.

At issue? The final House bill is expected to have little if anything in an Energy title – that is, support for energy-related farm programs. The Senate was far more interested in continuing to support the development of biofuels.

What’s the strategy for the crossing? Pass a Farm Bill ASAP. In the lame-duck session if possible. If the lame-duck session fails – huge programs (like milk money for poor students) will be already on hiatus, and the whole process will need to be restarted in the Senate – and with changes in each chamber’s membership that adds uncertainty. The Farm Bill is USDA’s top priority, bar none.

6 Guides to Steer You to the Summit

At Advanced Biofuels Markets – as well as at the Advanced Biofuels Leadership Conference in DC each spring, we make a special effort to bring the heads of all the major trade associations together – at one time, in one place.

ABFA. Headed by Mike McAdams, the Advanced Biofuels Association is the home of just about every major drop-in fuels player, and it runs a formidable lobbying effort on the Hill. McAdams and team are generally driving consensus, and shared efforts – recognizing how seriously outgunned that biofuels generally are in the Hill when ranged against Big Oil, BIg Food, and Big Ranch interests.

On stage at ABM this year on October 29th – ABFA president Mike McAdams.

ABO. Headed by Mary Rosenthal, the Algae Biomass Organization is the biggest algae association, and has recently tapped K&L Gates for Hill support. Their agenda ranges beyond fuels into chemicals, food, feed and nutraceuticals – and, with issues such as tax code parity they have differing views. But generally, usually in lock-step with the rest of the associations.

On stage at ABM this year on October 29th – ABO chairman John Pierce.

AEC / RFA. The Advanced Ethanol Council, headed by Brooke Coleman, is a semi-autonomous unit with the formidable Renewable Fuels Association headed by Bob Dinneen. RFA, of course, works on the broad-based issues such as protecting the overall RFS and E15 adoption, while AEC works on these as well as offering a haven for cellulosic biofuels players to work on the advanced biofuels side of tax credit policy.

On stage at ABM this year on October 29th – AEC executive director Brooke Coleman.

BIO. The Biotechnology Industry Organization has its long-standing and large Industrial and Environmental division, headed by Brent Erickson, which has more than 100 members. A long-time leader on RFS2 – has been working closely with ABFA on defense and aviation opportunities, and also is the primary driver on tax code parity for renewable chemicals and biobased materials.

On stage at ABM this year on October 29th – BIO exec VP Brent Erickson.

Growth Energy. Growth Energy is a younger ethanol trade group, backed heavily by POET – and has been the key driver on E15 ethanol blending adoption, and is deeply involved in “don’t mess with the RFS” efforts. It’s an ethanol and DDGs group whose members increasingly have opportunities in advanced biofuels – from corn oil production to cellulosic ethanol add-ons, to biobutanol conversions.

On stage at ABM this year on October 29th – Growth Energy CEO Tom Buis.

NBB. The National Biodiesel Board, headed by Joe Jobe, is tightly focused on its single fuel interest – but, of course, is deeply integrated with a broad set of feedstock interests. They’ve been long out in front on biodiesel adoption and higher blends, tax code parity for new feedstocks and protecting the RFS. They’ve also been focused of late on RIN integrity. Major issue for them right now is the tax extenders package and renewing the biodiesel tax credit.

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