Advanced Biofuels Face Uncertain Financing Future

Already languishing in the current deficit/debt landscape and facing mounting criticism in the wake of the Solyndra bankruptcy, the much-maligned DOE Section 1705 loan guarantee program came to a close last week with a flurry of activity. Despite frustration with the program in the biofuels industry, centering on delays and process uncertainty, two advanced biofuels awards – $105 million to cellulosic ethanol giant POET’s Project LIBERTY in Iowa and $133.9 million for Abengoa Bioenergy for an advanced biofuels plant in Kansas –were among the 11th-hour clean energy qualifiers.

What do the awards mean for the U.S. biofuels industry and what impact will the end of Section 1705 have on the industry’s chances of reaching a mandated 36 billion gallons per year (BGPY) of total biofuels by 2022? The answer to both questions requires a look at the state of cellulosic biofuels in the U.S., which under the EPA’s revised Renewable Fuel Standard (RFS2), must deliver 16 BGPY by 2022, or 44 percent of the entire 36 BGPY RFS2 mandate.

In its Biofuels Strategic Production Report (June 2010), the USDA estimated that 527 biorefineries would need to be built at a cost of $168 billion to meet the additional 21 billion gallons per year (BGPY) of advanced biofuels mandated by 2022 under RFS2. That works out to the commissioning of around 36 cellulosic biorefineries and an investment of at least $11 billion per year for cellulosic biofuels alone.

Together, the POET and Abengoa projects will produce roughly 50 MGPY of cellulosic biofuels. Although a far cry from RFS2’s 16 BGPY cellulosic mandate for 2022, and accounting for less than 1 percent of the USDA’s annual investment projection, the DOE loan guarantee provides an important cash outlay designed to get these projects up and running.

Even if more aggressive investments were to come from Big Oil, the cellulosic biofuels industry, which is still in its infancy, is facing a formidable financing challenge in the decade ahead. Given the scale of the U.S. fuel market in which biofuels must compete – 300 BGPY of petroleum demand representing nearly $1 trillion in market value for transportation fuel alone – a long-term growth outlook is necessary. Seen in this light, the point of the DOE loan program was never to hit home runs, but rather to return value to taxpayers in the form of improved energy infrastructure without the externalities associated with traditional forms of energy.

As we noted in our Algae-Based Biofuels report, the advanced biofuels industry needs to demonstrate commercial-scale viability for projects to attract the private capital necessary for widespread scale-up. By helping drive steel in the ground for these early projects, DOE financing could lead to valuable proof-of-concept data that may be used to attract risk-averse private investors in order to drive broader commercialization efforts.

In our recently published Biofuels Markets and Technologies report, Pike Research assumes that many first round cellulosic biofuels plants will become obsolete – in many cases, even before opening their doors – as a range of technology pathways emerge in rapid succession in the coming decade. This makes the availability of public financing all the more important. While we project that biofuels production will miss the RFS2 targets in the latter half of this decade, our estimation that cellulosic biofuels capacity will increase more rapidly in the 2016 to 2018 window depends on the availability of government financing like the DOE’s loan guarantee program to push the industry through a difficult near-term scale-up period fraught with investor anxiety.

Absent public financing mechanisms like the DOE’s 1705 program, we expect the U.S. advanced biofuels industry’s near-term scale-up efforts to slow and potentially stagnate with its long-term fate falling squarely in the lap of the USDA (assuming their biofuels programs survive budget scrutiny), the U.S. military, and international oil markets.

Article by Mackinnon Lawrence, appearing courtesy the Matter Network.

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