An Open Letter to President Obama on Biofuels

Numerous studies have been released on this topic.  One such study reported that, "Even at high oil prices, 2nd generation biofuels will probably not become fully commercial nor enter the market for several years without significant additional government support."  What is needed is an immediate, comprehensive study to determine requirements for the full commercialization cycle.  Once these requirements are known, we can apply them to those projects whose completion is necessary to meet our needs. The need is urgent, as 3 of the 15 funded projects that received DOE awards have already stopped plans to go forward.  Unless something radically different is done, more projects are likely to drop out.

The Advancement of Cellulosic Biofuels

Progress has been made in the area of advanced biofuels (cellulosic biofuels).  The progress ranges from research resulting in improved processes and product yields to favorable language in the last two energy and farm bills and the recent American Recovery and Reinvestment Act (ARRA).  Numerous conferences, committees and publications have emerged.  Technology suppliers have constructed several pilot plants and more are planned.

DOE has issued five R&D and three pilot/demonstration/commercial facility funding opportunities.  Currently, 15 projects covering biochemical, thermochemical and integrated biorefinery platforms have been selected and announced as award recipients by DOE.  Limited quantities of cellulosic biofuels are being produced.  A RFS was included in the 2007 EISA, calling for 15 billion gallons of corn ethanol and 21 billion gallons of "advanced biofuels" to be produced annually by the end of 2022.

DOE Funded Projects

Table 1 (below) shows the 15 projects that were selected for awards from DOE.  The selections were made on a competitive basis. Those who have gone thorough the process, be they winners or losers, say that it is very through and objective.  The awards for the 2006 DOE funding opportunity for commercial scale facilities were announced on February 28, 2007. 

In the ensuing two years there have been two groundbreaking announcements but very little physical construction.  It appears that there will be very little biofuel production from these facilities until at least 2011.  Currently, two of the six commercial-scale awards have withdrawn from their negotiations with DOE for business reasons and this occurred before the recent financial downturn and credit crisis. 

There was also a 2007 DOE funding opportunity for demonstration projects.  Nine projects were selected for awards and were announced in January, April and July of 2008.  However, one of the nine projects was withdrawn due to the financial downturn.

With world financial markets remaining in a lending crisis, more projects are likely not to proceed into construction since they may not be able to cover their cost sharing requirements. 

Table 1: March 2009 Status of DOE Funded Projects

Project Owner	Project Cost (Millions $US)	DOE (Millions in $US)	Date of Award	Status (March '09)	Volume (Millions gpy) & Type
Commercial Funding Opportunity
Abengoa	~190* +	76	Feb 07	Stage 3**	11.4 Ethanol
ALICO	~82.5* +	33	Feb 07	Halted negotiations June 08	20.9 Ethanol
Blue Fire	~100* +	40	Feb 07	Stage 3	19.0 Ethanol
Broin--Poet	~200* +	80	Feb 07	Stage 4	30.0 Ethanol
Iogen	~200* +	80	Feb 07	Halted negotiations June 08	18.0 Ethanol
Range	355	76	Feb 07	Stage 4 USDA Loan Guarantee 2009	P1-8 E+2 Methanol P2-40 E + 9 M
Demonstration Funding Opportunity
ICM Inc.	86	30	Jan 08	Halted negotiations  Jan 09	1.5-Ethanol
Lignol	88	30	Jan 08	Changing partners and location	2.5 Ethanol
Pacific Ethanol	73	24	Jan 08	Stage 3	2.7 Ethanol
NewPage	84	30	Jan 08	Stage 3	5.5 F-T liquid
Old Town Fuel and Fiber	90	30	Apr 08	Stage 2	2.2-Ethanol +Acidic Acid
Mascoma (see below)	136	25	Apr 08	Changed location	2.0 Ethanol
Ecofin	77	30	Apr 08	Stage unknown	1.3 Ethanol
Flambeau River Biofuel	84 now 250	30	Jul 08	Stage 3, doing NEPA	6.0 now 17 F-T Liquid
Verenium	91	10	Jul 08	Started Feb 09	1.5 Ethanol
Mascoma	~300	26 DOE + 23 Michigan	Oct 08	Stage 3	40 Ethanol

*   These are estimates based on a DOE 40% cost share.  Most are larger.
** DOE stage gate process include: stage 2 = detailed investigation, stage 3 = development,  stage 4 = validation and stage 5 = commercial launch

Identifying All Major Issues

What are the issues that are substantially delaying the progress of these plants that are needed by our nation?  A peer review of this paper with most DOE award winners and selected members of the Biorefinery Deployment Collaborative revealed that the commercial gaps are more significant than the technical gaps. Closing technical gaps is important, but closing commercial gaps is urgent.  Significant commercial gaps identified to date are included in Table 2 below.

Table 2: Seven MAJOR Commercial Gap

Commercial Gaps	Brief Discussion
1. Procuring the volume of biomass at the quality and price needed to satisfy owners and lenders.	This gap seems to be the easiest to close for woody biomass. This could become an issue, especially if an RPS is adopted (See my paper on this topic).
2. The selling price of the products. Partners and lenders will not typically rely on commodity pricing. Further, not all biofuels in the 2007 EISA have been certified by EPA as transportation fuels.	Biofuel incentives are not bankable because they are renewed for 3-year periods and do not reduce market risk. A coordinated approach between DOE and EPA is needed. For example, butanol has superior qualities but is not certified by EPA even for niche fuel markets.
3. Pilot trials are required by DOE, lenders and investors. Typically they are not eligible for funding in a DOE for production facilities grant.	Long pilot trials of months are necessary, but they are costly and add a financial hurdle, typically in the millions.
4. Establishing a guarantee for schedule, cost and performance. The processes are not fully commercial and the suppliers are currently not financially strong.	Satisfying the partners and lenders can be done with other financial instruments, which significantly add to high capital cost.
5. Obtaining Financing. This was difficult before the financial meltdown. Smaller projects can be self- financed if the owner has adequate financial reserves	Most owners are seeking DOE or USDA loan guarantees. The USDA approved an $80 million loan guarantee for Range Fuels.
6.  National Environmental Policy Act (NEPA) compliance.	This requirement is duplicated when owners file for a permit to build and operate facilities.
7.The ethanol blend limit of 10%.	The blend limit restricts biofuel usag

If our nation is to achieve its goal of an advanced biofuels industry, it appears that making awards to "buy down" some of the risk and letting the market do the rest is an inadequate strategy.  We must examine the entire commercialization pathway to see what is needed to successfully complete projects in a free market system.  This is a different strategy than has been used recently but these are different times. Cash flow to petroleum exporting countries is crippling the U.S. balance of payments and often funnels billions of dollars into nations and areas of the world that are hostile to our interests.

Urgent Recommendation

There are a sufficient number of DOE award winners with varying backgrounds, varying geographic locations and varying financial strengths to allow common needs to be established.  To create the needed level of credibility and due diligence, a special commission of national experts should be set up by Congress but under DOE to examine the entire commercialization pathway for advanced biofuels.  This must be done expeditiously because owners of stalled projects are anxious to move them forward.  Congress is anxious to move them forward and so are the American people.  A special commission is needed because the recommendations are likely to require regulation modification.  Further, they must streamline the process -- not add complexity, expense and bureaucracy.

Possible Outcomes

The following straw-man outcomes are presented to illustrate the types of expected solutions.  These straw-man outcomes show that the solutions expected are likely to be few in number, straightforward and not costly.

1. For U.S. produced advanced biofuels ONLY, offer an option of a fifteen year "floor price" (a guaranteed minimum per gallon) or the per gallon incentives.  Experience has proven that lenders and investors will not allow incentives authorized for 3 years' use in any economic projections.  Per gallon incentives do not eliminate market risk.  Even in times of high oil prices, investors and lenders frequently refuse to accept market risk with new technologies.  Based on most long-term price forecasts for oil, floor prices will be far less costly to taxpayers than per gallon incentives.  This is consistent with needs found in a recent Sandia Study.

Some industries have a sound position that the best solution is "a level playing field," which means no preferential incentives.  It will be critical to develop incentives that are limited, have no unintended consequences and sunset to create that "level playing field." An alternative, more costly but simpler, strategy is to increase the percentage of the governments' cost share as defined by the Federal Acquisition Regulations from a maximum of 50% to a maximum of 60 to 70%, enough to mitigate market risk.  This would also require eliminating grant "caps.

2. Improve the DOE award process so that a higher percentage of awards give society what it needs from the process.  The improvements are relatively straightforward and include 3 or 4 parts.

1. Establish independent and unbiased multi-technology pilot/demonstration plants that can utilize multiple feed stocks.  Investors, lenders, DOE and USDA loan guarantees and DOE require LONG pilot line runs. There is one proposal for such a pilot plant at the U.S. Forest Service Forest Product Laboratory.  It needs to be funded and constructed as quickly as possible.  Other independent pilot lines such as the one at Auburn University may need additional support.

2. Get lender involvement in setting the selection criteria for DOE awards.  It is of no value to our nation to have one set of DOE criteria then much later an additional set of lender criteria.  This slows the process, wastes time and money and kills projects.

3.  Recruit more industrial experts for the technical and policy reviews that are used in each DOE funding opportunity.  Increased industrial expertise will help ensure that award winners are both technically and commercially ready.

4.  Create an alternate competitive funding opportunity process in which there is an open evaluation process for the "best" solution package.  Have industry-led consortia formed that will implement these packages.  Fully fund the consortia to implement the top 3 to 5 proposals.

3. Achieve better utilization of existing federal resources especially those of DOE, EPA and USDA. Biorefineries are largely dependent on feedstock, technology, markets and financing.  The floor price is needed for markets.  Have USDA more involved in setting feedstock criteria and making the loan guarantees, which they have done for years in rural America.  Have DOE lead the process and evaluate the technology.  Have EPA certify fuels covered by DOE funding opportunities and expedite permits that comply with all regulations.  Allow each department/agency to participate according to its ability to influence the future.  Give departments/agencies the requirement, the authority and the tools necessary to get the selected projects commercialized.  This must be a central focus of the special commission.  This idea is not new, just overlooked.  Revisit the successful process that established a very successful TVA energy project.

4. Accelerate the deployment of the 10% demonstration grants (Section 932) by funding the plants to the 50% level with no cap or making them eligible for additional grant funding under the American Recovery and Reinvestment Act (ARRA) as long as they meet the start and completion dates.  Additionally, make them eligible for the DOE and USDA loan guarantee programs (up to 90% guaranteed) without going through additional reviews if they have passed the independent project review conducted by IPA as a subcontractor to DOE.

Concluding Thought

The authors conclude by quoting W. Edwards Deming who typically closed his week-long, very intense, quality seminars with a comment most will remember for their entire lives.  With all the proper voice inflections he said, "There is no need to do any of this ----------- (very long pause), failure is always an option."

Ben Thorp is a strategic energy consultant and expert who can be reached at bathorp@comcast.net.