* Government funds would be matched by private capital

* Republicans worry about wasted funds, skewed priorities

By David Alexander, Susan Cornwell and Roberta Rampton

WASHINGTON, July 5 (Reuters) - The Pentagon is pushing ahead with a $420 million effort to build refineries to make competitively priced biofuels, despite anger in Congress over the price the Navy paid for alternative fuel to test a carrier strike group this month.

The Pentagon plans provide $210 million in matching funds to help private firms build three refineries, each able to produce at least 10 million gallons of biofuel a year for military jets or ships, according to documents released this week.

The military's spending on alternative fuels has drawn criticism from Republican lawmakers, with Senator Jim Inhofe charging that President Barack Obama's priorities are "completely skewed" and Representative Mike Conaway accusing Navy Secretary Ray Mabus of "squandering precious dollars."

But Mabus warns that U.S. dependence on foreign oil is a strategic vulnerability that can only be addressed by reducing the military's reliance on petroleum as the sole source of fuel to power its jets, ships and tanks.

The Navy initiative announced on Monday to help private firms build biofuel refineries "will enhance our national security," Mabus said in discussing the $30 million first phase of the project.

"It's going to help support the creation and commercial viability of a defense critical industry, and that's in domestic biofuels," he said.

The announcement came as the Navy is preparing to test a carrier strike force using alternative fuels on July 18 during the six-week, 22-nation Rim of the Pacific exercises, the largest annual global naval maneuvers.

The Navy purchased 450,000 gallons of biofuels for $12 million, or nearly $27 a gallon for the exercises. The fuel was then mixed with 450,000 gallons of petroleum to achieve a 50-50 blend that cost about $15 a gallon. The Navy expected the jet and marine biofuels to last about a day during the exercises.

CONGRESSIONAL BACKLASH

The cost of the biofuels for the exercises has produced an angry backlash in Congress. Republican lawmakers denounced the spending at a time of Pentagon budget cuts and are working to halt the purchase of biofuels that are not competitively priced.

Obama's opponents see the military's green energy push as another attempt by the White House to promote alternative fuels even if they don't make economic sense, as in the case of the government-funded solar panel maker Solyndra, which went bankrupt last year.

President Obama is "pressing forward with his plan to force the DoD (Department of Defense) to spend $30 million on its so-called green fleet, all while he's gutting our military," Inhofe said in a statement provided to Reuters.

Conaway authored a provision, included in a bill authorizing defense programs, that would prevent Pentagon spending on biofuels unless they were competitively priced. The bill passed the House of Representatives, and a similar biofuels provision was approved by a Senate committee.

Conaway said he was not opposed to the Navy buying alternative fuels so long as the price was not greater than that of fossil fuels, but paying $27 a gallon versus $4 a gallon for petroleum "makes no sense."

"It's not about proving the technology. It's Mabus wanting to waste money ... on a publicity stunt for his green fleet," he said.

Conaway said he thought biofuels should be developed in the private sector, not with the Pentagon in the lead. But he said there was not as much support in Congress for trying to block the latest Navy project with the Energy and Agriculture departments because it involved research and development funds.

"We didn't have the support to rein that in," he said, acknowledging that the Navy was making "a bit of an end run" around opponents of the biofuels program.

Proponents of alternative fuels warn that attacking the effort is short-sighted.

"Simply saying that we can't afford to develop an alternative fuel strategy for our military is penny-wise and pound-foolish," said Democratic Senator Chris Coons.

FUELS OF THE FUTURE

Coons said firms like Dupont in his home state of Delaware are making big strides in developing a competitive advanced biofuels industry. He said the defense authorization bills in Congress should permit work on biofuels but require the Pentagon to justify the spending each year.

Daniel J. Weiss, director of climate strategy at the Center for American Progress Action Fund, pointed to the damage that volatile oil prices wreak on the Pentagon's budget. Mabus said a $1 per barrel increase in global oil prices costs the Navy alone $30 million.

"It's very short sighted to oppose investments in the cleaner fuels of the future," Weiss said.

Under the Navy's new biorefinery effort, the government would provide $210 million in funds, which would be matched on a dollar-for-dollar basis by private capital. The military expects to make five awards in the $30 million first phase of the program some time this fall.

The second phase of the project, which would probably begin next year, would whittle participants down to about three and provide another $180 million in financing, again to be matched equally by the companies involved, government documents say.

Mabus said earlier this week that $100 million in funding for the program had been appropriated and authorized in the 2012 fiscal year budget. The Pentagon anticipated receiving another $110 million in funding for the program in the 2013 fiscal budget beginning in October, the documents say.

Participants competing for the grants would have to provide business plans and strategies for building refineries that could produce at least 10 million gallons of biofuel per year. They would also need the capability to blend the fuel with equivalent amounts of petroleum. (Editing by Warren Strobel and Todd Eastham)