Annie Snider, E&E reporter

Defense Secretary Chuck Hagel has been considering delaying the Pentagon's portion of a $510 million federal program to invest in biofuel refineries that has been the subject of congressional battles for more than a year, according to multiple sources with knowledge of the deliberations.

Senate opponents have tried twice to block the program -- a joint effort of the Pentagon, the Department of Energy and the Agriculture Department -- which is aimed at spurring large-scale production of cost-competitive drop-in advanced biofuels. But after mounting a major lobbying effort that won the support of a handful of moderate and farm state GOP senators as well as nearly all Democrats in a key vote in November, supporters thought they were in the clear (E&ENews PM, Nov. 29, 2012).

Now, just as the first phase of contract awards to biofuel firms under the program is being finalized, the administration itself could decide to stall the effort, sources say.

"This issue is undergoing careful consideration at this time," Pentagon spokesman Mark Wright said. "This is the secretary of Defense's decision to make, and no decision has yet been made. We will announce the decision at the appropriate time."

The issue has opened up a divide between Hagel and the White House, which has staunchly supported the biofuels program, sources said. A White House official, however, denied this, saying "there is no daylight between Secretary Hagel and the White House when it comes to the administration’s commitment to energy security and support for investments in advanced drop-in biofuels."

The idea of delaying the biofuels program rose to the top echelons of the Pentagon roughly two weeks ago as the department's leadership grappled with options for implementing steep automatic spending cuts. The Pentagon's budget has taken the biggest hit under sequestration, which mandates a $46 billion reduction in this fiscal year. Last week Hagel announced plans to furlough the department's 800,000 civilian employees for 11 days this summer because of the automatic cuts -- half the length of time originally planned -- and vowed to keep hunting for savings in the budget in hopes of reducing that time even further.

DOD officials initially looked to the biofuels program as a source of funds to offset cuts elsewhere in the budget, but they soon learned that money tagged for the effort could not easily be moved to other accounts, sources said. The biofuels initiative is run under the auspices of the Defense Production Act, which grants the administration special authorities for investing in industries deemed critical to national defense. Money appropriated to the DPA account can be shifted among DPA programs but requires an act of Congress to be moved to another DOD account. Further complicating matters, the overall DPA account is accessed by multiple agencies, not just DOD.

When Pentagon officials realized the money could not be easily transferred, the conversation shifted to appearances, according to multiple sources who spoke on the condition of anonymity because the administration is pressing to keep the discord under wraps.

"It's an optics problem," said a staff member of a nonprofit group that has advocated for the program. "You can't be seen as giving money away to biofuels companies when, at the same time, you're taking money in the sequester from employees and [cutting] flight hours and delaying deployments."

The biofuels program never had the full-throated support of the top rung of DOD leadership. While Hagel's predecessor, Leon Panetta, was generally supportive of energy and environmental issues, his primary focus was fiscal matters, and he rarely got personally involved with energy programs.

Sources speculate that with the change in leadership and heightened concern about budgetary matters brought by the automatic spending cuts, longtime foes of the biofuels program may have seen an opportunity to squelch the initiative.

"Hagel is brand new; it's not his personal project," a source familiar with the project said. "It's obvious the person most invested in this is [Navy Secretary] Ray Mabus, but it's not his program and it's not his money."

During his Senate confirmation hearings earlier this year, Hagel said he was open to the possibility of using the military's research and development capabilities to improve energy security, but underscored that he "didn't commit to any one program" (E&E Daily, Feb. 1).

Lawmakers bend administration ears

Tipped off to the fact that Hagel was mulling cuts to the biofuels program, supporters sprang into action. Multiple lawmakers, including Sens. Mark Udall (D-Colo.) and Jeanne Shaheen (D-N.H.), who led opposition to efforts to cut the program in the 2014 defense policy bill, put in calls to Hagel and the White House, sources said.

"The industry is ready to move forward with larger, industrial-scale biorefineries that will make advanced biofuels competitive with petroleum fuel," the nonprofit source said. "This is important for national security because it will break the military's single-source dependence on oil -- a key strategic vulnerability."

Udall, Shaheen and other proponents of the program have contended that large-scale production of biofuels would help mitigate the price shocks that threaten to eat away at the department's budget. The Pentagon just this week submitted a request to Congress to move $1 billion between its accounts in order to deal with higher-than-expected fuel costs. The request came as part of a broader request to shift funds among accounts.

It is not clear whether congressional opponents of the program have taken the opportunity to press their case for killing the biofuels effort or whether they have opted to watch from the sidelines as the administration becomes wracked with internecine battles.

White House support

According to multiple sources, the White House has for at least two weeks been engaged in quiet lobbying with the Pentagon aiming to at a minimum slow down the department's action on the issue. On Friday, President Obama's top energy adviser may have been sending a signal across the Potomac when she trumpeted the military's role in energy innovation in a White House blog post.

"Beyond the direct benefits to our military, DOD's investments in clean energy benefit the country as a whole, by catalyzing private sector investment to more quickly commercialize advanced technologies for a variety of commercial applications," Deputy Assistant to the President for Energy and Climate Change Heather Zichal wrote.

Now, the White House must decide whether to pull its trump card and force the Pentagon to move forward with the program or let Hagel make his own call, the nonprofit source said. The issue, he said, has risen to the level of Vice President Joe Biden, but the decision whether to intervene will likely be made by either the national security or domestic policy staff.

Pentagon offices, along with advisers from DOE and USDA, have spent the last nine months vetting roughly two dozen industry proposals in the competition to win $30 million under the first phase of the program. Companies would use that money to develop plans for refineries that would then compete in phase two for construction funding. An announcement of the winners has been widely expected for weeks.

At stake is near-term construction of the first commercial-scale refineries for drop-in replacement biofuels. Such refineries are broadly expected to be built in the next decade or so; the federal investment is intended to speed forward the construction.

"I'm not going to tell you that there would never have been commercial-scale drop-in biofuel refineries without this program," the second source familiar with the project said. "It would accelerate it."

Following the 2011 failure of the government-backed solar firm Solyndra, congressional Republicans have been highly critical of such federal energy investments. That criticism has been especially strong when it comes to programs involving the military. Opponents have contended that spending on energy programs is an unwise use of limited defense dollars.

In addition to tangible setbacks to the biofuels industry that canceling the program could bring, supporters also say it would send exactly the wrong message to the industry at a time when it is engaged in battles on multiple fronts, including efforts to reform the renewable fuel standard.

"For the biofuels industry, the signal this would send [from the administration] is 'don't trust us,'" the source said.

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