US House Agriculture Subcommittee Holds Hearing on Future of Next Generation Biofuels

October 30, 2009

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Tim Holden (D-PA) chair of the Subcommittee on Conservation, Credit, Energy, and Research, held hearings concentrating on the future of next generation biofuels.

Dallas Tonsager, Under Secretary for Rural Development in the U.S. Department of Agriculture admitted in prepared testimony that "Advanced biofuels hold the potential to transform America's fuel supply, enhance our national security and energy security, reduce our carbon footprint, and foster economic growth in rural America. This is an enormous opportunity, and it will require the best efforts of many parties in many sectors -- the federal government, national and university labs, state and local governments, and the private sector -- to ensure that these multiple potentials are realized. ... The task at USDA Rural Development is to identify viable technologies as they emerge from the labs and accelerate their deployment across the private sector." He went on to summarize the status of the Farm Bill's: Section 9003: Biorefinery Assistance Program; Section 9004: Repowering Assistance; Section 9005: Bioenergy Program for Advanced Biofuels; Section 9007: Rural Energy for America Program; and Other Rural Business Programs.

USDA was also represented by Dr. Rajiv Shah, Under Secretary of Research, Education, and Economics. His prepared testimony focused on some critical challenges facing development of advanced biofuels: "If we are to reach our target of 36 billion gallons of biofuels by 2022, we will need to change the way we do business. The U.S. has funded thousands of worthy projects, but there has been little effective integration of these efforts across government research agencies, and there has not been a focus of partnering with public and private resources to develop biofuel supply chains capable for achieving Congress's goals. Significant parts of the supply chain have been ignored or have received too little attention such as sustainable feedstock production systems, solutions to lower the cost of biomass transport, and efforts to enhance compatibility with America's existing fuel distribution and utilization systems.

To accomplish the Congressional Mandate we need to accelerate the establishment of a sustainable commercial biofuels industry. This will require that we create an overall strategy that builds on the core competencies of all contributors, and integrates all Federal-funded project activities across all supply chain elements."

Speaking on specific advanced biofuels from the industry perspective were:

Ms. Mary Rosenthal, Executive Director, Algal Biomass Association, Preston, Minnesota

Testimony focuses on the failure of federal biofuels policies, laws, and regulations to recognize algae as an element of an advanced biofuels solution to our energy challenges.

Ms. Susan Ellerbusch, President, BP Biofuels North America LLC, Warrenville, Illinois

Beginning at page 5, find a thourough and suscinct description of the state of biofuels development and financing challenges.

Mr. William J. Roe, President and CEO, Coskata, Inc., Warrenville, Illinois

He describes the Coskata process and lists other technologies: The technologies that are emerging include, but are not limited to, the following:

· Cellulosic biofuel technologies

Ethanol from enzymatic hydrolysis of cellulose + fermentation

Ethanol from acid hydrolysis of cellulose + fermentation

Ethanol from biomass gasification + catalytic conversion of syngas

Ethanol from gasification + biological conversion of syngas

Butanol from enzymatic hydrolysis of cellulose + fermentation

Synthetic diesel from gasification + catalytic conversion of syngas

Synthetic crude oil from biomass catalytic cracking or pyrolysis

Hydrocarbon fuels from bio-fermentation of sugars

· Other advanced biofuel technologies

Synthetic hydrocarbons or alcohols from algae

Hydrocarbon fuels from conversion of animal waste or by-products

Hydrocarbon fuels from food waste including recycled oils/greases

Ethanol from fermentation of sugars from non-corn feedstocks

In our opinion, many of these emerging technologies are showing promise, and some will commercialize faster than others. None, however, will scale quickly enough to enable the industry to meet the current requirements of the RFS in the early years. ...

Mr. Bruce Jamerson, Chairman of the Board, Mascoma, Lebanon, New Hampshire

When taking into account a few assumptions, cellulosic biofuels can compete directly with oil when prices are in the $70-$90 per barrel range[1]. With oil prices currently around $80 per barrel and the Energy Information Administration (EIA) predicting the price per barrel to settle around $130 over the next 20 years[2], the industry is feeling confident in its ability to compete with oil without long-term government subsidies.

[1] Sandia National Laboratories, 90-Billion Gallon Biofuel Deployment Study. February, 2009.

[2] Energy Information Administration (EIA), Annual Outlook 2009. DOE/EIA-0383. Washington, DC, June, 2009.

After describing the Mascoma process and the need for improvements in the definition of "renewable biomass," Mr. Jamerson described the difficulties financing new technologies:

The USDA and DOE loan guarantee programs could be valuable tools to help commercialize new technologies. Unfortunately, they have not, to date, proven to be the catalyst for quickly developing commercial scale cellulosic facilities.

Given the current USDA loan guarantee structure, challenging credit market climate, and new technology of cellulosic projects, banks are reluctant to provide project financing and to use the USDA loan guarantee program to fund commercial scale cellulosic ethanol projects. Earlier this year, Mascoma and its financial advisors contacted 174 commercial lenders seeking a bank partner to apply for a USDA loan guarantee for the Kinross project. We spent significant time and money on the loan guarantee application process. Only two lenders were willing to work with us. We selected one, but in the end were unable to move forward due to structural problems with the USDA loan guarantee program requirements. Other first-mover cellulosic companies had similar experiences with their projects.

Lenders told us that they need several adjustments to the USDA loan guarantee program in order to meet their credit and pricing guidelines. For example, as the project size increases, the loan guarantee amount reduces. This discourages larger projects with more impact on jobs, climate and energy independence. Other areas that need addressing include:

• holding a minimum of 50% of the non-guaranteed portion of the loan;

• requiring identical terms for the non-guaranteed and guaranteed loan portions despite much different risk profiles; and

• limiting to 1% the difference between the interest rate on the guaranteed portion of the loan and the weighted average interest rate of the full loan amount.

In addition, we recommend several other program improvements that would improve funding prospects:

• allowing biorefinery applicants to use the Federal Financing Bank as the sponsor lender, similar to the DOE loan guarantee program;

• authorizing guarantees of a revolving credit facility for project working capital needs;

• allowing the replacement of the non-guaranteed portion of the loan with equity or subordinated debt at market rates to provide more flexibility and options in the financing structure; and

• increasing the percentage of guaranteed debt for projects over $125 million to enhance recruitment of sponsor bank support.

Mr. Craig Shealy, President and CEO, Osage Bio Energy, LLC, Glen Allen, Virginia

After describing his expanding winter barley-based ethanol production operations, Mr. Shealy brings up controversies and sticking points: myths and misinformation that give biofuels a "bad name;" unrealistic financing limits in the USDA Biorefinery Assistance Program; paperwork needed to certify that energy crops come from land in cultivation before December 2007 with no clear scientific evidence of the relevance.