Policy Shifts Signal Growth Ahead for Advanced Biofuels

Source: Mackinnon Lawrence, Contributor, FORBES • Posted: Monday, December 17, 2012

This has been a tough year for the U.S. biofuels industry: drought curtailed corn starch ethanol production and investment in the industry shrank to its lowest level in nearly a decade. Headed into 2013, though, industry momentum appears to be regaining steam. Led by advanced biofuels, the potential for expanding biofuels production has improved dramatically as Washington offers clarity on key policy issues.

Last week, in a vote on partisan lines, the U.S. Senate extended support for the military’s efforts to scale up advanced biofuels production. As reported in Biofuels Digest, it approved an amendment offered by Senator Kay Hagan of North Carolina to repeal a section of the annual Defense appropriations bill that would have prohibited “the Secretary of Defense or any other official from the Department of Defense (DoD) from entering into a contract to plan, design, refurbish, or construct a biofuels refinery or any other facility or infrastructure used to refine biofuels unless such planning, design, refurbishment, or construction is specifically authorized by law.”

Over the past year, the U.S. military has emerged as a key torchbearer leading the commercialization of advanced biofuels. Spearheaded by the Navy, which signed a Memorandum of Understanding (MOU) with the U.S. Department of Agriculture (USDA) and Department of Energy (DOE) to develop cost-competitive advanced biofuels, the DoD has been a lone bright spot for an industry that has suffered from press blowback and investor retrenchment in recent years.

Only $84 Billion to Go

Prior to the Hagan amendment, the Senate approved another amendment, offered by Senator Mark Udall of Colorado, to repeal section 313 of the annual Defense appropriations bill. Offered by Republican Senator James Inhofe of Oklahoma, Section 313 would have prohibited the DoD from procuring alternative fuels if they cost more than their conventional counterparts. The section was introduced in response to the U.S. Navy’s highly criticized purchase of advanced biofuels from firms like Solazyme and Dynamic Fuels for its “Great Green Fleet” exercises off the coast of Hawaii, at an estimated price-tag of $15 per gallon.

These bills are expected to facilitate public-private partnerships and funnel much-needed capital to support advanced biorefinery construction within the United States. In our Industrial Biorefineries report, Pike Research forecasts that at least 13 billion gallons of advanced biorefinery production capacity will come online over the next decade in the United States. Although that falls short of the 21 billion gallons of advanced biofuels carved out under the EPA’s Renewable Fuel Standard (RFS), more than $60 billion will be invested over that same period.

With the minimum cost of scale-up to meet the advanced biofuel production mandate estimated at $84 billion, the industry still has significant ground to make up. Although continued federal support will help assuage investor fears, uncertainties around feedstock supply and production profitability persist, translating into high levels of risk for investors.

Advanced biofuels, which address these concerns at least in part, have enjoyed a rising tide of policy support in recent months from Washington. In August, Congress allocated $170 million to support the development of military biofuels and other defense initiatives, voted to extend key tax credits for advanced biofuel producers, and granted algae producers tax credit parity with other feedstock pathways. Meanwhile, the recent commissioning of first-of-kind facilities from advanced biofuel producers KiOR and INEOS Bio are strong indicators of a maturing cellulosic biofuels industry.