Renewable Fuel Industry Officials Urge Federal Loan Guarantees, Higher Blend Limits

March 4, 2009 06:00 PM

via a special arrangement with Informa Economics, Inc.

Push is on to get EPA to issue RFS2 rule, including hoped-for boost in maximum blend rates

NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.

Reeling from the credit crisis and the significant drop in fuel prices, officials from the ethanol and biofuel industries told a House hearing on the state of the renewable fuels industry that their industries need stronger government-backed loan guarantees to invest in new technology and a needed boost in the amount of ethanol allowed in fuel blends.

“Access to immediate necessary operating capital is critically important to help weather the current economic conditions facing the industry,” said Nathan Kimpel, president and chief operating officer of New Energy Corp., a South Bend, Ind.-based ethanol producer, before the House Small Business Committee on Wednesday. "The economic crisis is significantly impacting sustained, continued growth and development of the industry," Kimpel said. "Recently, the U.S. renewable fuel industry has been devastated by the scarcity of both short-term credit to finance ongoing operations, much less the long-term capital to finance expansion and new construction."

Industry officials also called for quick implementation of the revised renewable fuel standard as well as an increase in the amount of ethanol and other renewable fuels allowed in fuel blends. The renewable fuel standard (RFS) was expanded by the Energy Independence and Security Act of 2007 (PL 110-140), which requires the motor fuel supply to include 36 billion gallons of ethanol or other renewable fuels by 2022. The RFA calls for 15 billion gallons of ethanol production by 2015. To qualify under the RFS, ethanol and other fuels would have to reduce life-cycle greenhouse gas emissions by 20 percent compared with gasoline.

Timeline. The Environmental Protection Agency (EPA) sent a rule implementing the RFS, which stipulates the minimum levels of ethanol blended with motor fuels, to the White House Office of Management and Budget for review Feb. 6.

Chairwoman Nydia Velázquez (D-N.Y.) said the greatest problem plaguing the industry is lower energy prices, which make its prices uncompetitive in the current market, and added that she would look into making sure EPA issues its draft RFS rule quickly and "properly."

“In the European Union or Brazil or places where they’ve had the successful implementation of renewable policy, the one commonality was that they made a long-term commitment to it,” said John Howe, vice president for public affairs for the biofuel development company Verenium Corp., which produces cellulosic ethanol from sugarcane, agricultural waste and wood products.

Manning Feraci, the vice president of federal affairs for the National Biodiesel Board, also called for “a long-term commitment to replacing petroleum with renewable fuel.” He said extended tax credits are needed to develop renewable fuels -- the industry representatives urged the extension of the $1-per-gallon biodiesel blending tax incentive, which is set to expire Dec. 31. Feraci stressed the need for the EPA to implement the renewable fuel standard regulations. Feraci said that if prolonged, the economic downturn will lead to a retraction in U.S. biofuel production. "Due to current market conditions, less than one-third of the industry's facilities are currently producing fuel," he said.

A grower's perspective. Brooks Hurst, a member of the board of directors for the Paseo-Cargill Biofuels Plant who testified on behalf of the Missouri Soybean Association, also urged an extension of the biodiesel fuel blenders credit. "In a volatile market, it really helps to be able to lock in prices. As we go forward with uncertainty, not knowing whether we will continue to have a blenders credit, it's hard for facilities to lock in contracts at a profitable rate," Hurst said, adding that he would also support the implementation of renewable fuel standards in a new energy bill. Kimpel said raising the blending wall for biodiesel fuels from 10 percent would increase investment as well.

Committee witnesses called for either a full loan guarantee or fewer restrictions on how the loans are issued. “The most limiting factor to small producers [of renewable fuel] is lack of capital,” said Ron Litterer, chairman of the National Corn Growers Association. Under the current loan guarantee program, the Department of Energy will guarantee a percentage of a loan made to a renewable energy producer to invest in production or development. But given the weak credit market, banks are unwilling to take risks on funding, industry officials said.

The loan guarantee program also restricts the amount of interest a bank can charge for the percentage that is not guaranteed by the government. Witnesses said banks want to see the technology has been proven on a commercial scale before offering the loan, but that new technology and renewable fuel plants cannot be built without a loan.

Industry officials repeatedly called for raising limits on the amount of ethanol allowed in fuel mixtures and quick implementation of the RFS rules. Hurst said quick implementation of the RFS is critical to ensure that biofuels are included in fuel mixtures and that they are not blocked by petroleum providers, who may not directly benefit from greater use of fuels blended with ethanol.

Feraci also said timely implementation of renewable fuels standards enacted in the Energy Independence and Security Act would be helpful. The act was set to be implemented Jan. 1, but that deadline, Feraci said, has not been met.

Meanwhile, trade group Growth Energy on Wednesday said the U.S. ethanol industry could create 136,000 jobs and inject $24 billion into the economy each year if the government hikes the allowable blend of ethanol with gasoline to 15 percent from 10 percent. The U.S. could consume 20.4 billion gallons of ethanol per year if the EPA increased the allowed blend rate to 15 percent, based on annual gasoline use of 136 billion gallons, according to a North Dakota State University study done for Growth Energy (the study was conducted by a group of current and former faculty of the university). That would require the U.S. to build another 6 billion gallons of capacity, or 60 ethanol plants each producing 100 million gallons per year, Nancy Hodur, research scientist in North Dakota State University's Department of Agribusiness and Applied Economics, told a news conference. Current industry capacity is 10.3 billion gallons per year, with another 1.9 billion gallons idled, 1.5 billion gallons under construction and room at existing plants for expansion of 0.6 billion gallons, she said. Building the plants would create 262,000 jobs and $36.8 billion in economic benefits, Hodur said. Longer term, the expansion would create 136,000 jobs and add more than $24 billion to the economy, she said.

Jim Nussle, a former congressman from Iowa who advises the Growth Energy group, said the study supports the economic need to increase the ethanol blend level, which he says was arbitrarily set 30 years ago at ten percent. “These figures really are dramatic and they prove that when we want we can create these desperately needed jobs,” said Nussle. “The federal government can act right now to increase the amount of ethanol blends in the nation’s fuel supply without having to dip into another stimulus package or create another bill.” Nussle said the EPA has the authority to increase the blend level through the rule-making process and while it could theoretically be done quickly he refused to speculate on how long it might take EPA to take such an action. (Nussle was head of the Bush administration's Office of Management and Budget, which reportedly did not sign off on a possible blend increase in the waning days of the Bush administration.)

A study by Duke University released yesterday noted that to avoid creating greenhouse gases, it makes more sense using today's technology to leave land unfarmed in conservation reserves than to plow it up for corn to make biofuel. "Converting set-asides to corn-ethanol production is an inefficient and expensive greenhouse gas mitigation policy that should not be encouraged until ethanol-production technologies improve," the study's authors reported in the March edition of the research journal Ecological Applications.

"One of our take-home messages is that conservation programs are currently a cheaper and more efficient greenhouse gas policy for taxpayers than corn-ethanol production," said biologist Robert Jackson, the Nicholas Professor of Global Environmental Change at Duke's Nicholas School of the Environment, who led the study. By the researchers' accounting, the carbon benefits of using ethanol only begin to show up years after corn growing begins. "Depending on prior land use" they wrote in their report, "our analysis shows that carbon releases from the soil after planting corn for ethanol may in some cases completely offset carbon gains attributed to biofuel generation for at least 50 years."

The Duke report said that cellulosic species -- such as switchgrass -- are a better option for curbing emissions than corn because they don't require annual replowing and planting. In contrast, a single planting of cellulosic species will continue growing and producing for years while trapping more carbon in the soil. "Until cellulosic ethanol production is feasible, or corn-ethanol technology improves, corn-ethanol subsidies are a poor investment economically and environmentally," Jackson added. the report noted that a cost-effective technology to convert cellulosics to ethanol may be years away. So the Duke team contrasted today's production practices for corn-based ethanol with what will be possible after the year 2023 for cellulosic-based ethanol. By analyzing 142 different soil studies, the researchers found that conventional corn farming can remove 30 to 50 percent of the carbon stored in the soil. In contrast, cellulosic ethanol production entails mowing plants as they grow -- often on land that is already in conservation reserve. That, their analysis found, can ultimately increase soil carbon levels between 30 to 50 percent instead of reducing them. "It's like hay baling," said aid Gervasio Piñeiro, the study's author, who is a Buenos Aires, Argentina-based scientist and postdoctoral research associate in Jackson's Duke laboratory. "You plant it once and it stays there for 20 years. And it takes much less energy and carbon dioxide emissions to produce that than to produce corn,” Piñeiro said

Rep. Joe Sestak (D-Pa.) noted concern that producers of biofuels and ethanol are being rewarded for production regardless of how efficient the fuels are in reducing greenhouse gas emissions. “I was taken with the RFS because it is the first with a performance standard,” he said, referring to the requirement that a biofuel produce 20 percent less emissions over its life cycle than gasoline.

The National Biodiesel Board's Feraci said that while he agrees with the concept of a life cycle analysis, he does not think there is currently a way to calculate indirect land use from growing the crops for fuel, nor does he think the danger of cutting down trees to grow crops for fuel is as pronounced as critics make it out to be. “Agriculture has been pretty stable and pretty sustainable,” he said.

Searching for alternatives. While the economic stimulus package passed earlier this year provides several renewable energy tax breaks, witnesses suggested other ways in which the government could help increase investments in renewable fuels.

One option would be to expand the 2008 Farm Bill’s cellulosic biofuels production tax credit, set to expire in 2012, for at least five or six years. “The short-term duration of the tax credit draws a question if there is a real commitment to biofuels,” said Feraci.

Howe suggested a biomass crop assistance program that could provide inducements for growers and landowners who might be hesitant to move from their current growing programs. “All of this needs to be funded robustly, and rules need to be looked at to allow private loaners to get behind projects,” Howe said.

NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.


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