US Energy Policy: What Happened to Advanced Biofuels?

Emerson’s Douglas Morris of the alternative energy industry team highlights his impressions from this week’s U.S. State of the Union address as it applies to alternative energy:

Being that it’s State of the Union time, I thought it would be curious to reflect on the status of the energy policy in the US. During President Obama’s address this week, he discussed the mutable energy policy in the United States. For the first time in years, there was no mention about the need for alternative energy from advanced biofuels. Instead, it was emphasized that the country must develop more offshore oil and focus on the burgeoning shale gas industry. This continues the trend to de-emphasize the advanced biofuels industry.

Recently, there have been a number of proposals and actual legislation that will change the landscape for advanced biofuels producers. As I recently discussed, the 30 plus year run for the Volumetric Ethanol Excise Tax Credit (VEETC) is over, so ethanol companies now need to compete for the Renewable Fuel Standard (RFS) volume quota without subsidy. Couple that with a bill that was recently introduced (H.R. 3773, the Domestic Alternative Fuels Act of 2012) to allow ethanol produced from natural gas and coal to be included in the RFS and the picture becomes even more interesting. (Perhaps one of the arguments for coal as a renewable fuel was to take a longer view at the timeline for feedstock regeneration?) Anyway, if this bill passes, which it likely won’t, the ethanol market would see quite a shakeup.

Getting back to the advanced biofuels industry, I think it is ripe for change. A number of companies have undergone initial public offerings (IPOs) and have ready access to capital to develop their processes. Other non-IPO companies are finding that if they have a sound business model, they too can get money from investors to build plants. So what change is needed? Likely, it is a move away from loan guarantees and grants.

Loan guarantees are not preferred, but were put in place to underwrite capital for companies. Now that capital is more available, a more effective policy would be a tax policy that provides an incentive to build up the industry. Loan guarantees, it turns out, are arduous to qualify for and execute and sometimes put people in a position to pick and choose technology. POET, the large ethanol producer, just turned down their loan guarantee for their 2nd generation Project Liberty plant in favor of more traditional financing that became available through a Joint Venture with DSM.

Regardless of what is available, what is really needed is a clearly defined energy policy that provides the certainty required for the industry to gain momentum. It will be interesting to watch what happens during 2012 and beyond.

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