After what initially looked to be a promising year for alternative energy in general and the advanced biofuels industry specifically,Congress has encountered significant barriers to realize a comprehensive, long-term energy bill or consensus on a pragmatic climate bill. In addition, the EPA for the second year significantly reduced targets for advanced biofuels production. Despite all this, the advanced biofuels industry is determined to commercialize and stand on its own two feet.
However, to facilitate private investment and make advanced biofuels a real alternative to fossil fuels, Congress needs to set long-term, technology-agnostic goals with built-in incentives. What we as an industry need is a hand up, not a handout. If the goal is ultimately to reduce our dependency on foreign oil, advanced biofuels represent the best near-term opportunity that can be implemented today.
Every president since Nixon has said the U.S. needs to reduce its increasing dependency on oil imports and fossil fuel consumption in general. However, despite occasional grandiose pronouncements, government support of renewables over the past 40 years has not been consistent enough to enable the broad-scale energy transformation that must take place. There have been minor achievements in this area, inevitably followed by setbacks. When oil prices soar, the country focuses its attention on renewable energy alternatives, and when oil prices fall, the goal is forgotten or at best set aside for another day. This yo-yo effect makes it extremely difficult for a nascent industry to set long-term financial goals and get through “the valley of death.”
The only way out of this valley and on to the promised land of commercialization is demonstrating to investors (venture capital partners, strategic partners, etc.) that your technology and long-term economics are not only feasible, but are viable in the long-term.
Sounds relatively simple enough: take a great idea, prove it works, raise funds, build a facility, and produce and sell product to a willing market. However, it’s not so simple in an industry such as advanced biofuels. While fossil fuel dependency may seem inexpensive in the short term, the long-term consequences are increased economic and environmental risk. If the mission is to reduce the need for fossil fuels, then the government must provide the industry and investors with clear long-term goals (such as the RFS2) accompanied by long-term incentives (such as investment and producer tax credits, and workable loan guarantees) for the production of advanced biofuels. Incentives that last for two to three years with no certainty of renewal do not provide enough confidence to the financial markets, making them unlikely to invest the large amounts of capital required, particularly in this current economic climate. Government needs to coordinate a 10-year to 20-year outlook similar to its commitment to the building of our national highway system, not the shortsighted three-year outlook that has unfortunately become standard operating procedure for our policymakers.
The EPA’s Renewable Fuel Standard (RFS2) calls for the production of 36 billion gallons of biofuels by 2022, which would replace approximately 30 percent of our nation's fuel supply, according to some estimates. Over 40 percent of the renewable fuel is to come from cellulosic biofuels. The RFS2 is a big step in the right direction, but the standard for 2011 was reduced from 250 million gallons to under 17 million. The reduction was unfortunately necessary from a regulatory standpoint -- the EPA is required to regulate according to actual production volumes -- but what signal does this send investors? Are we just playing the game, or are we in this to win?
We biorefiners are not without blame. Aside from the government providing the environment for our industry to flourish, we must do a better job of making the case that advanced biofuels are economically feasible. It is not enough to have a cool technology and slick PowerPoint presentations; we need to show we can eventually compete with oil, if given a helping hand to get started. This is why biorefiners’ commercialization plans need to demonstrate the technology, scalability and economics of each intermediary chemical step with independent third parties to “de-risk” their process.
Government needs to be careful it does not pick winners; the market, ultimately, is best at that. But the government can offer significant assistance to the industry as a whole by encouraging and incentivizing early movers while remaining focused on the ultimate goal of reducing fossil fuel demand. When developing a new technology, investors are extremely hesitant to be first movers but will become actively involved to be second and third participants. To achieve the goal of reducing fossil fuel consumption, the best policy is to set attainable long-term goals such as the RFS2, back them up with clear long-term incentives, and let the market sort out the winners and losers. Believe me, the market is very good at that!
Some might say the government shouldn’t be funding R&D for new technologies with unknown potential and that the markets should be able to pick a winner without incentives. While this approach may work for the high tech industry, it is not feasible for long-term, capital-intensive industries like fuel production. This argument also ignores the fact that many highly profitable industries today were initiated with government involvement and that the government still subsidizes many industries, including the oil industry, to this day, in the interest of the economy and national security.
Our industry does not need permanent support. Once these facilities are built, they operate for up to 100 years and continue to turn a profit. What is needed is long-term, consistent policy and incentives so that this emerging industry can successfully commercialize in the face of volatile oil prices. We need the hand up -- allowing us to provide proof of economics to strategic investors -- and then we’ll stand on our own two feet on the other side of the valley of death.
***Jim Imbler is the CEO of ZeaChem, a cellulosic ethanol company.