Federal loan programs ill-suited for cellulosic ethanol

Nov 20, 2009
by WLJ
Federal loan programs ill-suited for cellulosic ethanol

Last year, I wrote an article describing the difficulty cellulosic ethanol producers may encounter obtaining capital to finance the commercialization of new technologies. In addition to problems on Wall Street following the collapse of the financial markets, cellulosic biofuel producers did not have standard benchmarks of performance the same as grain corn ethanol plants (1 bushel of corn yields 2.7 gallons of ethanol) and federal loan programs were not tailored to the size and scope of next-generation biofuel plants.

All three factors still exist and are hampering the advancement of the industry.

On Oct. 29, the U.S. House Committee on Agriculture conducted hearings to evaluate the usefulness of federal loan programs and stimulus money targeted toward cellulosic ethanol.

Mascoma, a company at the forefront of cellulosic ethanol development, recounted that it had contacted nearly 200 lenders in an effort to obtain financing, but found only two who would work with it. The company eventually ended up without any federal loan funds due to technical difficulties in the program.

The Coskata Co. presented a list of 12 diverse technologies to produce cellulosic biofuel. It argued that a wide range of feedstocks should be considered viable for conversion to biofuel. The company said this would broaden geographic opportunities and reduce market pressure on a single commodity. As it is, the productivity of different feedstock and technology combinations are difficult to discern and create anxiety on the part of lenders searching for production benchmarks.

Several companies were critical of federal loan provisions that were too narrow or favored specific types of technologies. There is a wide array of potential feedstocks being researched for cellulosic ethanol, but most federal loan programs prioritize feedstocks that qualify. This limits the development of alternative technologies.

The amount of loan funding available also is in question. Federal loan programs require a minimum of 30 percent private capital from commercial lenders or equity. However, in the present lending market, lenders are reluctant to go this far with unproven technology. Lenders are cautious following low profit margins that prevailed last year and forced almost a dozen ethanol plants to file for bankruptcy.

Other companies noted that several federal biofuel regulations pose challenges to the cellulosic biofuel industry and are viewed negatively by lenders. For example, the Environmental Protection Agency’s (EPA) reluctance to raise the ethanol blend limit nationwide creates “a blend wall” that limits the growth of biofuel consumption in cars that are not flex-fuel. Proposed EPA regulations to reduce greenhouse gas emissions associated with biofuel production are another concern.

Finally, federal biofuel tax credits should be extended to 2022 to provide more stability in the marketplace rather than sunset in 2012 under current policy. All of these policy changes would be expected to bring greater lender confidence in cellulosic ethanol.

Direct tax credits are of marginal value to newly formed businesses with low operating profits or existing firms impacted by the national recession. — Cole Gustafson, Biofuels Economist, North Dakota State University Extension Service