Over There: The Yanks are Coming (同胞, can you spare a dime?)

In Washington yesterday, BIO exec VP Brent Erickson ruefully noted in a conference with reporters that the biofuels industry was “very disappointed in the loan guarantee program. Biomass was mixed in with wind and solar, which have much more mature technologies, and we have not fared well.” He noted that the program was designed to be a risk reducer, and to “go beyond” what the commercial credit market could do. “Instead, it does exactly what the commercial credit market does.”

The industry disappointed with the loan guarantee program? That’s putting it mildly. The big winners appear to be international airlines, carrying an increasing stream of biofuels executives out of the country looking for financing.

Unintended Consequences, Outsourcing-wise

It’s just one of the unintended consequences of US policy, which has moved from a policy of shifting old-line manufacturing jobs overseas, to a new policy of shoveling entire high-tech companies and industries offshore just as fast as United Airlines can carry them. The Biofuels industry is looking like boat people in reverse — floating out just as fast as, in days gone by, people “yearning to be free” floated into US harbors.

For sure, it’s an unintended consequence of US policy, but a consequence nonetheless. It’s true that Sapphire Energy and Range Fuels have landed loan guarantees, but more than half of the 50 Hottest Companies in Bioenergy are actively seeking capital offshore or are developing offshore operations in response to foreign investment interest.

You Don’t Need A Weatherman to Know Which Way the Wind Blows

The theme of unintended consequences was taken up by several members of the United States Senate, led by Charles Schumer of New York, who have raised hell over an announcement by the US Renewable Energy Group that its application for a $450 million stimulus bill tax credit would create 300 jobs in Texas and 3,000 in China where the wind turbines would be manufactured.

The Digest last year raised questions about the location of manufacturing for the all-electric sports car loan guarantees issued by the Department of Energy to Fisker, but in the case of USREG, Secretary of Energy Steven Chu told the Dallas Morning News that “according to the rules of that grant, they get the tax credit. Certainly the concern of this Recovery Act money going to stimulate as many American jobs as possible is a legitimate concern.” Chu warned that the experience of Europe was that if wind investment is not situated in the US, it will migrate to low-cost manufacturing countries abroad.

The concern stems from the way Senators look at the world. In politics, “jobs, jobs, jobs” are the chocolate of politics: popular in almost any assortment. Except that in politics, no job is a real job unless it is a job created in a legislator’s home district. Climate change, transformation of the economy and long-term economic competitiveness are the legislative equivalent of broccoli: good for you, and a tough sell.

Accordingly, there’s just about nothing worse than a climate change initiative (broccoli) that creates jobs in China’s district (no chocolate). Amidst a long-standing and difficult debate over the loss of manufacturing jobs overseas — we have here the appearance of indirect job use change —  in which US policy is not only failing to prevent the migration of manufacturing jobs overseas, it appears to be directly funding it from the US Treasury.

But it gets worse. Because it brings us back to the carpetbagging that increasing numbers of biofuels executives have been doing.

A Cautionary Tale: AHL-TECH

“I just got back from India last Saturday and have some interest from Indian investors,” writes AHL-TECH CEO Tom Mack, who we last reported on during the “Benjamins for Biofuels” series last fall, which covered the difficulties experienced by US companies in raising funds for bio-based renewable energy projects.  “It is unbelievable that a company like AHL-TECH has to go across the Pacific Ocean to India to look for support. In the meantime. Frankly, it seems U.S. investors don’t want to invest in manufacturing here.”

Mack points to an interesting trend, a complete lack of interest at DOE in funding early-stage companies developing transportation platforms using alternative fuels, while embracing early stage companies developing bio-based fuels and processing technologies. “Why do investors and DOE look to new and somewhat obscure companies like BlueFire Ethanol, Cobalt Biofuels, or “Soup-du-Jour Algae Fuels” to be the next multi-billion dollar player in fuel production, instead of BP or Shell or another huge fuel company, but expect that ethanol engine or vehicle technology advances should come only from the GM’s, Ford’s, and GE’s of the world and not from companies like AHL-TECH or AmeriFuels?” Mack sighs, “Is it because fuels are developed in a lab with scientists in white coats, whereas locomotives are developed on the drawing board and built in factories. There is a major disconnect here.”

What Mack is pointing to an active disinterest in promoting advanced manufacturing innovations by smaller companies — rather, more interest in protecting existing industries and hoping that they, in turn, invest in new technologies (like the GM model, where Chevy develops the Volt but in the process is acquired by the government because GM can’t pay the bills).

Mack rightly points out that the government is not only exporting jobs by structuring tax credits so that 90% of a US stimulus tax credit would stimulate job growth in China (not that we don’t wish our readers in China well – we do! – and not that the United States should not be grateful that China is providing much of the stimulus funding by buying US debt in the first place.)

But it is more than a poorly structured tax credit. As Chu points out, outlawing the credit’s application to Chinese turbines will only serve to make US renewable energy projects more expensive, less profitable, more risky, and thereby less financeable. It will not move the US off fossil fuels and dependence on the volatile markets for foreign energy. In short, we are in a pickle.

Mack’s solution – invest not only in platforms for supplying energy, but distributing it. It is a persistent weakness in US renewable energy policy. There are numerous credits for producing power, but the US has not been able to materially overhaul its electric transmission system for a generation — a one-time showcase of US know-how, the electric grid, is in precarious shape. It is the same in liquid transportation fuels. There is plenty of ethanol capacity, and last year there was overcapacity, and biodiesel is ride with overcapacity. Why? Because there has been pathetically low investment in the downstream systems.

The Rosy-Kolored Mandarin-Spake Downstream Downshift, Baby

It is an area of concern. US oil companies have largely divested their downstream systems, with retail gas stations primarily owned by the convenience store industry that uses fuel as something of a loss leader and makes money off high-price snacks and soda. They are reluctant to invest in ethanol distribution because they don’t make much money on fuel in the first place. Why bother, they say, where’s the ROI?

Hence some of Tom Mack’s frustration. His company’s technology is an ethanol-electric hybrid locomotive — a new platform for distribution. We need, he says, “to move ethanol-optimized technologies such as locomotives, industrial engines, generators, and so forth into the market. Since these types of equipment can use alternate fuel suppliers (e.g. the local ethanol plant or independent fuel dealer), we open up a whole new market force for ethanol. Shouldn’t we be working on the vehicles and engine technologies so that we can efficiently use the billions of gallons of new algae or cellulosic ethanol when it begins to flow? And why should the manufacturing side be any different than the production?”

These are good questions that deserve answers. Perhaps one of the problems is that the upstream is united — producers have banded together, often allied with growers, to lobby for assistance in developing capacity. But downstream is less organized, and many of the players are smaller companies that find it hard to get, or afford, government attention in terms of financing assistance.

Legislators with an interest in creating jobs – and woe betide the legislator who is not so focused this year — should get off the stump where they are talking about the loss of manufacturing jobs, and get into committee rooms where downstream can be given the same kind of urgent support that has been bestowed on the upstream.

Industry consortium calls for Investment Tax Credits

Meanwhile, elsewhere in the industry, a consortium of advanced biofuel producers signed a letter to U.S. Congressional leaders urging the creation of a 30 percent investment tax credit (ITC) for advanced commercial biorefineries. They state that the ITC is needed to jumpstart the industry, which must meet new federal mandates for renewable fuels.  The commercialization of the advanced biofuels industry has been slowed by the extended downturn in the U.S. economy, limiting access to private capital needed for the development of commercial scale biofuel projects.

They point out the difficulty in financing high capex projects like cellulosic ethanol, especially in a climate of policy insecurity where plant will last 40-50 years, yet policies regarding support of the industry are written in one-to-five year increments.

“Just as Congress responded to the impact of this downturn on the renewable electricity industry by allowing a 30 percent investment tax credit in new facilities that can be monetized through a federal Treasury grant program,” the letter, addressed to Senate and House tax writing leadership, said.  Additionally, the letter’s signatories recognized that cellulosic technology costs $250 million for a 50 Mgy facility, and that  conversion technology in a cellulosic biofuel refinery is pre-commercial, which makes the need for assistance to bridge the “Valley of Death” between early-stage equity finance and mature-stage project debt.

A Time For Statesmanship

But let’s not just complain about the Congress. Collin Petersen of Minnesota, Aaron Schock of Illinois, Jerry Moran of Kansas and Brian Bilbray of California are just a few of the members of the House who have taken an enlightened interest in biomass. Grassley of Iowa, Baucus of Montana, Thune of South Dakota and Conrad of North Dakota are just a few of many on the Senate side that have shown a willingness to work in a nonpartisan manner for green jobs and the family farm.

It’s a time for statesmanship, not partisanship, and these are the kind of leaders who can forge a consensus behind a policy that saves manufacturing jobs, builds a downstream, and gets the US away from a false choice between supporting renewable energy and supporting US jobs. A strong policy is one that delivers both.

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