Changing of the Guard

Heading back home from the Cellulosic Biofuels Summit in Washington this week, I spotted former Clinton White House chief of Staff (and former Obama transition chief) John Podesta on the Washington metro.

When last John and I had last spoken, it had been during the dramatic week in 2008 when the global financial crisis had progressed into near-meltdown. Wall Street was running scared, the economy was out of gas, and Podesta’s Center for American Progress had just issued a new report pointing our a path to recovery through transformation of the American energy system.

Today, the Democratic Party is running scared, the Obama Administration is out of gas, and Podesta’s Center for American Progress has issued a new report pointing our a path to recovery through transformation of the American energy system. You can read it, here.

Back in Washington city itself, the seats were filled at the Caribou Coffee shop a block west of the White House – that informal political center of the American system where meetings on the future of the country can be conveniently held without being recorded on the White House logs. But it was not the grand poobahs of policy that are holding court now, but the headhunters. The quiet exchange of policy papers has given way to the quiet exchange of resumes.

New Secretary of Energy?

Over at the Cellulosic Biofuels Summit, there was the usual exchange of agonies over the commercialization of cellulosic fuels, and many of the usual explanations from the usual suspects, salted in with an unusual amount of interest in the timing of the departure of Secretary of Energy Steven Chu. The scuttlebutt ranged from a few weeks to a few months.

If the axe falls, it will be the price for re-positioning the Department of Energy as a research lab. Meanwhile, the Secretary has embarked on a personal publicity barrage, with a dreadfully ill-informed puff piece appearing in the Washington Post, as the Secretary battles to keep his job.

It was loyal, hard-working Valri Lightner from the Office of Biomass who was deputized by the DOE to come down and give expression to the Department’s regret over the failure to commercialize cellulosic biofuels. Earlier in the week, loan guarantee czar Jonathan Silver had put in an appearance, and from all reports managed to escape with his life, though offering little by way of explanation for exactly how the Federal Government has managed to make such a meal of the Section 1705 Loan Guarantee program.

Silver’s team has deployed about 2.5 percent of its authorized funds, and generally infuriated energy companies and Congress in the process. The loan guarantee team has done a yeoman job of convincing the American people that the wrong people are in change of their money, and thereby helping to hand the House of Representatives back to the Republican Party. The DOE has managed something that is not about recovery, not about reinvestment, not about acting, and not even very American, out of the American Recovery and Reinvestment Act.

We are not quite sure what the Republican Party will propose to do in the coming two years – for they have so religiously and successfully applied the principle that ‘the duty of the opposition is to oppose” that we’re not quite sure if there’s any political capital in doing anything in Washington over the next two years.  But as united as the Republican caucus is, it will run only second to a uniting chorus of renewable energy leaders who have concluded that it is time for Chu to go.

The DOE Bioenergy Grants

Back to poor Valri, who focused generally on the DOE grant programs, and was typically frank though more nervous than we have seen her in the past. “The DOE has committed a billion dollars towards the commercialization of biorefineries, and that’s a lot,” she said, but then conceded that the DOE has actually deployed about $200 million of it.

The DOE, she said, had designed its program to overcome the Valley of Death problem that plagues high-cost, first of kind biotechnologies. She indicated that the DOE’s pilot and demo program grants to satisfy what she described as the needs for project data that commercial banks would need in order to issue loans.

Candidly, she conceded, there are no commercial banks making such loans, nor any threatening to make an appearance any time soon on the front steps of a bioenergy project.

The DOE had further made commitments that it would fund up to 40 percent of the first commercial-scale projects.

Candidly, she conceded that these first commercial scale projects would require as much as $400 million in total project costs, and that the DOE was limited to no more than $100 million in total commitments towards any single project. Which, according to most of the calculators in the room, was about $60 million short of 40 percent.

The DOE Loan Guarantee program

“Well, there are the loan guarantees,” she offered helpfully. And silence overtook the room. For everyone realized that the DOE had not bridged the Valley of Death, but simply crowded it, with a lethal combination of portfolio investment theory and a belief that the banking system remained as it was in AD 2007. For its millions in taxpayer dollars – not to mention the overhead cost of managing it all – the DOE has simply funded 29 demonstrations of how not to bring a project to commercialization.

Not that the investments weren’t helpful. All dollars are always welcome. Not that projects won’t get financed – the DOE’s lack of creativity has spawned an ocean of it in renewable energy finance circles. And driven a series of energy projects into the arms of a chemical industry that is just as concerned at the prospect of high oil and gas prices as the general public is.

The lift into commercialization is, in the end, going to fall to the chemical companies – Dow, Dupont, BASF, Ineos – who’d like an alternative to the rollercoaster ride of oil and gas pricing. The energy companies are going to be those waste-based projects – like Enerkem, BlueFire and Fulcrum, who have found a way to zero out – or even generate revenue – from their feedstock sourcing, by charging fees back to cities for emptying their landfills. Or those, like POET, that managed to empty the Iowa Power Fund and other state-based sources of cash.

Fulcrum Bioenergy’s loan guarantee

So we are not at all surprised, as many were, that Fulcrum Bioenergy has managed to wrangle a term sheet out of the DOE. What’s not to like? Get paid for the feedstock, and thereby get the fuel cost down to levels that even a shale oil developer would envy, even at small production scales, even with the sub-optimal yields of a technology that has not yet reached scale.

As Raymond James analyst Pavel Molchanov writes: “In the nearly two years since the Obama administration took office, the Department of Energy’s clean energy loan guarantee programs (Sections 1703, 1705 and ATVM) have announced $24.8 billion in funding support. While the headline figure may look massive, as a practical matter the funding for “alternative” energy projects is nowhere near as high. The single largest loan commitment, $8.3 billion, is for a nuclear power plant in Georgia. The second-largest, $5.9 billion, is for fuel efficiency retrofits to various auto production plants of Ford Motor (F). These two projects alone account for more than half of the total. Only about 25% of the total is directly relevant for renewable / alternative energy companies.

“While the DOE loan program has not lived up to its lofty expectations – mainly due to the onerous, ultra-bureaucratic application process,” Molchanov comments, “what’s most striking to us is that an entire category of renewables has thus far been left out entirely. The DOE has not yet approved a single loan for next-generation (Gen2) biofuels. Under Section 1705 (part of the 2009 stimulus), Gen2 is expressly covered. In some respects, DOE funding for Gen2 is particularly vital, because these technologies have historically been almost entirely in the R&D stage. Mainstream adoption of wind, solar, and geothermal in the U.S. is far ahead of Gen2, and thus commercial funding options (e.g., traditional bank loans) are more widely available.”

Jim Macias, CEO of Fulcrum Bioenergy, thought that the fixed pricing on feedstock that his company has been able to wrangle, was key to moving ahead so quickly on their loan guarantee. “The DOE absolutely did not want to have to cover the loan guarantee, or have taxpayer dollars at risk. We were focused on de-risking the project everywhere we could, and offering as much certainty as possible.”

The result? For Fulcrum, not only an opportunity to move forward, but acceleration. “We are going to be accelerating” said Macias, commenting on the company’s path forward. “In terms of our EPC[engineering, procurement and construction] work, we had started the ‘E’ earlier, but we should be moving to the ‘P’ by year end. With the loan guarantee, we have the capital to construct, and to cover contingencies. We are budgeting to be done by the mid third quarter of 2012, but we have hope that we might even do a little better tan that in terms of the timing.”

Next up for loan guarantees: BlueFire Renewables?

Next up – we would not be surprised to see BlueFire Renewables be the next company through the DOE hoops. And we expect even more opportunities to start to open up over at USDA – which has far less to work with in terms of dollars, and had a far later start, but from all reports is moving at a far faster pace, and may be poised to materially advance several key projects towards completion of their financing before the end of the year.

But Molchanov cautions, “While we expect to see a handful of Gen2 loan guarantee approval announcements over the next few quarters, the practical reality is that other funding models will be needed for the industry to get to full-scale commercialization. As we detailed in our Stat of the Week on August 30, “Biofuels, Gen2: A Long, but Promising, Journey from the Lab to the Fuel Pump,” a key model is strategic partnerships with “big brother” industry backers, including integrated oil and gas companies, independent refiners, and chemical producers.”

Deployment vs. more of the same

If the Duponts of the world are going to shoulder the first wave of the transition away from fossil oil, why not former Dupont CEO Chad Holliday for Secretary of Energy? He’s got vision, panache, guts, experience, and  has coalition-forming and partnership management in his DNA. Why not put some can-do, instead of can-research, into the Department of Energy? Duke Energy’s Jim Rogers has strong credentials. But for sure, let’s get someone into the job who has a track record of commercializing advanced technologies.

Your view? Who should be Secretary of Energy – take our Digest poll.

One thing is sure. Obama campaigned on “Change You Can Believe In”, and the bioenergy industry is supportive of change – change in the outcomes for sure, changes at the top if necessary to secure that. A new sheriff in town, in the view of the industry, would signal a fresh start.