Obama's $510M "Blueprint" biofuels program: The Digest's Take

The Digest’s Take: A magnificent start, now its industry’s turn

The President’s plan, announced in March, was to ensure the building of four integrated biorefineries and thereby jumpstart the race for scale in advanced biofuels. Given the debt and spending travails of the government – using existing funding was a realistic “must” – so there are limitations on US government support.

Nevertheless, what the group has outlined is more than simply a program to leverage the building of refineries – note that USDA will be coordinating the mitigation of feedstock risk, which means more support for growers in the form of credits and incentives to begin the production of energy crops – and also, ensuring that there are long-term feedstock contracts available with fixed pricing, from credit worthy suppliers.

Note also, that the Navy will be providing what we expect to be the long-term off take contracts at fixed prices from a credit-worthy customer in the US government.

Angels in the details

Finally, there’s the financial program itself, which will provide a strong equity infusion – something on the order, minimally, of $127 million per biorefinery (if in fact four are built, as per the President’s plan). With industry providing a minimum of $127 million per project from their side via the 1:1 match – about the proceeds from one of the several IPOs that have been brought forward (and about what Total, for example, invested in Amyris), that’s between $4 and $6 per gallon of capacity for the equity side of the capital requirements for constructing the plants (based on a 40-60 million gallon capacity).

If the average first commercial advanced biofuels plants cost $8 per gallon of capacity, as the USDA has forecasted, that could mean that either there will be a low debt requirement (reducing the fuel cost, perhaps dramatically), or a desire by the USDA to commission more than four plants

This initiative should produce somewhere between half and two-thirds of the Navy’s 336 million gallon needs, and given program start (after the RFP process) in 2013, look for capacity to become available by 2015 or 2016 – that’s well in time for the Navy’s Green Strike Fleet, and leaves plenty of time for the construction of additional plants to meet future capacity needs.

Stick to 4 projects, or build more?

Should the USDA aim to build more capacity? Our thinking is “no” – stick to the President’s original goal of four – and get them built with a minimum of delay. The country needs, at every level of society from coast to coast, to see proof positive that advanced biofuels can supply affordable, reliable, low-carbon domestic fuel – as soon as possible.

Better to get four projects definitively across the Valley of Death than to aim for 8 or 10 with this program – and in so doing, add so much debt to the projects (by spreading the equity thin) that the projects can’t raise the money in the short-term, and have to charge sky-high fuel prices in the long-term, to pay off all the notes.

Bottom line, this should be enough, and it’s highly welcome.