How federal funding is creating business opportunities in an emerging biofuels and alternative energy market.

Much of the strategy and public discussion regarding how to address the twin problems of global recession and global climate change focuses on the encouragement of a new energy economy. In its statements and actions, the Obama administration has continually declared that the United States must convert to a clean energy economy. And, with the introduction of an array of financial incentives, initiatives and programs, the federal government is literally putting its money where its mouth is in supporting its position.

“The ability to develop clean power and energy-efficient technologies is going to become the defining measure of a country’s economic standing, environmental health, energy security and national security over the next 50 years.”

– Thomas Friedman, Hot, Flat, and Crowded

One such initiative, of particular interest to the forest-rich Southern states, is the development of biofuels – fuels derived from any renewable biological resource, such as plant materials and forest products. Last summer, President Obama issued a presidential directive to aggressively accelerate the investment in and production of biofuels.

In response, in June 2009, the U.S. Department of Agriculture (USDA) released a Notice of Funds Availability under the Biomass Crop Assistance Program (BCAP) to provide matching payments to owners of wood products who provide their wood to facilities that convert it into fuel.

Within months of USDA’s Notice, numerous wood-burning facilities and crop owners applied for eligibility under the program. By January 2010, more than 400 biomass conversion facilities, including 39 in Florida and Georgia, were qualified under the program. The uptake was far greater than anticipated – so much so that Congress recently had to revise its initial estimate of $70 million in required funding for the program to somewhere in the region of $3 billion.

In February 2010, USDA released a proposed rule to establish the full BCAP and terminate the Notice of Funds Availability. Comments on the proposed rule are due April 9, 2010. Once the new BCAP is on-line, funding related to production, collection, harvesting and transport of eligible crops will be available and it will behoove agricultural and forest landowners, operators and investors to stay on top of BCAP and be ready to take advantage of its benefits.

BCAP Generally

BCAP, authorized by the 2008 Farm Bill, is intended to assist agricultural and forest landowners and operators interested in growing crops for the production of bioenergy. The expectation is that, through BCAP, farmers and landowners can transition from annual to perennial crops, which will bolster the creation of new renewable energy markets in the U.S.

BCAP is authorized to support two main types of activities. First, it provides funding in the form of matching payments for eligible materials that are sold to facilities that will convert such materials into biofuels. Second, BCAP provides funding to producers of eligible renewable biomass crops in the form of establishment payments. This article discusses both funding opportunities in further detail below.

CHST Matching Payment Program

Matching payments are made for the collection, harvest, storage and transportation (CHST) of eligible crops for use in a qualified biomass conversion facility. Under the proposed rule, a list will be provided of those crops deemed “eligible and acceptable” to receive matching payments. However, whole grain derived from any crop eligible to receive payments under Title I of the Farm Bill is excluded, as are certain other crops.

This CHST Matching Payment Program is perhaps the most attractive benefit of BCAP. It reduces financial risk by providing a subsidy or incentive payment for those landowners that invest in eligible crops while simultaneously making the biofuels market competitive with other markets that use biomass.

EPA Announces New Renewable Fuels Standard, Cuts 2010 Goal for Cellulosic Biofuels

On February 3, 2010, the U.S. Environmental Protection Agency (EPA) finalized a rule revising the national Renewable Fuel Standard (RFS2)   program to meet Congress’ long-term renewable fuels mandate of 36 billion gallons by 2022.

Most significantly, RFS2 establishes new renewable fuel categories and eligibility requirements, including setting the first mandatory greenhouse gas (GHG) reduction thresholds for categories of fuels. RFS2 requires that the lifecycle GHG emissions of a qualifying renewable fuel must be less than the lifecycle GHG emissions of the 2005 baseline average gasoline or diesel fuel that it replaces and establishes different levels of reductions for the four different renewable fuel standards. RFS2 also creates a new definition of “renewable biomass,” which definition determines feedstock eligibility and opens the category to previously ineligible types of biomass.

EPA also scaled back, by 93 percent, its 2010  target of 100 million gallons of cellulosic biofuels to the “reasonable and achievable” target of  five million gallons. EPA claims the overall goal for advanced biofuels for 2010 is still possible, but it  reduced the target for cellulosic biofuels in light of the number of projects that have been put on hold, delayed or scaled back.

By 2022, the greenhouse gas reductions resulting from implementation of RFS2 will be the equivalent of taking 27 million vehicles off the road. EPA estimates that an increase in use of renewable fuels by 2022 will decrease gasoline costs by 2.4 cents per gallon and decrease diesel costs by 12.1 cents per gallon.

RFS2 is also expected to expand the market for agricultural products and open new markets for advanced biofuels by 2022, which will increase the cost of food $10 per person in 2022.

If eligible crop owners register with their county Farm Service Agency (FSA) offices and then sell and deliver eligible materials to a qualified facility, matching payments will be made at the rate of $1 for each $1 per dry ton paid by the qualified facility, up to a maximum of $45 per dry ton. An eligible owner is able to receive matching payments for a period of two years, which runs from the date the first matching payment is issued.

To bring the system in alignment with the goals of BCAP, USDA seeks comments on three different payment options. For example, one option uses a “tiered approach,” which would make payments for sale to facilities converting eligible material to advanced biofuels to the maximum of $45 per ton, but facilities converting materials to any other use, such as heat or power, would receive payments at some point below the maximum rate.

Regardless of the option chosen, it is important to note that matching payments are made only to producers of eligible crops, or persons with the legal right to collect or harvest the materials. The term “owner” can often depend on contract or on how the timber was purchased. For example, a lump-sum purchase generally transfers ownership of the timber to the logger, whereas sales made on shares or “pay as cut” may leave the ownership in the hands of the landowner until it is purchased by the qualified facility. For more information on qualifications of eligible owners and eligible materials under BCAP’s matching payment program, please contact the authors or another member of SGR’s Sustainability Practice.

Eligibility of a Qualified Biomass Conversion Facility

Biomass conversion facilities convert renewable biomass into heat, power, bio-based fuels, advanced biofuels, or any combination of these. Under the 2008 Farm Bill, any ethanols derived from corn kernel starch are specifically excluded.To become a qualified biomass conversion facility, the facility must first enter into an agreement with Commodity Credit Corporation (CCC) through the FSA state office, in the state in which the facility is located. If the facility is not yet in operation, the applicant should demonstrate it has obtained all required permits necessary for operating. Also, even if a single entity or individual owns multiple facilities eligible for qualification, each facility should enter into a separate agreement.

The agreement includes several requirements that a biomass conversion facility must meet before becoming qualified. For example, the facility must be physically located in the U.S. or its territories, and the facility must agree to make certain information available to CCC and to institutions of higher learning.

The agreement also has certain guidelines for the purchase of materials. Under the Notice of Funds, all transactions were to be conducted at “arm’s length.” The 2010 proposed rule replaces this language with “related-party” transaction language so that none of the parties in a related-party transaction are eligible for CHST matching payments. However, these restrictions will not render ineligible stockholders of a company who deliver to that company, or members of a cooperative who deliver to that cooperative.

 

A failure to adhere to this agreement comes with serious consequences. For example, the agreement provides that if the facility fails to comply with any of its terms, the facility will, on demand of CCC, be required to reimburse the government for all payments made to eligible material owners plus interest, even though the conversion facility itself did not receive the payments. Accordingly, if a facility is concerned  that  its program is not meeting all requirements, it is imperative to seek counsel.

Establishment and Annual Payments

The proposed rule also expands the final BCAP to specifically support the development of renewable biomass production near biomass production facilities through establishment and annual (E&A) payments.

E&A payments are proposed for persons and legal entities with eligible land that is located within a specific, designated project area. These payments are designed to cover no more than 75 percent of the costs necessary to establish non-wood and woody perennial biomass crops in the project area. E&A payments are calculated on a per-acre basis, on market-based rental rates as determined by CCC. Participants may also be eligible to receive CHST matching payments; however, because the annual payment is reduced when the matching payment is issued, it may often be wise to decline the matching payments.

Project areas are determined on a continuous basis and are to be proposed by project sponsors. There is no restriction on who can own or operate an eligible facility or sponsor a project area. The proposed rule does require that all contracts provide for the implementation of a conservation plan, forest stewardship plan or the equivalent.

For more information on the establishment and annual payments under BCAP, including project area selection criteria and eligible crops, producers or lands, please contact the authors.

The SGR Perspective

In the timber-rich Southeast, biofuels most certainly will have a strong place in the development of a new energy economy. SGR’s Sustainability Practice monitors developments in regulations, funding, tax incentives and other financing sources and works with clients in the timber and energy industries to help maximize benefits received from participation in the development and sale of alternative energy projects and fuels.

Timber owners, energy companies and biofuels startups would be wise to closely monitor developments in federal regulations and federal funding of alternative fuels, especially in programs such as BCAP, which are designed to spur the creation of a biofuels industry. With BCAP currently on hold pending adoption of the proposed rule, the time to plan to take advantage of this program is now.