Annie Snider, E&E reporter – 2011-07-25

Agencies eye defense law to speed capital to biodiesel industry

The Obama administration is considering declaring domestic biofuel production a critical defense capability and using a little-known military procurement law to funnel capital into the fledgling industry, industry sources say.

Responding to a March directive by President Obama, the Navy and the departments of Energy and Agriculture are designing a new program that would provide as much as $500 million to the biofuel industry in an attempt to bring production facilities to commercial scale, according to people familiar with the effort. The program would tap various financing mechanisms available to the three departments, most notably the Defense Production Act.

In order to invoke the act for biofuels, Obama would have to declare the technology an essential national defense capability — something sources say he would likely do either through a “presidential determination” or an executive order.

In recent months, DOD officials have been drawing a clear line between biofuels and military capabilities.

“This isn’t something we need to do because we’d like to do it,” Navy Secretary Ray Mabus recently told NPR. “Our biggest vulnerability in the military right now, one of our biggest vulnerabilities is in energy and in how we get it, how we use it.”

Last month, Mabus’ deputy for energy put an even finer point on it when he told a House panel that biofuels are mission critical.

“Diversification to advanced biofuels is essential to sustain the U.S. military’s mission capabilities,” said Thomas Hicks, deputy assistant secretary of the Navy for energy.

Building an industry that can meet the military’s thirst for fuel the Navy plans to get at least half of its energy from non-fossil sources by 2020 and is looking to biofuels to make up a significant portion of that.

But industry is not producing biofuels at that kind of scale. When the Navy put out a request for 450,000 gallons of bio-based jet and diesel fuel to do a test run of an alternatively powered carrier strike group last month, Hicks said it was unlikely any single company would be able to meet the full order, which is a fraction of what the Navy will eventually need (Greenwire, July 7).

Investments made through the Defense Production Act could be the key to bringing the biofuels industry to the scale the military needs, say industry leaders. “We’re in a situation now where these technologies are right at the cusp of commercialization,” said Brent Erickson, an executive vice president at the Biotechnology Industry Organization, who has been involved in talks with the agencies. 

“A significant investment by DOD could speed that up and help people get over the valley of death.”

The 1950 law was created to help the military get essential materials quickly during the Korean War and has played a pivotal role in establishing a number of domestic industries, including aluminum and titanium, said Rich Mirsky, who retired as manager of the Defense Production Act Title III program in 2005.

“The purpose is to be able to provide the military with the material it needs when the commercial sector is either unwilling or unable to do it,” Mirsky said. “It’s generally military-unique type equipment, but there are other projects, too.”

For instance, Cree Inc., the North Carolina-based light-emitting diode (LED) factory President Obama visited last month, received early funding from the Defense Production Act to improve the technology (ClimateWire, June 14).

Hicks declined to comment on the upcoming announcement but said what the three agencies are working on could be game-changing.

“We’re looking at combining authorities, combining our resources in ways that haven’t been done before,” Hicks told Greenwire. “What we have in this effort is a really unique group. We have the Navy, who can really play the role as the consumer of the end product, we have Agriculture that has that connection to the agricultural community that’s growing the feedstocks, and we have Energy that has expertise around the technologies. Marrying that all up is really unique.”

For instance, a $100 million capital investment through the DPA could be paired with a USDA loan guarantee and private financing to cover the cost of a commercial-scale facility, which industry estimates generally peg at between $200 million and $500 million.

Moreover, the military could do what commercial airlines can’t for biofuels, said Jim Rekoske, who heads Honeywell UOP’s renewable energy division, which has a contract with the military.

Since airline companies’ credit ratings have plummeted, a contract to supply a commercial airline with biofuels won’t get a company the loan it needs to build a commercial-scale refinery, he said.

“Most of them are considered to be junk in terms of their credit rating,” Rekoske said. “If I take that to a banker, there isn’t much of a likelihood that they’ll be able to give me the full value of that [contract].”

But financiers see a DOD contract as a much more solid investment, he said. Combining a capital investment with a long-term DOD contract could go a long way to bringing the price of a gallon of biodiesel under the price of a gallon of petrol diesel, Rekoske said.