Monday, May 07, 2007

Local Development of Cellulosic Plants Not Likely, At Least for a Couple of Years

Minnesota Governor Pawlenty proposed a new biofuels policy titled the "NextGen Initiative" this past December. In this policy he proposed three things: 1) an increase in Minnesota's Renewable Energy Objective which would require utilities to acquire 25% of their energy from renewables by 2025, 2) a proposal to quintuple the number of E85 pumps in Minnesota, and 3) a proposal to increase state funding to cellulosic and advanced biomass gasification technologies, with a special focus on farmer ownership. I'm primarily interested in the third prong of this policy. In particular, I'm curious about feasibility. I wonder if it is feasible for local farmers to raise the capital necessary to build a cellulosic or advanced gasification plant. Some quick research tells me that it probably isn't.

An average-sized corn ethanol plant can be built for well under $100 million. However, a cellulosic plant costs about $250 million. Common sense tells me that this pricetag could discourage local farmers from successfully investing in cellulosic and advanced biomass gasification plants. Current lending law adds to my conviction. Farm Credit Administration rules only allow banks to lend cooperatives capital if farmers comprise 80% of the voting control. 12 CFR sec. 613.3100 (2007). If a plant costs upwards of $200 million, 80% farmer control will be tough to achieve, to say the least.

Even corn ethanol plants are increasingly owned by venture capitalists. High oil prices, demand for larger plants and policies such as the 2005 Energy Policy Act renewable fuel standard make ethanol an increasingly attactive investment. Economist David Morris predicts that about 75% of new ethanol cooperatives will be developed by outside investors.

Besides financial barriers, there are a few other reasons why farmers would choose not to invest in cellulosic ethanol plants. First of all, most farmers grow crops like corn and soybeans. Why would they invest in a plant that used a feedstock like switchgrass? Production incentives for alternative energy crops and technical support for growing those crops will most likely need to precede any local investment in non-corn ethanol plants. I would also guess that farmers would be less likely to invest in an immature technology. Investment in a cellulosic ethanol plant is more speculative than investment in a corn ethanol plant and I would hazard to say that local investors are more conservative than large firms such as Iogen. I could be wrong, but I just don't think most farmers have as much money to play with.

In some ways it might not matter who develops cellulosic plants. After all, any development in this field would eventually benefit farmers through new market demand for energy crops and everyone through enhanced environmental quality. However, I think it would be better to tie more direct benefits of cellulosic development to farmers. First of all, there is the ever-popular argument that local investment stays within the community; i.e. local farmers rely on local banks, local accountants, etc.; whereas, large investors rely on large banks located in large cities and so on and so forth. Furthermore, it might just be that anchoring the development of cellulosic biofuels within the farm community would further its development more extensively than anchoring control remotely. If farmers see that producing native grasses is profitable both as a crop and a value-added product, they might more readily plant native grasses. Without the second tier of profit potential, native grasses are less valuable than corn and less worth the risk of planting.

I personally do not see much local investment in cellulosic plants on the horizon. More incentives for production of alternative feedstocks and revamped lending laws could change this situation, but I'm guessing this won't happen for at least two years.

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