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By Andrew Holland on Jul 23, 2012 with 4 responses

The Navy’s Biofuels Program and the Great Green Fleet – Opportunities and Risks

The following article was written by Andrew Holland for Consumer Energy Report‘s free Energy Trends Insider newsletter.

Last Wednesday, the Green Strike Group sailed during the international Rim of the Pacific (RIMPAC) exercises off the coast of Hawaii. These exercises are the Navy’s largest of the year, and  feature participants from around the world. The reason, however, that this is important to clean energy investors is that the Navy could act as a market maker for the struggling biofuels industry. If the Navy guarantees its market over the next decade, there will be certainty for biofuels companies to make the investments necessary to reach commercial scale.

The fuel being used by the strike group – other than the nuclear powered aircraft carrier – is a 50/50 blend of biofuel and traditional petroleum-based fuel. The Navy made the buy of 450,000 gallons of biofuel in December of last year, paying about $26 per gallon. This was the largest purchase of advanced drop-in biofuel ever. The Navy contracted with Dynamic Fuels (50% owned by Tyson Foods) and Solazyme to provide the fuel.

Going forward, there are two things that investors need to know:

1.    Congressional Action

There is great uncertainty right now about the status of the Navy’s biofuels program because of recent Congressional action. It has become a target of Republican attacks in both the House and Senate Armed Services Committees. During Committee consideration of the FY2013 Defense Authorization bill, both committees passed an amendment that forbids the Department of Defense from purchasing fuel that is more expensive than traditional fuel, unless it is for testing and demonstration purposes. In addition, the Senate passed an amendment, sponsored by Senator McCain, which forbids the Department of Defense from directly investing in biofuels production facilities unless directly authorized by Congress.

Although biofuels supporters have pledged to fight this on the floor of the Senate before Congress leaves for recess in August, I am not convinced that there will be enough floor-time available to allow debate and a vote on this. In addition, when we see that Moderate fossil-fuel Democrats like Senators Manchin (D-WV) and Webb (D-VA) opposed biofuels in committee, I am not sure that the vote would be successful anyway. Like many things in Washington these days, this is an issue that will only be decided after we see what happens on November 6.

2.    Federal Funding

Regardless of the Congressional action, the Department of Energy, the Navy, and the Department of Agriculture have gone ahead with their plans to use their authority – given by the Defense Production Act (DPA) to directly invest in biofuels production facilities this year. On July 2, these agencies announced in a Funding Opportunity Announcement (FOA) that they were making available $30 million in funding. This is the first tranche of a projected $510 million program, shared among the three agencies, projected to last the next three years. This $30 million investment will go forward, but as the program is subject to annual appropriations from Congress, future funding is very uncertain.

The FOA calls for government and industry to share the costs equally to build or substantially retrofit a commercial-scale biorefinery (more details from the  FOAhere ). Although government contracting rules mean that we do not know which companies have applied, and we will not know who has received conditional approval for the investment until October 1, we can surmise those that are likely to be included. As mentioned above, Solazyme and Dynamic Fuels were the initial suppliers of the current Navy contract. Other companies that have been specifically mentioned repeatedly by those working on this issue, both inside and outside the government, include those as well as Gevo, Virent, and Honeywell.

This year’s $30 million grant is not the big prize, but the forthcoming $480 million more could mark a significant investment into commercial scale refineries. If Congress allows the program to go through, and if the Obama Administration returns for a second term, then that funding will be disbursed, and the selected companies will stand to see large investments into new production facilities.

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  1. By RSteenblik on July 23, 2012 at 11:48 am

    See this Planet Ark story for a counter (green) view:

    http://planetark.org/wen/65984

    Not competing for food? Ha!

    Gevo (a key investor in which is venture capitalist Vinod Khosla), one of the suppliers, is currently making its fuel at ethanol plants, from corn, and is planning to use sugar in the future:
     

    http://www.gevo.com/our-business/commercialization-strategy/

     

    Our strategy of retrofitting existing ethanol facilities allows us the opportunity to capitalize on the approximately 20 billion gallons per year of operating ethanol production capacity worldwide. In North America, we will work with our exclusive contractor, ICM.

    Gevo believes that its low-cost commercial deployment strategy will allow rapid expansion of production capacity in response to customer demand. Gevo’s technology platform is designed to give current ethanol producers an opportunity to increase their operating margins through the retrofit of their pre-existing facilities.

    Additionally, Gevo’s capability to convert sugars from multiple renewable feedstocks into isobutanol will enable us to leverage historically low-cost grain feedstocks (e.g., corn) and to eventually expand our production capacity into international markets that use sugar cane or other feedstocks which are prevalent outside of the U.S.

    The energy input/output ratio of this when using corn must must be at least as bad as for ethanol.
     

    Substituting solar power (with some back-up storage or supply) for diesel-electric generators makes sense, especially where the supply lines to bring in the fuel are vulnerable and therefore expensive.

    By contrast, demonstrating that the fleet can run on alternatives to petroleum fuels seems redundant. Plenty of tests of these fuels have already been carried out in all kinds of engines and aircraft. Synthetic paraffinic kerosene (SPK) has been proven technically, and can be manufactured from a wide range of lipids (fats and oils). Biodiesel and other “renewable” diesel fuels have been used for years. The marginal engineering and scientific value of the “great green fleet” exercise is therefore pretty minimal.

    Apart from the very high cost of producing alternatives to middle-distillate fuels, there are several problems with the strategy that is being advocated. Consider fuels made from used cooking oil and animal fat. Great stuff, with a reasonably good life-cycle emission profile. Problem is, these sources are in limited supply. At the same time, their use for the military is in competition with their use for civilian biofuels, the demand for which is artificially driven by biofuel blending regulations, especially in the EU, the United States and Canada. These regulations (“biofuel mandates”) drive up the price for the feedstocks, obliging the military to pay more than they otherwise would for them. But it also means that when any of these feedstocks are used for fuel for the military, less is available to meet the civilian biofuel mandates. But because the biofuel mandates are inflexible, suppliers then turn to less sustainable feedstocks, such as palm oil or oils derived from edible oilseeds. So although the DIRECT effect of the military diverting used cooking oil to fuel use may be good or at worst benign, the INDIRECT effect is just as bad as if they used edible oils directly.

    So, is fuel made by algae the answer? Maybe in the long run. But the commercial-scale production of such fuels is many years away. And the types of algae most used for producing lipids at the moment are fresh-water algae, not salt-water. That means that the algae bio-reactors must be near a fresh-water supply. (And, in the case of Solazyme and Gevo, a source of sugar.) Although the water in which the algae live can be recycled, the process of producing sugars or lipids consumes water. That means, for the Navy, having some sort of desalinization plant associated with the biofuel plant.

    Then there is the question of the security benefit. Lots of hype over their security benefit, but of course any produced in the ‘States are not going to require any less transport to far-away places than would petroleum fuels. Probably more transport, given that presumably the Navy procures the petroleum fuels for its Indian-ocean fleet from more local refineries.

    In places where the military is only going to be set up temporarily, how useful would even portable hydroprocessing plants (necessary to produce SPK) be? They, too, would be vulnerable to enemy attack. And the military would have to get the feedstock from somewhere. I know that military chow can be greasy, but it would have to serve A LOT of meals to produce enough feedstock to keep its planes flying.

    As for algae bio-reactors, if the aim is to make them portable, they will not benefit from economies of scale and therefore are likely to be very expensive.

    If the U.S. Navy or some similar military organization can bring its large R&D resources to bear on the problem, great. But what they are proposing sounds more like going quickly to subsidizing the construction of very pre-commercial manufacturing facilities around the USA. Is that the wisest use of the money — as opposed, say, to spending more on earlier-stage R&D?

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  2. By Cliff Claven on July 24, 2012 at 7:38 am

    Feeling the heat, the Office of the Secretary of Defense has just issue a new restrictive policy that will hinder the Service’s ability to purchase fuels at exhorbitant prices (Burke, Sharon. “DoD Alternative Fuels Policy for Operational Platforms”. ASD (OEP&P), July 5, 2012. http://www.nationaldefensemagazine.org/blog/Lists/Posts/Post.aspx?ID=832 ).  Any expectation of the Department of Defense guaranteeing a biofuels market while prices remain uncompetitive is highly questionable.

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  3. By RSteenblik on July 24, 2012 at 12:24 pm

    Interesting article, Cliff. I wonder if this is a misquote:

    Navy Secretary Ray Mabus said in a recent speech. “We’re doing all sorts of things in alternative energy. We’ve certified all our aircraft, fixed wing and rotary wing, on a 50-50 blend of biofuel and avgas.

    I would assume he means jet fuel, not av(iation) gas(oline).

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    • By Cliff Claven on July 24, 2012 at 3:29 pm

      Not sure about the accuracy of the quote, but the tested biofuels are being mixed 50/50 with either JP-5 jet fuel or F-76 naval distillate (diesel oil).  The airlines have been certifying blends with Jet A civilian jet fuel.  I am not aware of any large-scale testing with avgas (i.e., 110LL)

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