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