Study: Aggressive biofuel policies necessary to drive investment

By Kris Bevill | October 14, 2010
Posted Nov. 12, 2010

A new study conducted by researchers at the University of California, Davis, suggests that more aggressive federal renewable fuels policies are needed if the U.S. is to replace diminishing petroleum supplies with renewable fuel options.

Study author Debbie Niemeier, a UC Davis professor of civil and environmental engineering, and co-author Nataliya Malyshkina, a postdoctoral researcher at the university, used a market capitalization approach to evaluate petroleum supplies versus renewable fuels replacement technologies. Niemeier said they believe this is the first time this method has been used to quantify aspects of sustainability. Two key elements used for the study were market capitalizations and dividends of publicly owned oil companies and alternative energy companies. "Sophisticated investors tend to put considerable effort into collecting, processing and understanding information relevant to the future cash flows paid by securities," Niemeier said. "As a result, market forecasts of future events, representing consensus predictions of a large number of investors, tend to be relatively accurate."

After evaluating long-term investment trends, Niemeier and Malyshkina concluded that based on current information, investors do not believe that alternative fuels will occupy enough market share to make them a viable market choice. Given that current proven oil reserves are estimated to run out well before the study forecasts that alternative fuels will occupy a sufficient share of the market, the authors concluded that more aggressive policies are needed to spur development of alternatives. "Policies that increase access to research and development funds and policies that subsidize market entry would be very beneficial," she said. "Of course, the ultimate goal of any of these policies should be to facilitate choices in the marketplace. That's what a free market is supposed to offer and right now, our choices as consumers are limited."

The UC Davis report compliments recent industry criticism regarding the treatment of emerging technologies in the renewable fuel standard (RFS). The U.S. EPA is scheduled to finalize its 2011 RFS volumes by Nov. 30 and is likely to nearly extinguish the cellulosic biofuel volume requirements when compared to the original volume requirements set forth in 2007. In July, the EPA proposed a range of between 5 and 17.1 million gallons for cellulosic biofuels next year, as opposed to the 250 million gallons originally called for in the RFS legislation. The U.S. Energy Information Administration recently estimated that actual production next year will be even less than 5 million gallons and recommended the EPA should lower its 2011 cellulosic volume to 3.94 million gallons. Ethanol producers and industry representatives echo the findings by the UC Davis researchers and argue that reduced federal mandates scare away investors. Therefore, increased mandates, or at least maintained volume levels, are necessary to nurture emerging alternatives.

"We have to have a target and we need to stick with it," said Andy Foster, president and chief operating officer of AE Biofuels Inc.'s advanced biofuels division. "The problem when the government keeps moving numbers around is that it creates a level of uncertainty that is unsettling to companies that are developing technology as well as to investors. It sends a signal that there's not a consistent policy in place. I understand the need to have an accurate estimate as to what to expect for the nation's fuel supply, but I think revising the RFS up and down on a constant basis tends to add a bit of uncertainty to the marketplace about whether this industry has long-term government support."

The EIA's analysis concluded that Dupont Danisco Cellulosic Ethanol LLC might contribute only 30,000 gallons of cellulosic ethanol to the overall cellulosic biofuels goal next year versus the 150,000 gallons estimated by the EPA. Jen Hutchins, corporate communications director for DDCE, said the EIA did not consult with the company prior to reaching its conclusion and DDCE expects to produce at 50 percent of its 250,000 gallon nameplate capacity next year. Her company has previously spoken out regarding the ill effects of continually reduced federal mandates, stating that lowered RFS volumes reduce the mandate's effectiveness and negatively impact potential investment opportunities for cellulosic projects.