Listening and Learning

Revamps to the USDA’s loan guarantee program are a direct result of industry input.
By Kris Bevill | March 10, 2011

It’s no secret that financing continues to be the advanced biofuels sector’s largest hurdle to overcome before widespread commercialization. Producers have been filing comments and testifying before Congress for years on the difficulty in acquiring financial backing for their first-of-a-kind, and often extremely expensive, projects. Finally, a federal agency has actually made progress in putting the ball in motion to reform program guidelines to enable greater federal support for these projects.

In mid-February, the USDA announced proposed changes to three of its 2008 Farm Bill programs—the Repowering Assistance Program, the Bioenergy Program for Advanced Biofuels and the Biorefinery Assistance Program—all geared toward giving a needed boost to build out the next generation of domestic biofuels production. The Repowering Assistance Program provides payments to eligible biorefineries that replace fossil fuels with renewable biomass fuel sources. Proposed changes will allow payments to be distributed during the construction phase of a project. The Bioenergy Program for Advanced Biofuels provides payments to biorefineries for the amount of qualifying advanced biofuels produced on-site. The first round of these payments was distributed in January. More than $15 million was distributed to producers in 33 states for the advanced biofuels they had produced from noncorn renewable biomass. Meant as a financial incentive for biorefineries, the payments are part of the Obama Administration’s plan to bring greater energy independence to the country, Agriculture Secretary Tom Vilsack says. Proposed changes to the program are relatively minor and include definition provisions for determining whether a producer of biogas or solid advanced biofuels is a “larger producer” or a “smaller producer,” and clarifies that eligible advanced biofuels may be produced at facilities other than biorefineries.

Loan Guarantee Modifications

While the continuation of these programs is essential to many advanced biofuel producers, even more significant are the proposed changes to the 9003 Biorefinery Assistance Program, the USDA’s loan guarantee program. Created to provide financial support for the development and construction of commercial-scale advanced biofuels projects, the program has come to be considered a key component of the cellulosic ethanol build-out. The USDA made marked progress in January when it awarded three loan guarantees to cellulosic ethanol projects. Many believe the program revamp will further that initial success for the industry and say it provides financing hope for future advanced biofuels producers.

Changes to the 9003 program are extensive. Among them, an increase to the maximum loan guarantee percentage, the addition of “refinancing” as an eligible project, the elimination of a pre-application requirement, the removal of an element requiring a project to be located in a rural area, broadening applicability requirements to allow foreign-owned projects to apply, and allowing bond markets to be used to finance loans.

USDA Rural Development Under Secretary Dallas Tonsager says the proposed changes to 9003 were spurred by the recent recession. “The economy has caused a lot of people to be very cautious about investments in biofuels plants,” he says. “What we’re trying to do is provide more assurance to lenders, particularly in taking the risk necessary to construct these plants. The USDA is looking for ways to work with the existing finance market to a larger degree, and do things they need to have in order to take up the opportunity to finance biofuels plants.”

He says the most significant change to the program is the increase of the maximum guarantee—from 80 to 90 percent—and the move to a minimum retention requirement for lenders. “So if we guarantee 80 percent and there’s 20 percent left, we don’t make the lender keep quite so much of that unguaranteed risk,” he explains. “We allow them to sell that off. So lenders can take on bigger projects because they get other lenders to participate and they get to spread the risk out. We think that’s really important.”

For investment banking firms such as St. Louis, Mo.-based Stern Brothers & Co., modifications to allow the use of the bond market will be the most significant changes to the program. John May, managing director for the firm, says he initiated the change to open up the program for bond market financing two years ago after witnessing failure on the part of commercial lenders to provide financing for cellulosic ethanol projects. “That proved to me that banks were not going to lend into this market in a major way anymore,” he says. “Certainly not where there was a technology risk or an offtake risk. The idea of a program that was willing to take those risks but was dependent upon a commercial bank to be the lead lender was flawed.”

Stern Brothers pioneered the use of bonds in biofuels and waste-to-energy, he says, so the concept of bringing in the bond market to advanced biofuels projects was an easy leap for him to make. The bond market is more willing to take risk associated with first-of-a-kind technologies and offtake agreements, he says, and therefore is the most efficient mechanism to finance advanced biofuels projects. He believes allowing the use of the bond market to finance these projects could transform the way they are funded, in a positive way. The USDA takes a more neutral stance toward the change and likens it to its Business and Industry Guaranteed Loan Program, which requires a lead lender who can participate out a percentage of the bond issue. “We believe you have to have a lead lender,” Tonsager says. “You have to have a responsible party. What we’ve done is make it more possible for banks to put together projects where they can participate out the various aspects of the loan. We didn’t make any particular exceptions for bond companies.”

Here Today, Gone Tomorrow?

Comments to the proposed program changes will be accepted by the USDA until April 15, but the race to receive available funds will begin as soon as the agency releases a Notice of Fund Availability. USDA officials said in mid-February the announcement would come “soon” but couldn’t offer an exact date. The agency has $365 million of available funding for the 9003 program. Tonsager says it’s possible all the money could be used for fiscal year 2011 project applications, depending upon the scale of application requests. Previous application requests have ranged from $30 million up to a few hundred million, he says. The maximum allowable loan guarantee is $250 million. “My guess is we’ll probably see between five and 20 projects as a pretty broad range,” Tonsager says. “If we get a lot of small apps we could do a greater number. If we get a few big ones that are really qualified it could consume a lot of that money pretty quickly.”

Among other considerations, the USDA uses approximately 12 scoring criteria to weigh applications against each other. For example, while the agency is proposing to remove the requirement that projects be located in a rural area (defined as having a population of 50,000 or less) rural projects will receive more points than those located in urban areas. Job creation, types of feedstock used and greater amounts of financial participation on behalf of the applicant will also boost an applicant’s chances of receiving funding.

Biobased chemical projects will also now be eligible to apply for loan guarantees, but Tonsager assures that the agency is not veering from its goal of using the loan guarantee program to accelerate the commercialization of fuels such as cellulosic ethanol. “We’re very anxious to move cellulosic ethanol forward,” he says. “We think it’s important to take that next step. Congress recognized that by giving us these programs initially. We’ve tried to learn from the industry; we took lots of comments on this and these changes are a direct result of the input we’ve received during the comment period.”

But while the program modifications are encouraging, the future of the 9003 program hangs in the balance as Congress shows signs of waffling on its commitment to expanding the domestic renewable fuels industry. The U.S. House of Representatives took steps early in the session to eliminate the USDA’s ability to participate in building out the nation’s blender pump infrastructure, leading to speculation that appropriations for biofuels-related programs, including the 9003 loan guarantee program, could end up on the chopping block. May says eliminating funding to the 9003 program would be a disaster. “Here you have a government agency that really understands the particular space it’s trying to serve and if money that’s been allocated to it is raided, it’s just a shame. We’re going to try to get the 2010 projects funded in the first half of the year so that we can show the USDA, Congress and the administration that the program does work and, hopefully, that will be the basis for Congress to decide to continue to appropriate funds to the program.”

Tonsager says the USDA will continue to be bullish on the importance of biofuels and use all of its available resources to support the industry. The industry holds regular meetings with biofuels organizations, is planning its strategy to make good on a previous commitment to expand biofuels infrastructure and will be seeking applications for biofuels-related research projects under another 9000 program within the next few months, he says. “It is an absolute mantra in the USDA to keep moving forward on every front in biofuels,” he says. “I can’t think of an element at USDA that isn’t somehow looking strongly at biofuels projects. We’ll look for every resource we can. We have certain resources now for funding that we’re using the best way we can. I’m sure for the duration of this administration that we’re going to be absolutely committed to moving forward on biofuels projects.”

Author: Kris Bevill
Associate Editor, Ethanol Producer Magazine
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