If the biofuel industry is going to get off the ground, it's going to need continued and unbiased federal support. That includes a better funding mechanism and some policy changes, suggest Cole Gustafson and the heads of several biofuel companies.

“Federal policy needs to change on several fronts,” says Gustafson, North Dakota State University biofuel economist. “Cellulosic biofuel companies are ready to go in the near future, but federal loan programs are keeping them constrained.”

He charges that those loan programs are not well-suited to many of the companies' projects and that the federal government favors some technologies over others.

“In our area,” Gustafson says, “one of the most immediate opportunities is using biomass to essentially co-fire with coal in electric utilities. And that is not on the (federal government's) radar screen. A very similar project is going forward by a group of Nebraska growers (called Renewable Biomass Energy of Nebraska). They're going to start to gather biomass, pellet it and then just mix it in with coal to reduce the carbon footprint.”

The U.S. Department of Energy (DOE) has identified switchgrass as “having high priority for further development,” as an alternative fuel source. With its deep root system, switchgrass can produce high yields on relatively poor soils while sequestering carbon.

But Gustafson and others say other crops are proving to be viable and should receive federal help.

“In the Red River Valley, we're looking at using sugar beets. The sugar beet is a wonderful crop for biofuel. It has a technology that's already commercialized in Europe and Brazil, so we don't need research and development. We just need to get started; we're having a very difficult time trying to find a sponsor.”

Energy cane and sweet sorghum are other crops suited to biofuels that have had little government support, he adds.

“The DOE has this mindset that it's going to be switchgrass or timber or corncobs or, nowadays, it's putting a lot of effort into algae. Algae is not going to work everyplace. I think that the deferential decisions that DOE is making are the problem, and that loan terms are so restrictive in terms of asking for increasing matches (in funding).”

The economic recession hasn't helped, the biofuel economist points out. “Everybody scaled back on gasoline purchases and there are a lot of problems with the ethanol industry, like bankruptcies. Demand fell and production fell.”

But, in the past few months, oil prices are up and ethanol-producing plants are climbing out of bankruptcy. Yet a biofuels blend wall of 10% (the percent ethanol in gasoline that can be used in conventional cars) is resulting in an oversaturation of biofuels in the Midwest, which could lead to increasing costs in shipping biofuels to other areas, he surmises.

“The most pressing issue is solving the so-called blend wall issue — the market's inability to absorb additional biofuel volumes,” according to Susan Ellerbusch, BP Biofuels North America president.

Ellerbusch and several other biofuel industry leaders testified before the House Ag Committee's Subcommittee on Conservation, Credit, Energy & Research the end of last October.

“The blend wall,” she added, “results from well-intentioned but disconnected energy policy and legal frameworks. BP believes that a combination of time, technology development and policy support and infrastructure investment will solve this problem.”

William Roe, president and CEO of Illinois-based Coskata, a renewable energy company, went further.

The blend wall is “inconsistent with the mandate established in the current Renewable Fuel Standard (RFS). Biofuel developers have been therefore unable to plan further projects in the absence of a more-consistent and long-range policy from the government,” Roe's written testimony stated.

Although there has been hope for an increase in the blending limit to as much as 15%, the Environmental Protection Agency decided last month to postpone its decision until mid-summer of 2010.

The biggest hurdle the biofuel industry faces, says Roe, is the lack of project financing to start building early stage facilities.

“Securing financing for a first-of-a-kind facility is often challenging,” agreed Bruce Jamerson, board chairman of the biofuel company, Mascoma Corp., in his written testimony. “The difficult capital market conditions over the past year and a half have made financing even tougher, particularly for commercial debt financing.

“Continued federal government support is critical to keep the cellulosic fuels industry on track to meet the production mandates of RFS and meet the promise of new jobs, less dependence on imported fuels and enhanced national security,” he testified.

Bankers aren't happy with USDA's loan guarantee program to fund commercial-scale cellulosic ethanol projects, Jamerson said. Mascoma was turned down by 172 out of 174 commercial lenders when trying to find a bank partner to apply for a USDA loan guarantee for a cellulosic refinery to be built in Kinross, MI.

“Lenders told us that they need several adjustments to the USDA loan program in order to meet their credit and pricing guidelines.”

To help attract private capital for commercial cellulosic ethanol production facilities, the government should offer a 30-40% refundable investment tax credit for advanced biofuel projects — something Jamerson and a coalition of leading ethanol companies advocate.

The 2007 Energy Independence and Security Act requires the production of 36 billion gallons of renewable fuel by 2022. That breaks down to 15 billion gallons of “conventional” renewable fuel (mostly ethanol derived from corn), 16 billion gallons of cellulosic biofuel and 5 billion gallons of other “advanced” biofuels.

In late 2009, the estimated capacity to produce corn ethanol and other conventional renewable fuels was around 12 billion gallons, and not all of that capacity was in operation, Coskata's Roe pointed out.

“At this same point in time, there is essentially no material production capacity online for either cellulosic biofuel or other advanced biofuels,” he added.

“There has been tremendous activity in both the private and public sectors to develop the technology platforms necessary to meet the requirements, and some of the more promising are now beginning to scale to commercial levels.”

Yet none of these technologies will scale up fast enough to meet early RFS requirements, predicted Roe, without “enduring government policy that will help stimulate the significant capital investment that it will need to take to ensure this change.”