Deficit worries stall biofuel incentives

By PHILIP BRASHER • pbrasher@dmreg.com • July 4, 2010

Washington, D.C. — Worries over the federal budget deficit are raising concerns in the biofuels industry about the future of its existing subsidies and chances for getting new incentives.

Congress must renew the 45-cent-per-gallon tax credit for ethanol or else the subsidy will expire at the end of the year. At the same time, the industry is seeking subsidies to install new pumps at service stations and fund the development of biorefineries that can make biofuels from crop residue and other new feedstocks.

The new "blender" pumps the industry wants stations to install would dispense varying mixes of ethanol and gasoline. The hope is that motorists would fill up with 20 to 30 percent ethanol rather than the 10 percent blend that's now standard. A House bill introduced this week would provide grants to help defray the pumps' cost. Installation could cost as much as $50,000 apiece, according to the government.

The biodiesel industry's inability this year to get its subsidy renewed could be a warning to ethanol producers.

The $1-a-gallon tax credit lapsed at the end of 2009, and Senate has been unable to agree on a bill that would revive the subsidy and extend it to the end of the year.

The biodiesel subsidy itself isn't controversial, but Senate Republicans and some Democrats have objected to other spending in the bill that would add to the budget deficit. The legislation includes money for state Medicaid programs and an extension of unemployment benefits.

"It's a tough budget climate," said Tom Buis, chief executive of Growth Energy, an ethanol trade group.

Salo Zelermyer, a former Energy Department lawyer who now lobbies for some renewable energy firms, said any new biofuel measure that has a cost to taxpayers "is going to be difficult unless there's a clear mechanism to pay for it."

Companies that want to make the next generation of biofuels claim they are close to making it economically but need more help from the government. None of the projects has yet to qualify for a federal loan guarantee. A 2007 law required refiners to use this year 100 million gallons of ethanol made from crop residue and other sources of plant cellulose. However, the projects have shown so little progress that the Environmental Protection Agency had to slash the usage requirement to 6.5 million gallons.

The Obama administration had been offering one way to pay for new alternative energy measures through climate legislation that would require utilities and other companies to buy permits for greenhouse gas emissions. The revenue could be used in part to fund the development of alternative energy, but the bill stalled in the Senate and now it's not clear even a stripped-down version can pass.

Another source of money for the ethanol industry could be its own subsidy. The chairman of the House Agriculture Committee, Rep. Collin Peterson, D-Minn., is kicking around the idea of reducing the 45-cent tax credit and shifting the money into subsidies for installation of blender pumps. Ethanol producers are open to the idea, Peterson said in an interview.

The industry's immediate concern is getting the subsidy renewed this year. Iowa Sen. Chuck Grassley, who has long protected the industry from his seat on the Senate Finance Committee, expresses optimism that Congress won't let the subsidy expire. But he once thought the same thing about the biodiesel credit.

"If you were asking me this question a year ago about biodiesel, I would have said there's not a problem. We would have gotten it passed by the end of the year," he said.

Enacting new incentives for ethanol will be tougher than extending the existing subsidy, he said.

The lapse in the biodiesel subsidy has emphasized a concern expressed by investment firms about the dependence of the biofuels industry on government support.

"The public policy uncertainty is keeping debt and equity investors out of the (biodiesel) industry," said Jeff Stroburg, chairman and chief executive of Renewable Energy Group of Ames, which owns five biodiesel plants and manages three others.

Renewable Energy Group's plants are operating at 25 to 30 percent of their capacity while waiting for the subsidy to return.

Yet another worry for the ethanol industry has to do with Grassley himself. If he is re-elected in November, Senate Republican rules would require him to step down next year from the No. 1 seat on the Finance Committee unless the Republicans take over the Senate. In that case, the Iowan would regain the committee's chairmanship for two more years.

If Democrats retain control of the Senate, an aide says Grassley wants to become the senior Republican member on the Judiciary Committee. Sen. Orrin Hatch, R-Utah, is considered the likely replacement for Grassley as the top Republican on Finance.

"Obviously, we've got our fingers crossed that they change the rules and allow him to stay on," Buis said.