(LOS ANGELES) President Obama has called for a new clean energy policy to move us toward energy independence, but biofuels will remain a small part of America′s future portfolio unless we can find a way to get investors off the sidelines. A new report from the Milken Institute, Scaling Enterprise Finance: The Future of Biofuels, looks at how to jumpstart investment in biofuels R&D, production and distribution, using mechanisms from expanded futures markets to crop insurance.
Global ethanol and biodiesel production revenues reached $34.8 billion in 2008. However, when compared to the $1.76 trillion in revenues generated by the top five oil companies in the world, it′s evident that biofuels have a long way to go before the industry matures.
"Biofuels show great promise, but building a network of processing plants, nationwide distribution systems and retail outlets requires a lot more investment than what we have now," said Joel Kurtzman, Executive Director of the Center for a Sustainable Energy Future at the Milken Institute. "We need to align the policies, incentives and the flow of capital quickly — and there are financial tools that can help get the job done."
Improvements are currently being made across the board in biofuels. Ethanol was once labeled a negative use of energy, but technological advances have increased the yield of corn-based ethanol to 2.3 units (dry mill) for every unit input (sugarcane-based ethanol has a yield of 9.3 energy units). Other sources, including biomass waste and algae-based biodiesel, are also promising, but require further R&D. Each of these sources will need capital to bring it to the next stage of development and deployment.
Finding that capital, however, can be a challenge. Investors have been rocked by the recession and tight credit markets. The private sector is waiting for government-backed assurances before taking on additional risk, while government agencies, such as the Department of Energy, are looking for assurance that there is interest from the private sector before providing grants. Added to this "chicken or the egg" scenario is regulatory uncertainty, wild variations in agricultural prices and a lack of equity and debt financing.
Scaling Enterprise Finance: The Future of Biofuels looks at some of the possible solutions to help biofuel technologies and production get past these challenges. They include:
- Expanding the Biofuels Interagency Working Group, co-chaired by the-Secretaries of Agriculture and Energy and by the Administrator of the EPA, to include the Treasury Department to further increase collaboration and effectiveness.
- Using policy and financial innovations such as feedback profit incentive chains, wherein biofuels producers receive public funding but must funnel a portion of profits back into their plants, and tolling arrangements, which have been successful in other energy industries by locking in a profit margin for producers, thus mitigating the tremendous risks investors face on building biofuel plants.
- Employing crop insurance to decrease price and supply volatility for biofuel feedstock production.
- Establishing long-term forward markets for biofuel end products so manufacturers can plan and invest for long term production.
These and other policy and market mechanisms included in the report can provide a higher level of certainty for feedstock suppliers and biofuels producers and would help the industry grow to meet the challenges of achieving a more sustainable energy future for the U.S.
These and other policy and market mechanisms included in the report can provide a higher level of certainty for feedstock suppliers and biofuels producers and would help the industry grow to meet the challenges of achieving a more sustainable energy future for the U.S.
The report is the result of a Financial Innovations LabTM jointly developed and funded by the Milken Institute and the Office of Energy Policy and New Uses, U.S. Department of Agriculture. This event gathered leading scientists and technologists, biofuel producers, rural stakeholders, banks, institutional investors, venture capitalists, public officials and representatives from think tanks and clean-tech industry associations.
Financial Innovations LabsTM are part of the Milken Institute′s continuing leadership in promoting financial innovations to help solve ongoing social, economic and environmental challenges.