US renewable chemicals to gain from the New US Farm Bill

I have been working on this since February but unfortunately travel and work has further delayed me from posting this.  Tecnon OrbiChem’s April Bio-Materials issue just came out yesterday and now, I have a few days of blogging before becoming busy again preparing for the Biopolymers Symposium and BIO World Congress.

This news about the new US Farm Bill (Agricultural Act of 2014) has energized the renewable chemicals industry and with the hope that there will be more commercialization to take place in the near future. The blog talked to Corinne Young,  chief advocate for re:chem™, the Renewable Chemicals and Advanced materials Alliance, a recently formed group (created in 2013) that has worked to support some of the content on the Farm Bill especially the new language that aims specifically to help the renewable chemicals industry growth.  And yes, re:chem™is now open for membership. Just click one of the links above for contact information.

Here is a definition of a Biobased Product under the Agricultural Act of 2014:

“A commercial or industrial product—i.e., intermediate, feedstock, or end product (other than food or feed) — composed in whole or in part of biological products including renewable agricultural and forestry materials”

According to Young, there are several key provisions under Title IX Energy Programs in the new Farm Bill that includes loan guarantees specifically targeting renewable chemicals, R&D grants, and access to government purchasing programs aiming to aid renewable chemical companies to scale-up in the US, and bring their products to the US market.

Biorefinery Assistance Program (Section 9003)
Among the Farm Bill policy changes were the expansion of the Biorefinery Assistance Program (Section 9003), where companies seeking to produce high-performance renewable chemicals and biobased products in the US are now eligible for loan guarantees to build manufacturing plants. In the old Farm Bill, the Biorefinery Assistance Program targeted only the advanced biofuels industry. The new Farm Bill will have a mandatory budget authority for $100 million in fiscal 2014 and $50 million each in fiscal 2015 and 2016.

This $200 million mandatory funding can help leverage private investments to support an even larger number of loan guarantees.  According to Myriant, typical credit subsidy costs of the loan guarantees (meaning the cost to the government when evaluating the risk of default) averages about 30%, so the $200 million in total mandatory funding could leverage upwards of $700 million in loan guarantees.  Up to 15% of the funding for loan guarantees can be used to cover the expenses for renewable chemical and biobased manufacturing.

When I asked what this means (as I am clueless when it comes to finance talk), Young cited an example where a renewable chemical company has a $100 million biorefinery project, and under the program, the US Department of Agriculture (USDA) can provide an $80 million guarantee with the remaining coming from project equity or other funding sources.  The $80 million guarantee will come from a commercial lender at a better rate because of the credit enhancement as the government has the project’s full backing (hence loan guarantee).  This guarantee from the government is critical as private investors and creditors are skittish to get involved in high-risk projects.  The renewable chemical industry, after all, is still at its infancy, and the first thing this industry needs to prove is that they can produce at a larger-scale volume.

This type of project-financed mechanism will help renewable chemical companies get the financing they need to build commercial-scale facilities in the US.  The mechanism provides financial backstop and assurances to commercial lenders that if, for whatever reason, the biorefinery didn’t work, and the project went bankrupt, the federal government could step in.  This helps provide assurance and less of a risk for commercial lenders to get involved in these first-of-a-kind facilities.

Biomass Research and Development Initiative (Section 9007)
This program has also been historically geared towards biofuels especially cellulosics and algae, but the new Farm Bill now provides parity to biochemical projects, where development of these feedstock will have more incentives to be used towards high-value, high-margin chemicals and materials, and not just for biofuels.

The program provides competitive funding as grants, contracts, and financial assistance for research, development, and demonstration of technologies and processes leading to commercial production of biofuels and biobased products. The USDA and DOE (Department of Energy) will coordinate research and development programs related to biofuels and biobased products through the Biomass Research and Development Board. Mandatory funding will include $3 million annually for four fiscal years, FY2014-FY2017. The program will appropriate $20 million funding annually for FY2014-FY2018. Unfortunately, the program’s funding for this new Farm Bill is lower compared to the previous appropriated funding of $35 million annually (FY2009-FY2013).

Biobased Markets Program (Section 9002)
The Biobased Markets Program coordinated by the USDA’s Biopreferred Progam requires federal agencies to purchase products with maximum biobased content subject to availability and flexibility and performance standards. The minimum biobased content standards are applied to federal contracts on case-by-case basis. The USDA also has a BioPreferred labeling program.

The new Farm Bill extends the program through FY2018 including,

• Federal preference for biobased products and establish a targeted biobased-only procurement requirement for federal agencies.
• Limits reporting on the availability, relative price, performance and environmental and public health benefits of biobased materials subject to the availability of data.
• Adds reporting requirements of quantities and types of biobased products purchased by procuring federal agencies and a focus on biobased content requirements (explicitly including forest products).
• Mandates (within 1 year of enactment) designation of intermediate ingredients or feedstocks and assembled and finished biobased products according to guidelines.
• Adds auditing and compliance activities to ensure proper use of biobased labeling.
• Mandates study (and report) by USDA to assess economic impact of biobased product industry, to be completed within one year of enactment.
• Encourages expedited coordination, review and approval (with appropriate technical assistance) of forest-related biobased products.
• Authorizes mandatory funding of $3 million annually for FY2014-FY2018. Authorizes to be appropriated $2 million annually for FY2014-FY2018.

According to Young, the New Farm Bill provides additional funding and authoritative expansion to the BioPreferred program. It also sends the signal that government support is not going away, and in fact expanding existing programs to help provide market pull through the economies of federal government.

You can listen to more updates on the extended Biobased Markets Program on this March 14 Webinar that the USDA recorded along with the accompanying slides below:

[slideshare id=34140082&doc=biopreferredwebinarmarch14-140430135223-phpapp01]

Re:chem’s next priority is pushing for the Qualifying Renewable Chemical Production Tax Credit Act, which was introduced last year in the US Congress (H.R.4953 and S.3491). The group is hoping to encourage recognition of renewable chemicals in the US tax code, given that most renewable chemicals manufacturing are energy-efficient and could provide sustainable manufacturing in the US. The US tax code is currently being overhauled in Congress. Re:chem said it will make sure renewable chemicals and this production credit, specifically, is going to be included in the tax package that is now underway.

The ultimate policy goal of the bill is to enable the bio-based industry to achieve sufficient scale at which point the technology and market are mature enough for the private sector to invest in without incentives. The legislation would not only enable the biobased industry to scale but also provide consistency in the tax code for technologies utilizing renewable biomass.

Another proposal that re:chem hopes to include in the tax code is expanding the Master Limited Partnership (MLP) treatment to technologies utilizing renewable natural resources and not just feedstock such as coal or oil. Facilities processing renewable biomass hopes to be qualified under MLP, which provide a stable and efficient source of capital, and allow investors to take direct stakes in energy projects.

Here’s an MLP definition from Wikipedia:
MLP is a limited partnership that is publicly traded on a securities exchange. It combines the tax benefits of a limited partnership with the liquidity of publicly traded securities. MLPs are limited by United States federal law to only apply to enterprises that engage in certain businesses, mostly pertaining to the use of natural resources, such as petroleum and natural gas extraction and transportation. To qualify for MLP status, a partnership must generate at least 90% of its income from what the Internal Revenue Service (IRS) deems “qualifying” sources. For many MLPs, these include all manner of activities related to the production, processing or transportation of oil, natural gas and coal.

Just as the MLP structure helped build much of the US’ modern oil and gas infrastructure, the renewable chemicals industry is hoping to drive similar investments in bio-based chemicals infrastructure. Currently, renewable chemical companies are facing high cost of capital to build facilities, and extension of the MLP structures will reportedly help the industry lower the cost of capital and drive private investments.