Facing a frozen credit market and slow funding from the government, the cellulosic biofuels industry has hit a speed bump this year and will likely be unable to meet short-term RFS targets as a result. During today's OnPoint, Arnold Klann, CEO of BlueFire Ethanol, discusses how the economic downturn has affected the production and development of second-generation biofuels. He explains why he believes cellulosic ethanol remains a viable investment for the private sector and discusses the impact DOE loans will have on his industry's ability to meet RFS targets.
Monica Trauzzi: Welcome to the show. I'm Monica Trauzzi. Joining me today is Arnie Klann, CEO of BlueFire Ethanol. Arnie, thanks coming on the show.
Arnold Klann: Well, thank you for having me, Monica. I really enjoy being invited here.
Monica Trauzzi: Arnie, BlueFire Ethanol had planned to start operating its first commercial cellulosic biofuel plant by the end of the year. Plans have changed and we've seen changes across the board in your industry this year. The growth of the cellulosic industry has really come to a standstill because of the economic downturn. What's the current state of operations and what's the path forward that you see coming out of the economic downturn?
Arnold Klann: Well, I think there's two issues here. One is for BlueFire Ethanol specifically. Our timing was delayed, first and foremost, by the time it took for us to get our permits for the facility. We had anticipated a six-month licensing process. It actually ended up being closer to 20 months and so that, unfortunately, put us right into the melt down in the financial community. But the way out, and I think for all of the companies that are in this space right now, just not for BlueFire, but for everyone who's trying to do the cellulosic to ethanol and biofuels approach, is the fact that financing is very difficult. Even before the melt down there were these issues of this is a first-of-a-kind technology. How do you finance first of a kind and manage the risk associated with first-of-a-kind technology? And so the pathway today, and it's really a credit to first with the Bush administration, but now definitely the Obama administration has kicked us into high gear, is to put in place mechanisms to address the risks associated with this financing. So, with the loan guarantee program that's been put in place with DOE that they've gone out and people have solicited bids and they're now evaluating those, and then also with the various grant programs, that's really the way these projects are going to get funded.
Monica Trauzzi: You also have many investors who are reluctant because they lost money with the first-generation biofuels. So, how do you convince those private-sector investors that cellulosic is different, that it's viable and that they should invest in it?
Arnold Klann: Well, there's several ways of doing that. Quite frankly, with the first generation some investors made tremendous amounts of money, some lost money. Those investors are still sitting there. They're looking at the cellulosic side saying, OK, we want to invest, but we want to be first to invest in the second projects that are finally operational. And so, to that extent, we have to convince them that this technology is commercial today, it's ready to go, that it will have a return on the investor's money that's invested. And most particularly is you have a mandated market now with the passage of the Renewable Fuel Standard. It mandates a 16 billion gallon a year of cellulosic market by 2022. That's going to take a tremendous amount of capital invested both on the debt side as well as on the equity side and the equity investors don't want to lose out on that. There is a mandated market and, of course, the oil companies are getting involved now. So, yes, some lost money. There's still many in the market that want to invest in this business.
Monica Trauzzi: One of the issues that we're hearing about now is the fact that your industry is not going to be able to meet the short-term targets. So does a shortage of cellulosic fuel cause it to become less cost competitive in the market and then essentially put it at a further disadvantage?
Arnold Klann: Well, the problem, I think, the government, oddly enough, got ahead of itself a little bit with the Renewable Fuel Standard in terms of what we thought as industry we could match and meet. Clearly, there's extenuating circumstances that created that shortfall that's going to occur into 2010 and probably into 2012. But, in the long term, the pricing model is going to stay the same. We have to compete ultimately with gasoline. Again, if you look at the mandates of why this business even got started it was driven to offset foreign imports of oil. And I think from a cost standpoint, as the technologies get deployed, they get into a cost model that should be less expensive than corn-based ethanol and should compete favorably with oil. So I don't see us as being at a disadvantage, but we are disadvantaged from a time standpoint.
Monica Trauzzi: When will production goals be back on track?
Arnold Klann: Right now, and this is just a guess, it's a function total of financing, but assuming the financial markets open up and capital markets are going to come back into the normal regime here with the guarantees from the DOE, I would say you could probably catch up around 2013, 2014.
Monica Trauzzi: Talk a bit about the state of funding coming out of DOE and, in particular, what your company has received and is looking to receive.
Arnold Klann: OK. We received a $40 million grant out of what was known as the 932 Program. That was awarded in March of 2007. Unfortunately, because of the time of when it was awarded they did not have the money in hand at that time, so it delayed actually us getting the funding until…really, the first time we drew down on that grant was in July of 2008. Having said that, the DOE has now moved much quicker. From our standpoint, we filed for another grant for our Lancaster, California project. We're waiting to hear if we were successful on winning that or not. We also applied for a loan guarantee from the Department of Energy for Lancaster and, again, we should be hearing from the DOE shortly based on their schedule. And then we will be applying for a loan guarantee for our Fulton, Mississippi project once we have our permits in place and we're anticipating that by the end of December to the first part of January.
Monica Trauzzi: I want to switch gears and talk about the debate over climate legislation that we're seeing on Capitol Hill right now. How will legislation impact the work that you guys are doing and how quickly you're able to get some of these projects online?
Arnold Klann: Well, again, it's really kind of two issues. Getting the projects online is strictly a function of financing at this point and I think that's across the table. We're in this conference today here in Washington and everyone is talking about the same issues, it's financing. In terms of the climate legislation, what it's going to do is determine a mechanism for pricing the carbon credits that we, as a biofuels industry, can generate. In the case of BlueFire Ethanol, since our business model is to put this adjacent to or in existing landfill and avoid the burial of cellulosic materials into the landfill, over time that generates huge amounts of carbon credits because that biomass not being buried in the ground is avoiding future methane production. And methane, of course, is 20 plus times more potent as greenhouse gas. In the climate legislation that's being presented today in the various forms, cap and trade and that, there's a recognition of that and so that will help us ultimately define what the carbon market is going to look like and what the financial benefits will be for selling those credits.
Monica Trauzzi: OK, we'll end it right there. Thank you for coming on the show.
Arnold Klann: Well, thank you Monica.
Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.
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