The Force: Cellulosic Biofuels Tax Credit Is Back, but Is It Necessary?

19 january 2013

So, the fiscal cliff was averted in a last minute-deal by DC lawmakers. Sort of. For now. Or so we’re told. We think.

It doesn’t take an aversion to sausage-making to be mystified by really big pieces of legislation that come out of Washington — they come stuffed to the gills with side-provisions. In many cases, fine ideas that simply have not been able to find themselves a viable tax legislation vehicle.

So, although the “fiscal cliff” tax rate deal didn’t directly affect biofuels – the industry found itself delighted to see several key tax credit extensions in the final bill.

One is the cellulosic biofuels production credit, now defined as the “second generation biofuel producer credit” and is (i) expanded to apply to liquid fuel derived from cultivated algae, cyanobacteria, or lemna and (ii) extended to apply to qualified fuel production before January 1, 2014.

The Force

You might as well call it the Force. Apparently, the PTC is what gives a cellulosic producer his power — if you take the Washington lobbyspeak at face value. It surrounds us and penetrates us; it binds the biobased galaxy together. As is said in DC: “May the PTC be with you.”

The problem with these tax credit provisions is that they are supposed to incentivize steel in the ground but in the end incentivize no such thing.

Why? Projects that need the credit to be viable can’t get 15-year financing on a one-year extender. Lenders zero the credits out because they know the loan must be safe even if the credit sunsets long before the loan does. Projects that don’t need the credit – well, they don’t need the credit. Much as they appreciate it.

So what is the credit? Really, a bonus return on equity, and even more powerfully, a windfall for growers. More on that later.

Looking at the data – tax credits needed?

As we sift through the data, the Digesterati have found that, with a 50 cent RIN, numerous projects can achieve a 12 percent ROI (the traditional threshold for, say, fossil-fuel investments). Even without the next-gen PTC.

(Quick decode for newbies: A RIN is a renewable fuel waiver that an obligater blender could buy, under the Renewable Fuel Standard, in lieu of buying a wet gallon of cellulosic biofuel. You add the cost of gasoline and the cost of a RIN – that’s the effective value of cellulosic biofuels).

We offer the following table in evidence – couched in the caveat that numbers change, and not all data is available for all projects. No need to sue us if, for example, it turns out that DuPont can get feedstock for south of $65 per ton.