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State RPS, Incentives Spur Development

Biomass project development could be expedited in 2010 and coming years, as developers contribute to state renewable portfolio standards and scramble to meet deadlines for funding opportunities.
By Lisa Gibson
The most influential factors for U.S. biomass development in 2010 most likely will be state renewable portfolio standards (RPS), along with financial incentives, perhaps none as effective as the Grants for Specified Energy Property in Lieu of Tax Credits program.

The incentive was established under Section 1603 of the American Recovery and Reinvestment Act and is designed to fill the gap where the Production Tax Credit isn't useful. It requires the U.S. Department of the Treasury to make a one-time payment to eligible renewable electricity developers in the amount of 30 percent of a project's qualified capital cost, instead of the production tax credit, which is paid over a 10-year period. Statutory provisions specify that the property must be placed in service during 2009 or 2010. It can, however, be on line after 2010 by a statutory deadline, but only if construction began in 2009 or 2010. Thus, developers who want to reap its benefits are running out of time.

"We're seeing a lot of biomass projects moving into the preconstruction phase because of the opportunity to get these grants," says James Bertrand, a Leonard, Street and Deinard shareholder and head of the law firm's energy group. "It significantly improves the overall financial picture." The program is less complicated than the tax credits because there is no need for a tax credit investor, he adds.

Biomass projects can take advantage of both the grants and state RPS because they can be located where there is transmission capacity, Bertrand emphasizes. "Wind projects don't have that same flexibility," he says. In addition, areas with no wind potential may be rich in biomass. Twenty-nine states and the District of Columbia have developed RPS and six have established portfolio goals. New York's standard is 24 percent by 2013, the earliest, but followed closely by Montana, 15 percent by 2015, and Wisconsin, 10 percent by 2015, according to the Database of State Incentives for Renewables & Efficiency, funded by the U.S. DOE. Standards extend as far as 2025. National standards also could be on the horizon to accelerate biomass development, as a bill with a federal renewable electricity standard, American Clean Energy & Security Act, passed in the House of Representatives in June.

"We're seeing a lot of attention in this area, very much more so than in the past 10 years," Bertrand says of biomass projects. "Clients who haven't previously been in the biomass industry are looking at it now," says Tammie Ptacek, also a shareholder at Leonard, Street and Deinard.

The Department of the Treasury has awarded one cash grant payment to a biomass project in the amount of $10.2 million, and had received 13 or 14 biomass project applications at the beginning of October, according to Ellen Neubauer, grants program manager at the Department of the Treasury's Office of the Fiscal Assistant Secretary. Cash grant recipients cannot claim tax credits under sections 45 or 48 of the Internal Revenue Code for the same property, as it is an extension of the tax credit program. The program does not provide initial funding and applicants must be in the commercial production phase of their projects to qualify.

The online application can be found at www.treasury.gov ecovery. The site also features program guidance and specific terms, conditions and requirements. The application deadline is Oct. 1, 2011.


Money Means Trends

Incentives cause trends in the biomass market, according to Ptacek. Biomass power has the potential to grow exponentially in the U.S. as a result of the cash grants in a renewable market previously dominated by ethanol, according to Peter Flynn, professor at the University of Alberta and a biomass industry expert. In terms of demonstrated technology, biomass power is more developed than other biomass endeavors, Flynn says, but is behind in the U.S. when it comes to implementation. It's ahead of biofuel and ethanol development in other countries such as Finland, Flynn says. The George W. Bush administration focused mainly on reducing dependence on foreign oil, with a lukewarm approach to greenhouse gas (GHG) emissions, he adds. "I think under the current administration, the focus has shifted to broaden the mandate," he says. "That, I think, will shift the focus to a mix of biomass power and fuels from biomass."

Biomass electricity projects were eligible to receive Production Tax Credits under the Bush administration, as well, but the main factor in the change is that the cash grant opportunity makes renewable electricity projects more appealing, Bertrand and Ptacek agree. "It's clear that this administration has decided to emphasize biomass power," Bertrand says.


More Federal Funding

The federal government has a plethora of funding opportunities besides the cash grants. The U.S. DOE's Loan Guarantee Program is well-known and heavily utilized. It's designed to provide fourth-stage financing in the form of loan guarantees to commercial-scale innovative renewable technologies that avoid, reduce or sequester GHGs and air pollutants. The loan cannot exceed 80 percent of total project costs.

The program includes two key elements: Section 1703, established as Title XVII under the Energy Policy Act of 2005, and Section 1705, an amendment included in the American Recovery and Reinvestment Act of 2009. The former supports eligible projects that are unable to obtain conventional private funding because of high technology risks, while the latter supports renewable energy, transmission and leading-edge biofuels projects that will commence construction by Sept. 30, 2011, according to the DOE. The program periodically issues requests for proposals, or solicitations, for various categories, such as innovative technologies, encompassing new or significantly improved technologies.

The DOE has several focus areas in biomass projects for the Loan Guarantee Program, including cellulosic ethanol, biomass to syngas, electricity or diesel, and bio-oil-derived fuel, says Dan Tobin, senior investment officer with the Loan Guarantee Program. "In addition, applicants should look at alternative feedstocks," he says, adding that the DOE is not focused on providing funding for projects that use corn as a feedstock. Projects that utilize 50 to 70 dry tons of biomass per day (considered demonstration scale) or more will be favored in the competitive program. In the biofuels area, the DOE is favoring innovative projects that have not been deployed commercially in the U.S., but have been piloted and demonstrated successfully. "It's in the best interest of the applicant to submit applications that show life-cycle GHG emissions," Tobin adds.

In 2008, biomass projects made up 24 percent of all renewable energy applications submitted to the program, second only to solar at 31 percent, according to the DOE. Applications also were submitted for hydrogen, wind and geothermal technologies, among others.

The application process includes an overview of the project, along with more detailed information later. DOE would also like to see a detailed plan by the project sponsor for mitigating market risk and to provide the agency with a reasonable assurance of loan repayment. For more information on the Loan Guarantee Program, visit www.lgprogram.energy.gov/. The Web site includes suggestions for strong applications.

The USDA also offers funding, including the Biomass Crop Assistance Program, which supports production of biomass crops by assisting with collection, harvest, storage and transportation of eligible material for use in biomass conversion facilities. Other USDA programs include the Biorefinery Assistance Loan Guarantee Program, which provides grants for demonstration-scale biorefineries and loan guarantees for commercial-scale biorefineries that produce advanced biofuels. The program includes a guaranteed loan limitation of $250 million, according to the USDA, and up to 50 percent of project costs at the pilot or demonstration scale. Mandatory funding for 2009 is $75 million, and $245 million is available for 2010 until expended.

The USDA's Repowering Assistance Program provides payments to biorefineries to replace fossil fuels with renewable biomass to produce heat or power. The program provides $35 million for 2009 that is available until exhausted, with $20 million still available, according to the USDA, and provides additional funding of $15 million per year through 2012. The Notice of Solicitation of Applications was published in June. The Bioenergy Program for Advanced Biofuels provides payments to eligible producers to support and ensure expanded production of advanced biofuels. Mandatory funding for the program in both 2009 and 2010 is $55 million, increasing to $85 million in 2011 and $105 million in 2012. The Notice of Contract Proposals for the Bioenergy Program was also published in June.

The Biomass Research and Development program supports research, development and demonstration of biobased products, biofuels and biopower. Eligible recipients include institutions of higher learning, national laboratories, federal research agencies, state research agencies, private-sector entities and nonprofit organizations.

Finally, the Rural Energy for America Program issues grants and loan guarantees to assist agricultural producers and rural small businesses with energy efficiency improvements. It also establishes a grant program for energy audits, technical assistance and feasibility studies. The loan guarantee limit is $25 million or 75 percent of the project costs, according to the USDA. Mandatory funding for 2009 totaled $55 million and will increase to $60 million for 2010 and $70 million for 2011, with discretionary funding of up to $25 million each fiscal year through 2012. The Notice of Solicitation of Applications was published in May. Viability LLC, a firm that helps companies prepare and submit grant applications, recently secured $1.3 million in grants from the program for its clients and leveraged $31.5 million in overall project investment, the company reports. For more information on all USDA funding opportunities, visit www.usda.gov.


Other Options


Viability prepares grant applications for state and federal programs including tax credits and carbon credits. The firm has assisted with about 30 biomass projects, since its establishment six years ago, ranging from $3,500 to about $10 million in grants, loans and carbon credits for one project, according to Viability President Chris Byrnes. The company also writes grants for other renewable energy projects and has a 70 percent success rate with federal grants, compared with a success rate of 10 percent for most federal grant applications, he says.

Most of Viability's clients come through word-of-mouth, Byrnes says, or are referred by their vendors. "A lot of our business is in agriculture and natural resources," he says.

With grant applications, the firm charges 10 percent of the asking amount, half when the grant application is submitted and the other half if and when it's awarded. If the grant is not awarded, the other half of the fee is not collected, Byrnes says. Carbon credits have a slightly different fee structure and loan guarantee fees are much less. The firm does not guarantee awards will result from its work.

The grant-writing process can take three to six months, he says, as the company will need to provide a stockpile of information to Viability's writers including a company history, information about its owners and finances and proof that the company complies with equal employment rules. Whether hiring a grant writer or doing it alone, applications need to include a lot of information, much of which can come from vendors and third parties who can verify technical information. "We try to make it as easy for the client as we can," Byrnes says.

Among his clients, Byrnes says the number of projects has not increased, but the size has, a trend Flynn mentions, too. Companies developing those larger projects are applying for more programs, Byrnes adds.

Investment firms can also ease financial pains during project development. Akeida Capital Management LLC is an environmental asset firm focused on originating and investing in sustainable energy projects, its latest investment being a 12.5-megawatt biomass power plant in Blue Lake, Calif. The plant is in the final stages of a refurbishment process that began in September, 2008 and has a 10-year power purchase agreement with San Diego Gas and Electric for all of the electricity generated, enough to power 25,000 homes, according to Akeida. The firm provided a $10.5 million senior secured loan to complete construction.

The company has dealt mostly with electricity generation, especially biomass power, according to Managing Director David Kandolha, but is beginning to dabble in waste to energy and methane capture. "At this point, we're not eliminating any specific types of projects, but we're definitely building up comfort in specific areas," he says.

Developers looking for investment from such firms need to gather information such as progress to date, current needs and current capital structure. "The best way [to attract attention] is to provide concise information about their projects," he says. Providing updates is beneficial, as well. "We tend to be late-stage investors, so if a project doesn't meet our criteria today, it's also helpful for developers to periodically update us on their projects because they might meet our criteria later on," he says. The capital structure is important so Akeida can take into account debts to other agencies and determine whether the developer is capable of paying back the amount.

The company provides loans, debt, equity and combinations of the three. The typical hold period on the financing is two years, and the amount is determined on a project-by-project basis. Akeida has invested in three biomass power plants so far, all in the past year, and is open to biofuels, but has not found a promising project yet, Kandolha says. The main limitation, he says, is that Akeida invests in projects, not companies. "We're not developmental investors, so we don't take technology risk," he says. "We limit our investments to projects using commercially proven technology."

Akeida has seen an increase in biomass project funding requests, but Kandolha says the firm has gotten its name out in the industry so he hesitates to contribute it to an increase in development. "I would think there would be an increase because we think it's an attractive area to invest in," he says.

Bertrand says there are some measures developers can take to increase chances of gaining investors or getting grants, loans and other incentives. "We are seeing projects getting financed, particularly those that have power purchase agreements for the off-take from the biomass-to-electricity projects," he says. "Independent of the loan guarantee, as lenders are evaluating projects, the ones moving to the top of the pile are those that have all the necessary components including transmission and power purchase agreements." BIO


Lisa Gibson is a Biomass Magazine associate editor. Reach her at lgibson@bbiinternational.com or (701) 738-4952.
 

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