Financing Biomass Plants Using the BCAP
In June 2009, USDA issued a Notice of Funding Availability under its Biomass Crop Assistance Program for matching payments for the collection, harvest, storage and transportation of eligible wood, plants and other renewable materials for sales to qualified bioconversion facilities that convert biomaterials into heat, power, biobased products or advanced biofuels. The intent was to promote the use of renewable biomass products for the production of electricity and biofuels. However, like many laws, this one had unintended consequences. The matching payments resulted in a significant increase in the price of raw timber and undermined an industry that has used sawdust and wood shavings to make cabinetry.
As a result in February, USDA terminated the 2009 NOFA and issued proposed new rules for the BCAP program. Final rules are expected this summer, and the following summarizes the current proposals and discusses their implications for the biomass industry.
Matching Payments: Payments are available for the delivery of eligible material to a qualified biomass conversion facility to either the producer of the material, or the person with the right to collect or harvest the material. Eligible materials generally include renewable plant materials such plants and trees and waste materials, including wood wastes and wood residues, that would not otherwise be used for higher value products (to avoid sawdust and wood shavings). A qualified biomass conversion facility is one that converts or proposes to convert renewable biomass into heat, power, biobased products, advanced biodiesel or advanced biofuels and undergoes a qualification process with the Commodity Credit Corp.
USDA offered three different payment formulas in its proposal, including $1 for each $1 paid by the facility per dry ton of eligible material: up to $45 per dry ton, but matching payments for wood or wood wastes converted into heat or power for on-site use would only be made if those materials exceeded the facility's historical use; up to $45 per dry ton for materials converted into advanced biofuels, with a lower cap for all other conversions; and paid in a way that rewards delivery to new facilities, newly converted public facilities, and facilities that are increasing their use of biomass. It will be interesting to see which one of these three options the USDA selects in its final rule.
Establishment and Annual Payments: BCAP also offers payments to producers in a designated project area to help cover the cost of establishing a biomass crop, as well as to incentivize long-term commitments to the crop. A project area is established by a group of producers or a biomass conversion facility in conjunction with the CCC. A project area must demonstrate a sufficient facility, and quantity and quality of producers.
Establishment payments can be up to 75 percent of costs such as seed and stock, planting and site preparation. Annual payments are made to producers who contract with CCC to establish or produce eligible crops, with contract terms up to five years for nonwoody perennial crops and up to 15 years for woody perennial crops. An annual payment is reduced to the extent that the producer also receives a matching payment. Eligible crops for establishment and annual payments include crops ineligible for matching payments such as algae and animal, food and yard waste.
The new BCAP is expected to be a significant financing source for biomass plant developers. We believe that the new rules, when issued, will address the unintended consequences of the initial NOFA and serve their intended policy objectives of promoting the use of renewable biomass for electricity and biofuels.
Gregory J. Lynch is managing partner of the Madison, Wis., office of Michael Best & Friedrich LLP. He is also the co-chair of the Renewable Energy Group and co-founder of the Venture Best venture practice. Reach him at firstname.lastname@example.org, http://twitter.com/Renewable_Energ or (608) 283-2240. Craig Johnson is a member of the Renewable Energy, Business and Health Care Practice Groups in the Madison office at Michael Best & Friedrich. Reach him at email@example.com or (608) 257-3064.