Scaling Enterprise Finance and the Future of Biofuels
September 23, 2009
Washington, D.C.
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| Alan Boyce, President and CEO of Adecoagro, leads a discussion about obstacles to second-generation biofuel production. |
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The popularity of biofuels as a commodity and an investment has grown significantly in the past few years. Major market players have begun investing in these alternative fuels, and producers' revenue is expected to almost triple from 2008 to 2018. In addition, the Obama administration expects biofuels to be pivotal in addressing climate change and creating a greener economy.
Yet many institutional, technological and financial barriers still exist, slowing the development of a solid biofuels market.
To find out how finance might channel more capital into biofuels production, the Milken Institute, in conjunction with the U.S. Department of Agriculture's Office of Energy Policy and New Uses, convened a Financial Innovations Lab in Washington, D.C. The diverse group of participants included leading scientists and technologists, biofuel producers, rural stakeholders, banks, institutional investors, venture capitalists, public decision-makers, think tanks and clean-tech industry associations.
Background
Joel Kurtzman, Executive Director of the Milken Institute's SAVE initiative, discussed the opportunities that biofuels present for the environment and investors alike. Some of the challenges he identified were misallocated funding, badly designed incentives and inconsistent policies. Stephen Kaffka of the California Biomass Collaborative discussed how regulations and environmental assessments had affected biofuel crops.
Christopher Groobey of Wilson Sonsoni Goodrich and Rosati gave the history of project finance as it relates to biofuels, and participants reviewed how insufficient expertise, scarce working capital and backlash from the food industry had damaged investors and the biofuel industry at large. This history lesson was important, Groobey said, because it changed the financing methods and expectations of new project lenders.
Other barriers discussed ranged from the political to the practical. Biofuels production faces opposition because of questions about its contribution to food shortages, the energy returned on investment and its environmental impact. In addition, companies can't maintain a consistent supply of raw materials, in part because they can't provide enough product to satisfy the contractual demands of potential buyers, creating a chain that hurts the industry's long-term goals.
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| Corinne Young is the director of Government Affairs for Myriant Technologies LLC, which develops second-generation biofuels. |
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Potential solutions
Some options explored were hedging strategies for biofuels producers, product diversification and loan guarantee programs. One notion that met with favorable reviews was establishing a chartered corporation that would guarantee biofuel securities and loans. Another was attaching "toll arrangements" to biofuel payment agreements, or guaranteeing profits to biofuel producers on the condition that a share of those profits go directly toward expanding production.
Also popular was the idea of creating a working group involving the Environmental Protection Agency, the Department of Energy, the U.S. Department of Agriculture and the U.S. Treasury to improve communication on energy goals and to enable joint decision-making.
A full report is available here. For more information, contact Caitlin MacLean, manager of Financial Innovations Labs, at cmaclean@milkeninstitute.org.
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