Transcript Renewable Energy and the Financial Crisis -

Committed to the future of rural communities
Renewable Energy and the
Financial Crisis -- Weathering the
Storm
Tony Crooks
USDA Rural Development
SAAS and SRSA Combined Annual Meeting
February 2, 2009
Atlanta, Georgia
Agenda
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Wisdom of Yogi Berra
The Boom, the Bust, the Aftermath
Consolidation on a shoestring
Energy markets & policy pivot points
Never waste a crisis!
Smart energy policy
Rational expectations
Wisdom of Lawrence Peter "Yogi" Berra
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A former Major League Baseball player
and manager for the New York Yankees
and was elected to the baseball Hall of
Fame in 1972
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One of only four players to be named
the Most Valuable Player of the
American League three times
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One of only six managers to lead both
American and National League teams
to the World Series
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Known especially for his pithy
remarks, known as “Yogi-isms.”
Famous “Yogi-isms”
• "It ain't over, till it's over."
• After Berra's 1973 Mets trailed the Chicago Cubs
by 9 games in the National League East; the Mets
rallied to win the division title on the next-to-last
day of the season.
• "It's like déjà vu all over again."
• Upon witnessing Mickey Mantle and Roger Maris
repeatedly hit back to back home runs for the
Yankees in the early 1960s.
“A nickel ain't worth a dime anymore.”
The Boom, the Bust, the Aftermath
Financial Crisis: A hearty perennial
Top Ten Financial Bubbles
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Dutch tulip bulbs, 1636
English South seas, 1720
French Mississippi land rush, 1720
US stock price, 1927-29
Mexican bank loans, 1970
Japanese real estate and stocks, 1985-89
Scandinavian real estate and stocks, 1985-89
Southeast Asian real estate and stocks, 1992-97
Mexican surge in foreign investment, 1990-93
US over the counter stocks, 1995-2000
Kindleberger and Aliber, Manias, Panics and Crashes, 2005.
This time last year:
Food commodity prices rose more than 60 percent in the last 2 years
Trostle, “Global Agricultural Supply and Demand: Factors
Contributing to the Recent Increase in Food Commodity Prices,”
USDA ERS, WRS-0801 May 08.
All commodity prices were rising
Trostle, “Global Agricultural Supply and Demand: Factors
Contributing to the Recent Increase in Food Commodity Prices,”
USDA ERS, WRS-0801 May 08.
Markets moving in tandem
Rolling correlations
-- Vegetable
oils
andcrude
Brent
Rolling price correlation
VegOils (base Rdam
) vs Brent
oil Crude
JulJuly
0606--Apr
April-08
08
1
0.8
0.6
0.4
0.2
0
Brent vs Rape Oil
-0.2
Brent vs Soy Oil
Brent vs Palm Oil
-0.4
Brent vs Sun Oil
-0.6
Jul-06
Oct-06
Jan-07
Kingsman Biodiesel Weekly, used with permission.
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
The Boom, the Bust,
Washington Post, “The boom, the bust,
and the aftermath”
The Aftermath
Total Federal debt as a percentage of GDP
“Always go to other people's funerals,
otherwise, they won't come to yours.”
Consolidation on a shoestring
Consolidation on a shoestring
Ethanol stock prices
Pacific Ethanol, Aventine, VERASUN, Biofuels Energy, and Green Plains RE
Midwest ethanol valuation
Commercial biodiesel production in the U.S.
176 plants ~ 2.61 billion gallons production capacity
176 plants
Source: National Biodiesel Board
Updated: September 2008
Estimated Biodiesel Production and Sales in the U.S.
450
450
Millions of gallons
400
350
300
250
250
200
150
100
75
50
0
0.5
2
5
15
20
99 0 00
01
02
19
2
03
20
04
20
20
20
Source: National Biodiesel Board
Updated: September 2008
25
05
20
06
20
07
20
DOE grants for commercialized CE plants
Wheat straw
Corn fiber & stover
Wood waste
Municipal green waste
Bagasse
Second generation biofuels
An unvarnished look
• Progress update:
– Commercial scale plants received first payments
• Range Fuels, BlueFire, POET, Abengoa
• What about Iogen? Alico??
– Demonstration scale plant awards
• $114 million announced Feb ’08 for 4 “10 percent” demonstration
facilities and 2 TBD
– Opportunities and challenges ahead
• Technology risks and financing
• DOE/USDA Rural Development support
– Range Fuels LG Approved, 1/16/09
Cellulosic ethanol considerations
• Acute issues of cost, legal structures, management
• Capital expenditures/gallon ~ 3/5 times traditional plant
– Maybe affordable only to corporations and equity funds, or in very
small scale to rural communities
• Intellectual property rights of key importance
– Design/Build firms less prominent
– Enzyme/pre-treatment R&D instrumental to industry success
• Number and specialization of co-products to multiply
– Diverse and complicated mix of third party marketing firms
• Extra expense of highly technical applications –
– Specialized marketing and service firms
– Long-term off-take agreements
Food, Conservation, and Energy Act ’08
Energy Title Programs with Mandatory Funding
$1.1 billion to leverage renewable energy industry
investments in new technologies and feedstocks
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Rural Energy for America Program (REAP) -- $255 M
Biorefinery Assistance -- $75 M (’09), $245 M (’10)
Biomass Crop Assistance Program (BCAP) – ($70) M
Repowering Assistance -- $35 M
Bioenergy Program for Advanced Biofuels -- $300 M
Biomass Research and Development -- $118 M
Biobased Markets Program -- $9 M
Biodiesel Fuel Education Program -- $5 M
Biofuels Infrastructure Study -- $1 M
“If you come to a fork in the road, take it.”
Energy market pivot points
Energy market pivot points
• How will the Obama administration address energy issues?
• Where will energy and climate change stand in the overall
priorities of the administration and congress?
• Where will climate change legislation stand on the list in
comparison to renewable portfolio standards and
fundamental energy economics?
• What new initiatives are expected to support alternative
energy?
• What will receive federal assistance?
“The towels were so thick there I could
hardly close my suitcase.”
Never waste a crisis!
Never waste a crisis!
Agenda items for New Administration and Congress
• American Recovery and Reinvestment Plan -infrastructure spending on “shovel ready” projects
to jump start the economy and create up to 4
million jobs; Jan/Feb
• Energy Bill -- Renewable Energy tax titles and
portfolio standards; Jun/Jul
• Climate Change Bill (2010/11)
American Recovery and Reinvestment Plan
QuickTime™ and a
decompressor
are needed to see this picture.
Energy Bill may provide many “opportunities”
• Revive tax equity markets with stimulus or energy bill is a
significant issue especially for Wind
– Installations have been reduced by 50 percent.
• Enable wind energy companies to monetize credits
– Investment tax credit, production tax credit and an effort to
redeem depreciation credits
– Perhaps retroactive to 2008?
• Three important considerations/options are in play
for Renewable Energy Credits:
– Redeemable (for cash)
– Tradable (freely transferable),
– Refundable (involves rapid depreciation and the ability to
invest retroactively)
Climate Change Bill
How will new Admin address carbon controls?
• Difficult and tricky issues
– Cap and trade is more likely than tax mechanism
– Lesson from ‘93 Act with effort to push a Btu tax that failed
miserably
• Still resonates on the Hill – no mood to relive this
• Carbon allowances/control auctions are expected to
be a huge financial event
– Pres. Obama is calling for a 100% phased-in auction
– Expected to be most lucrative/painful part
“If you don't know where you are going, you
might wind up someplace else.”
“He hits from both sides of the plate. He's
amphibious.”
Smart energy policy
Smart energy policy
• Value nature’s services
• Align energy efficiency with climate policy
Value nature’s services
Renewable Portfolio Standard – Wind,
solar, geothermal, biomass
• Utilities must have portion of their energy generated
by renewable energy Or must purchase Renewable
Energy Certificates (offsets)
• 10% by 2012
• 25% by 2025
Align energy efficiency with climate policy
Four well-recognized premises on sustainable
biofuels production:
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2.
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4.
Should have a positive energy balance
No carbon loans from nature
Maintain feedstock biodiversity – no monocultures
No trading food for fuel at scale
“The future ain't what it used to be.”
Rational expectations
Rational expectations
These 3 expected Bills have already been
described as the GOLD RUSH of 2009!
Renewable energy lobby may be overplaying its hand
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Bills may be less lucrative than anticipated.
Look for Administration to implore Americans to look for
new definitions for Doing Well and Doing Good
Sacrifice and public service may be the new order of the
day
Greatest generation laid a foundation for us
Nation building in America by taking the lead in solving the
world’s biggest problem -- Energy Technology revolution
WE should build out, not bail out!
“I just want to thank everyone who
made this day necessary.”
“I wish I had an answer to that because
I'm tired of answering that question.”
“Nobody goes there anymore.
It's too crowded.”
“Even Napoleon had his Watergate.”
“I never blame myself when I'm not
hitting. I just blame the bat and if it
keeps up, I change bats.”
U.S. Counties capable of supporting cellulosic ethanol
Value of U.S. dollar, 1970-2008
Dollar weakness and the price of oil
Daily averages
except for Oct. 29
Source: Hawkes, “Does Dollar Weakness 'Cause' High Oil
Prices?,” St. Louis Federal Reserve Board, Nov ’07.
Factors contributing to higher food commodity prices
Trostle, “Global Agricultural Supply and Demand: Factors
Contributing to the Recent Increase in Food Commodity Prices,”
USDA ERS, WRS-0801 May 08.
Biodiesel demand drivers
Biodiesel challenges
• Strong petroleum price
expectations
• Biodiesel Blender’s Credit,
Fed. Excise Tax Credit,
Income Tax Credit for
Biodiesel use
• Remedy for lubricity issues
of Ultra Low Sulfur Diesel
(1% - 2%)
• Continued unrest in Middle
East
• No sustained rally in
feedstock prices
• Production costs relative to
petroleum diesel
• Relative opportunity cost of
feedstock (vegetable oil)
• < 60 day shelf life
• Degrades rubber and plastic
in high concentration (B100)
• Supply availability in next
12 - 24 months
Cellulosic ethanol considerations (continued)
• Variety of feedstocks are expected
 Producers less likely to be solely row crop farmers
 “Farmer-owned” business model must expand to accommodate
new approaches
• Collection and storage systems yet to be established
 Maybe opportunity for hybrid Engineering firm-Farmer/Owned
partnerships tying together capital, intellectual property, and feedstock
 Example -- POET collaborative partnerships with farmers and investors
Renewable energy proposals outlined in other titles
Food, Conservation and Energy Act ’08 (continued)
Research Title:
Authorize $500 million to create a Bioenergy and Bioproducts
Research Initiative
– Facilitate collaboration between Federal and university scientific
experts
– Make bioenergy production more cost-effective.
– Link USDA Rural Development bioenergy activities to hasten
technology transfer
Forestry Title:
Authorize $150 million to develop new technologies to better utilize
low-value woody biomass
Conservation Title:
Enhance the Conservation Reserve Program (CRP) by adding a
biomass reserve program to give priority for whole-field enrollment of
lands producing biomass for energy production.