Rural Development

Advanced Biofuels Deliver Substantially Greater Pollution Reductions Than Corn-Based Ethanol

Posted on February 4, 2010. Filed under: Advanced Biofuel, Hydrous Ethanol, Rural Development | Tags: , , , |

New Renewable Fuel Standard, Which Sets First Heat Trapping Emissions Requirements for Biofuels, Gets Favorable Review From UCS

EPA Analysis Demonstrated That Without Additional Support, Cleanest Biofuels Will Fail to Meet Targets
By Union of Concerned Scientists
February 3, 2010

The Environmental Protection Agency’s (EPA) new rules for the Renewable Fuel Standard, the nation’s primary biofuels program, got a favorable review from the Union of Concerned Scientists (UCS). The science group praised the agency for a transparent process that accurately accounted for biofuels’ lifecycle heat-trapping emissions by including so-called “indirect-land-use emissions.” The new rules reflect the fact that advanced and cellulosic biofuels deliver substantially greater pollution reductions than today’s biofuels, such as corn ethanol. 

“We now have a yardstick to measure the global warming pollution from different biofuels,” said Jeremy Martin, a senior scientist in UCS’s Clean Vehicles Program. “EPA should be congratulated for having an open process on this rule that involved scientists, farmers and the ethanol industry.”

Despite intense pressure from the corn ethanol industry to exclude emissions from indirect-land-use change, the EPA found that such emissions are a major source of heat-trapping pollution from corn ethanol and other food-based biofuels. This finding affirms the view of 200 scientists and economists with relevant expertise who sent a letter to the EPA in September 2009 arguing that “grappling with the technical uncertainty and developing a regulation based on the best available science is preferable to ignoring a major source of emissions.” The EPA also issued an analysis examining the scientific uncertainty involved in calculating emissions from indirect-land-use change and plans to ask the National Academy of Sciences to look at the issue.

Indirect-land-use-change emissions also have been the focus of recent analysis by the California Air Resources Board, as well as peer-review scientific articles, which concluded that using food crops to produce fuel increases worldwide demand for those crops, prompting farmers to clear previously untouched land to grow new crops. Clearing land, especially tropical forests, releases massive amounts of heat-trapping gases into the atmosphere.

The Renewable Fuel Standard, enacted in 2005, requires fuel suppliers to blend a higher percentage of renewable fuels, such as ethanol and biodiesel, into motor vehicle fuels over time. In 2007, Congress passed the “Energy Independence and Security Act,” which expanded the standard’s overall volume requirement from 7.5 million gallons by 2012 to 36 billion gallons by 2022, and significantly increased the requirement for low-carbon cellulosic biofuels. It also required the EPA to establish independent volume mandates for different fuel categories. Each category was to be defined by its lifecycle heat-trapping emissions compared with conventional gasoline. The categories include: renewable fuel (20 percent less emissions than gasoline), biomass-based diesel (50 percent less), advanced biofuels (50 percent less), and cellulosic biofuels (60 percent less).

Corn ethanol facilities that were operating or under construction in 2007 are exempt from meeting the emissions-reduction requirements. The EPA projects that new corn ethanol facilities coming on line in 2022 could meet the 20 percent heat-trapping emissions reduction threshold for renewable fuels. However, this analysis is based on projected increases in crop yields and improvements in ethanol production technology and is not an analysis of the performance of today’s corn ethanol facilities.  

UCS experts say cellulosic ethanol, derived from grass, wood chips and other waste material, is a better option. According to EPA analysis, ethanol made from corn residue, or stalks and cobs, could reduce emissions by more than 90 percent compared with gasoline, in part because it would not necessarily displace land used to grow food crops and therefore would not trigger significant indirect land use emissions. 

Cellulosic fuel production, however, has fallen short of the EPA target. The 2007 energy law required suppliers to produce 100 million gallons of cellulosic fuel in 2010. But current cellulosic ethanol production stands at only 6.5 million gallons. Therefore, the EPA announced today that it is waiving 93.5 million gallons of the 100 million gallon requirement.

“Achieving energy security and tackling climate change will require a big contribution from cellulosic fuels,” said Martin. “Just setting a goal isn’t good enough in this economy. We need investment policies that help this industry get off the ground.”

According to UCS, the most important thing federal legislators could do to meet the Renewable Fuel Standard’s goals would be to support investment in building commercial-scale cellulosic biofuel facilities across the country. An investment in this essential clean energy technology would jumpstart rural economies and expand the economic benefits of biofuels production.

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Small-scale Distributed Energy in Wisconsin Benefits Farmers, Local Communities

Posted on July 12, 2009. Filed under: Rural Development | Tags: , , , |

Small-scale distributed energy in Wisconsin benefits farmers, local communities

by Lisa Gibson

Biomass Magazine

April 29, 2009

 

If Wisconsin would take advantage of “low hanging fruit” and cash in on the state’s biomass potential via small-scale distributed energy systems, advantages would reach both the agricultural sector and rural communities, according to a recently released Program on Agricultural Technologies (PATS) policy perspective. ‘How Could Small Scale Distributed Energy Benefit Wisconsin Agriculture and Rural Communities?’ was published in late April. 

Authors Gary Radloff, director of policy and communications with the Wisconsin Department of Agriculture, Trade and Consumer Protection, and Alan Turnquist, outreach specialist at the Program on Agriculture Technology Studies at the University of Wisconsin-Madison, say a distributed energy system in the state might curb logistical challenges that come along with large-scale, industrial production, such as biomass feedstock aggregation, short-term storage and transportation. “In policy discussion, we need to keep in mind policy incentives for smaller-scale operations,” Radloff said.

“For me, the thing that struck home was that all of these logistics behind biomass are so dependent on location,” Turnquist said of his research. The small-scale distributed energy option is obvious, he said, creating a marriage between the idea of hundreds of thousands of producers and smaller-scale uses.

Wisconsin has almost 15 million tons of potential biomass, the paper states, and if smaller local operations use that feedstock, it could increase energy production opportunities and increase returns for rural communities. It’s not just the scale of biomass potential that makes distributed energy a powerful tool in Wisconsin, but also its diversity, Turnquist said. “The single biggest benefit is that we have the capacity to do it right now,” he said.

Small-scale operations are starting to pop up around the state, according to Radloff, mostly at rural schools. Starting small and building out might be a way to build the biomass-to-energy infrastructure in the state, he added. Some larger projects also are in the works such as Governor Jim Doyle’s order for four university campuses in the state to “come off the grid” and switch to biomass, Radloff said. If more energy is produced locally and used locally, it can complement other renewable energy sources such as wind and solar, Radloff said. The two researchers compare local energy production to something most Wisconsinites can relate to, a local farmer’s market; the money locals spend goes to other locals they might know personally.

It is possible to construct a system in which a portion of the renewable energy dividend stays at home and the long-term benefits are shared by the landowner, farmer, forester or local community, Turnquist and Radloff write, as several biomass technology options can be economically efficient when located in rural settings, as indicated by studies and real world examples.

But what if local people don’t want the energy systems in their communities? According to Radloff and Turnquist, local systems would require local participation, including organization and decision making, that could eliminate the Not In My BackYard (NIMBY) opposition wind farms and new ethanol plants have met. If the payoff and decision-making process stay in the community, locals may rally more support toward community renewable energy products, they said. “It’s not just about natural resources and infrastructure,” Turnquist said. “It’s also about people and communities.”

Opportunities also exist for small-scale projects to partner with larger-scale operations, according to the authors. They cite as an example Xcel Energy’s 2008 proposal to add a biomass-to-energy burner to their existing plant in Ashland, which already uses woody biomass.

The amount of biomass that can be produced and harvested in Wisconsin still is an open question, the paper states, along with how much the communities actually will benefit from bioenergy and other renewables. But, it adds, local energy production is an important part of the state’s economic future and policies should be crafted to ensure the economic and energy returns go to rural Wisconsin residents and that groups undertaking distributed energy projects can manage the risk in the bioenergy market.

 

About Renergie

Renergie was formed by Ms. Meaghan M. Donovan on March 22, 2006 for the purpose of raising capital to develop, construct, own and operate a network of ten ethanol plants in the parishes of the State of Louisiana which were devastated by hurricanes Katrina and Rita.  Each ethanol plant will have a production capacity of five million gallons per year (5 MGY) of fuel-grade ethanol.  Renergie’s “field-to-pump” strategy is to produce non-corn ethanol locally and directly market non-corn ethanol locally. On February 26, 2008, Renergie was one of 8 recipients, selected from 139 grant applicants, to share $12.5 million from the Florida Department of Environmental Protection’s Renewable Energy Technologies Grants Program.  Renergie received $1,500,483 (partial funding) in grant money to design and build Florida’s first ethanol plant capable of producing fuel-grade ethanol solely from sweet sorghum juice. On  April 2, 2008, Enterprise Florida, Inc., the state’s economic development organization, selected Renergie as one of Florida’s most innovative technology companies in the alternative energy sector.  On January 20, 2009, Florida Energy & Climate Commission amended RET Grant Agreement S0386 to increase Renergie’s funding from $1,500,483 to $2,500,000. By blending fuel-grade ethanol with gasoline at the gas station pump, Renergie will offer the consumer a fuel that is renewable, more economical, cleaner, and more efficient than unleaded gasoline.  Moreover, the Renergie project will mark the first time that Louisiana farmers will share in the profits realized from the sale of value-added products made from their crops.

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Energy Loan Program With No Projects May Get Funds

Posted on January 30, 2009. Filed under: Advanced Biofuel, Field-to-Pump, Rural Development | Tags: , , , , |

Energy Loan Program With No Projects May Get Funds

By Daniel Whitten

 

January 29, 2009 (Bloomberg) — Congress is planning to direct at least $10 billion in economic stimulus funding to an Energy Department loan guarantee program that hasn’t backed any projects since it began in 2005.

 

The new money is intended to generate $100 billion in loans for renewable energy and transmission projects, according to Senator Byron Dorgan, a North Dakota Democrat. Congress previously approved at least $38.5 billion for clean-energy loan guarantees, and not a single project was funded.

 

“It will get worse the more you put into it,” said Doug Koplow, president of Earth Track of Cambridge, Massachusetts, which reviews environmental subsidies. “There is still a lot of talk about dumping much more in, and you have to be wary.”

 

Lawmakers, trying to encourage a shift to clean-energy sources such as wind and solar, have sought to stretch government funds by using loan guarantees instead of grants or direct support for renewable energy projects.

 

The Senate’s economic stimulus plan includes about $78 billion overall for Energy Department programs or tax breaks for energy projects. The House plan would spend about $10 billion less on such projects.

 

A July Government Accountability Office report found the Energy Department’s loan guarantee program lacked “adequate management and internal controls.”

 

Energy officials hadn’t determined the resources needed to carry out the program, set policies for processing applications or monitor the loans, the report found. GAO, the investigative agency for Congress, also said the Energy Department had no clear idea of program costs or how it would identify eligible lenders.

 

Staff Expertise

Former Energy Secretary Samuel Bodman told reporters Jan. 14, before he left office, that the loan guarantee program had foundered initially because the staff lacked experience financing large projects. The department hired staff with such expertise before he left, Bodman said. A spokesman for the department said in an e-mailed statement today that Energy Secretary Steven Chu has targeted the program for improvement. “Fixing the program is a top priority for Secretary Chu so that we can get moving with investments that will build a new energy economy, put Americans back to work and address the climate crisis,” said Dan Leistikow, the department spokesman.

 

Mary Anne Sullivan, an attorney at Hogan & Hartson in Washington who represents clients seeking guarantees, said the department’s improved preparation, combined with the new Obama administration’s commitment to the program, should lead to loan guarantees being given out.

 

‘More Quickly’

“With motivated administrators of the program, it should go much more quickly,” said Sullivan, who was a general counsel at the Energy Department during former President Bill Clinton’s administration.

 

Koplow, of Earth Track, said government employees who administer financing programs don’t have any personal or institutional risk in reviewing whether projects will succeed.

 

Brent Blackwelder, president of the Washington-based environmental group Friends of the Earth, said in a statement yesterday that under the Senate plan, as much as half of the $100 billion in loans might be used for nuclear power plants. He said that would be a waste of the money.

 

Duke, Southern

Seventeen companies have submitted applications seeking $122 billion in loan guarantees for nuclear-plant construction, the department said in October. Among the companies are Atlanta- based Southern Co., Duke Energy Corp., in Charlotte, North Carolina, and PPL Corp., based in Allentown, Pennsylvania.

 

Officials at the Nuclear Energy Institute, the industry’s main lobbying group, have said the guarantees are critical because of the high cost of building reactors and difficulty in getting financing.

 

The department also has received applications from Tesla Motors Inc., of San Carlos, California, which makes electric cars; and Alico Inc., in La Belle, Florida, and Irvine, California-based BlueFire Ethanol Fuels Inc., both of which are planning cellulosic ethanol plants.

 

Congress approved the loan-guarantee program as part of energy legislation in 2005. It called for the government to guarantee repayment of loans made to fund energy projects such as nuclear power plants, coal projects and renewable-energy investments.

 

Of the $38.5 billion already authorized, the department is planning to distribute $18.5 billion in guarantees for nuclear plants; $10 billion for renewable or energy-efficient systems; $8 billion for clean coal; and $2 billion for processing of nuclear fuel.

 

To contact the reporter on this story: Daniel Whitten in Washington at dwhitten2@bloomberg.net

 

 

About Renergie

Renergie was formed by Ms. Meaghan M. Donovan on March 22, 2006 for the purpose of raising capital to develop, construct, own and operate a network of ten ethanol plants in the parishes of the State of Louisiana which were devastated by hurricanes Katrina and Rita.  Each ethanol plant will have a production capacity of five million gallons per year (5 MGY) of fuel-grade ethanol.  Renergie’s “field-to-pump” strategy is to produce non-corn ethanol locally and directly market non-corn ethanol locally. On February 26, 2008, Renergie was one of 8 recipients, selected from 139 grant applicants, to share $12.5 million from the Florida Department of Environmental Protection’s Renewable Energy Technologies Grants Program.  Renergie received $1,500,483 (partial funding) in grant money to design and build Florida’s first ethanol plant capable of producing fuel-grade ethanol solely from sweet sorghum juice. On  April 2, 2008, Enterprise Florida, Inc., the state’s economic development organization, selected Renergie as one of Florida’s most innovative technology companies in the alternative energy sector.  On January 20, 2009, Florida Energy & Climate Commission amended RET Grant Agreement S0386 to increase Renergie’s funding from $1,500,483 to $2,500,000. By blending fuel-grade ethanol with gasoline at the gas station pump, Renergie will offer the consumer a fuel that is renewable, more economical, cleaner, and more efficient than unleaded gasoline.  Moreover, the Renergie project will mark the first time that Louisiana farmers will share in the profits realized from the sale of value-added products made from their crops.

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US Weekly Ethanol Margins in the Red, Demand Soft

Posted on January 24, 2009. Filed under: Advanced Biofuel, Field-to-Pump, Rural Development | Tags: , , , , |

US weekly ethanol margins in the red, demand soft

 

 

NEW YORK, Jan 23, 2009 (Reuters) – U.S. ethanol distillers on average remained in the red this week on soft demand from motor fuel blenders.

 

 

Ethanol producers have been suffering negative or low margins for months on weak demand, particularly as ethanol prices have traded above gasoline prices.

 

 

As distillers trim production because of the lack of demand, the price structure between ethanol and gasoline could continue to plague the renewable fuels industry for weeks or months.

 

 

“Anxiety levels are not expected to be reduced in the near future,” said Rick Kment, an industry expert at DTN in Nebraska.

 

 

Spot ethanol prices fell about 2 cents a gallon to $1.58 in the Midwest market, dealers said. Cash gasoline prices were about $1.10 to $1.15 per gallon, on the other hand.

 

 

The ethanol crush spread was practically unchanged at 20 cents a gallon, using the formula of the Midwest ethanol price minus the corn price divided by 2.8.

 

 

Operating costs such as natural gas prices and overhead trim the crush spread by about 25 cents per gallon, bringing net margins to about -5 cents a gallon.

 

 

Some producers make the livestock feed distillers grains as a byproduct of making ethanol, which can improve profits. Those near feedlots can sell wet distillers grains, which are energy efficient. Ethanol plants that are further from feedlots sell dried distillers grains, but have to spend money on natural gas to dry them.

 

 

Corn is the main input cost for U.S. ethanol makers. March corn CH9 closed at about $3.88 a bushel on Thursday, down about 3 cents from last week.

 

 

A downturn in ethanol margins over the last several months has deepened a series of production shutdowns and curtailments as the hardest-hit distillers slow operations.

 

 

U.S. ethanol company VeraSun Energy Corp., which filed for bankruptcy protection in October after making expensive hedges on corn and amid the credit crunch, said 12 of its 16 plants were closed.

 

 

The U.S. Renewable Fuels Standard mandate requires 11.1 billion gallons of biofuels to be blended into gasoline in 2009. The stricter mandate has given producers some hope that margins would turn around this year.

 

 

Long term the RFS could be in trouble. The Energy Information Administration, the top U.S. energy forecaster, said late last month that the United States would likely blend just 30 billion gallons per year of biofuels by 2022, not the 36 billion gallons the mandate requires.

 

 

As the price of ethanol has soared compared to gasoline, prices for credits — known as Renewable Identification Numbers — that refiners and blenders can buy in the open market to meet their biofuels mandates, instead of making the product, have risen to about 12 to 13 cents. (Reporting by Timothy Gardner, editing by Jim Marshall)

 

 

About Renergie

Renergie was formed by Ms. Meaghan M. Donovan on March 22, 2006 for the purpose of raising capital to develop, construct, own and operate a network of ten ethanol plants in the parishes of the State of Louisiana which were devastated by hurricanes Katrina and Rita.  Each ethanol plant will have a production capacity of five million gallons per year (5 MGY) of fuel-grade ethanol.  Renergie’s “field-to-pump” strategy is to produce non-corn ethanol locally and directly market non-corn ethanol locally.  On February 26, 2008, Renergie was one of 8 recipients, selected from 139 grant applicants, to share $12.5 million from the Florida Department of Environmental Protection’s Renewable Energy Technologies Grants Program.  Renergie received $1,500,483 (partial funding) in grant money to design and build Florida’s first ethanol plant capable of producing fuel-grade ethanol solely from sweet sorghum juice.  On April 2, 2008, Enterprise Florida, Inc., the state’s economic development organization, selected Renergie as one of Florida’s most innovative technology companies in the alternative energy sector.  By blending fuel-grade ethanol with gasoline at the gas station pump, Renergie will offer the consumer a fuel that is more economical, cleaner, renewable, and more efficient than unleaded gasoline.  Moreover, the Renergie project will mark the first time that Louisiana farmers will share in the profits realized from the sale of value-added products made from their crops. 

 

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Incentivizing Biofuels Sustainability

Posted on January 17, 2009. Filed under: Advanced Biofuel, Field-to-Pump, Rural Development | Tags: , , , , |

From the February 2009 Issue of Ethanol Producer Magazine

Incentivizing Biofuels Sustainability

Scientists weigh in on sustainable biofuels production including how to best manage cropping systems and establish an incentive program that awards environmentally responsible biofuels development.
by Jessica Ebert

 

A conference conceived by Dale Brockway of the USDA Forest Service and shepherded by the conference co-chairs William Parton, an ecologist at Colorado State University, and Richard Pouyat with the USDA Forest Service, took more than a year to plan. Parton and Pouyat are members of the Ecological Society of America, which organized the event and brought more than 300 people to the Ronald Reagan Building and International Trade Center in Washington, D.C. For one day, speakers representing various government agencies, ethanol producers and academic researchers, presented their views on the environmental benefits—and costs—of biofuels production.

“From the beginning we wanted to promote a thoughtful discussion about the environmental implications of biofuels,” explains Clifford Duke, the director of science programs for the ESA. “But when we started planning the conference we weren’t sure if the issue would remain salient over the roughly year and a half we thought it would take to do the planning for the conference.” Then, about two weeks before the conference, which was held on March 10, two papers were published in the journal Science that raised concerns about the carbon debt that could potentially be linked to biofuels production.

The ESA’s Ecological Dimensions of Biofuels conference provided a timely forum for discussing the sustainability of biofuels production systems and the means by which biofuels industries, particularly the emerging cellulosic ethanol industry, can grow and prosper while promoting environmental stewardship. The one-day event was followed by a two-day workshop where 50 scientists, including ecologists, soil scientists, economists, water quality experts, botanists and microbiologists, were invited to discuss the issues that emerged from the conference. These workshop discussions culminated in a policy paper that was recently published in the journal Science.

In that paper, 23 of the workshop participants explained how the explosion of grain-based biofuels production systems and conventional management practices has caused environmental harm, including increased soil erosion, loss of biodiversity, and the leaching of fertilizer nutrients such as nitrogen and phosphorus from soil to ground and surface waters. These effects stem from policies that promote action before the consideration of consequences. The authors point out that the 2007 mandate for 36 billion gallons of renewable fuels by 2022 and the subsidies for both refiners and growers as stipulated in the 2008 Farm Bill will encourage the same acceleration and adoption of production systems before the environmental impacts of these systems are properly vetted.

For example, “To get maximal yield, farmers may apply maximum amounts of fertilizer, which can exacerbate a nutrient-loss problem,” says Andrew Sharpley, a water quality researcher at the University of Arkansas and a contributor to the Science paper. “The crop may not be grown on lands that are most suited to it. These policies may encourage a shift away from rotating crops to a monoculture,” he says, and there is a potential for increased use of water. “All of this could impact the quality and quantity of water in the long run.”

This, however, is not the way it needs to be, these scientists write. In the bulk of their paper, these experts in soil and water quality and agricultural systems and economics explain that these impacts can be reversed or at the very least lessened. They explain how the adoption of best management practices and the development of sustainable incentive programs can soften the environmental impacts of grain-based ethanol production and strengthen the potential positive attributes of cellulosic biofuels.

“Sustainable biofuel production systems could play a highly positive role in mitigating climate change, enhancing environmental quality and strengthening the global economy, but it will take sound, science-based policy and additional research effort to make this so,” the researchers write. “Decision makers at all levels need to understand that applying best available practices to biofuel crop production will have positive impacts both on the sustainability of our working lands and on providing a long-term place for biofuels in our renewable energy portfolio, and that the policies necessary to ensure this outcome are not currently in place.”

Incentives for Best Management
So what practices should be used and what policies are needed to ensure environmental sustainability in the face of accelerated biofuels production? At the farm level, the authors outline best-management practices that build healthy soils, promote water quality and increase biodiversity. The use of no-till farming, advanced fertilizer technologies and cover crops, for example, can slow erosion and capture nutrients thereby preventing runoff into nearby waterways or ground water. Creating patchworks of land characterized by mixtures of crops, grasses, shrubs and areas of unmanaged habitat can increase the presence of pollinators, beneficial insects and wildlife, Sharpley explains.

In addition, the improvement of crops through genetic manipulation or classical selection can increase the stress tolerance of these plants or reduce the need for pesticides. The biggest benefits, however, may come from the development of cellulosic feedstocks. Many of these will be perennial crops that, once established, require little if any chemical inputs or tillage. These feedstocks are also better suited to being raised among a mixture of species.

Although the environmental benefits of these best-management strategies are known, the adoption process is slow at best. “If we’re going to expand agriculture for biofuels and use more agricultural lands, we need to do that in the right way and use the best-management practices we have,” Parton says. “We need to find policies to do that.” Therefore, at the government level, a program that rewards environmentally conscious growers and producers should be established, the authors write. An incentive program like this would award subsidies when certain performance standards were met. These standards would likely be regionally based and could include the use of best-management practices and measures of greenhouse gas emissions, water quality and soil erosion. This kind of incentive program could be modeled after the organic food certification program where canners or processors have to make sure that their suppliers have met certain standards and the products are truly organic.

“It means that you don’t have policemen out there,” explains Otto Doering, an agricultural economist at Purdue University. “It means that the processing plant that buys the materials has to make sure the grower of the cellulosic material is doing the right thing. You don’t have big government regulation. It’s built into the market system.”

The U.S. EPA has the perfect opportunity to make something like this happen. Under the 2007 Energy Independence & Security Act, the EPA must certify that any ethanol production, beyond the 15 billion gallons that’s already being produced or that will be produced at plants under construction, meets certain greenhouse gas emission requirements. “What we’re saying is that we shouldn’t just think of greenhouse gas standards, we should put it in a broader framework for good environmental stewardship,” Doering says.

The first step toward such a framework was taken with the publication of the Science paper, which its authors intended to be a springboard for greater dialogue. The ESA is planning to follow this up with the publication of several science-based manuscripts from the conference speakers. These papers will be published in the society’s peer-reviewed journal Ecological Applications. The ESA is also working with the Energy Foundation, a partnership of major donors that provides grants to institutions working to advance energy efficiency and renewable energy, to publish five reports on biofuels sustainability, which will be written for the public and will be produced as part of the ESA’s “Issues in Ecology” series, according to Duke.

In addition, Parton is working through the ESA to organize an international conference on biofuels sustainability. “The Science paper reflects what the science community is concerned about and that we need to do something ahead of time,” Parton explains. “It’s an interesting and global science question. We know what we should be doing. We’re just not doing it.”

Jessica Ebert is a freelance writer for Ethanol Producer Magazine. Reach her at jebertserp@yahoo.com.

About Renergie

Renergie was formed by Ms. Meaghan M. Donovan on March 22, 2006 for the purpose of raising capital to develop, construct, own and operate a network of ten ethanol plants in the parishes of the State of Louisiana which were devastated by hurricanes Katrina and Rita.  Each ethanol plant will have a production capacity of five million gallons per year (5 MGY) of fuel-grade ethanol.  Renergie’s “field-to-pump” strategy is to produce non-corn ethanol locally and directly market non-corn ethanol locally.  On February 26, 2008, Renergie was one of 8 recipients, selected from 139 grant applicants, to share $12.5 million from the Florida Department of Environmental Protection’s Renewable Energy Technologies Grants Program.  Renergie received $1,500,483 (partial funding) in grant money to design and build Florida’s first ethanol plant capable of producing fuel-grade ethanol solely from sweet sorghum juice.  On April 2, 2008, Enterprise Florida, Inc., the state’s economic development organization, selected Renergie as one of Florida’s most innovative technology companies in the alternative energy sector.  By blending fuel-grade ethanol with gasoline at the gas station pump, Renergie will offer the consumer a fuel that is more economical, cleaner, renewable, and more efficient than unleaded gasoline.  Moreover, the Renergie project will mark the first time that Louisiana farmers will share in the profits realized from the sale of value-added products made from their crops. 

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Vilsack: Some Hard Choices on Ethanol

Posted on December 18, 2008. Filed under: Advanced Biofuel, Rural Development | Tags: , , , , |

Vilsack: Some Hard Choices on Ethanol

TIME (Thursday, Dec. 18, 2008)

By Michael Grunwald

 

Iowa is the ethanol capital of the nation, and President-elect Barack Obama has been a reliable supporter of biofuels, so it’s no surprise that former Iowa governor Tom Vilsack, his choice for agriculture secretary, has been an even more reliable supporter of biofuels, even chairing a national coalition on ethanol (ethyl alcohol, a fuel distilled from plant matter). “As governor of one of our most abundant farm states, he led with vision,” Obama said of Vilsack today, “fostering an agricultural economy of the future that not only grows the food we eat but the energy we use.”

 

Unfortunately, the scientific evidence is increasingly clear that the agricultural economy should stick to growing food; using cropland to grow fuel instead turns out to be an environmental and economic catastrophe, accelerating the conversion of forests and wetlands into new cropland while jacking up food prices around the world. (See pictures of the global food crisis here.)

 

Vilsack has never been known as a reformer on this issue. And neither has Obama. But while many conservationists and sustainable agriculture activists are disappointed in the appointment, they could have done a lot worse than Vilsack. The Farm Bureau hailed his nomination, but it would have done institutional cartwheels if Obama had picked a toe-the-line “aggie” like House Agriculture Committee Chairman Collin Petersen or former ranking member Charlie Stenholm. Vilsack does have predictably close ties to traditional agriculture and agribusiness, and he did run the nation’s leading corn and soybean state. But he’s also been a supporter of farm conservation programs, clean water regulations, and a cap-and-trade scheme to prevent global warming. “He’s not really an aggie,” says one lobbyist involved in food and agriculture issues.

 

In any case, Obama has made fairly conventional Cabinet picks even for departments where he’s called for dramatic reform; it’s hard to imagine him picking a dramatic reformer for a department where he hasn’t. That’s especially true for the intensely politicized Agriculture Department. Any serious opponent of the farm lobby — like the six implausible candidates, including rural affairs activist Chuck Hassebrook and organic farmer Fred Kirschenmann, that a group of prominent foodies recently suggested to Obama — would get ripped to shreds by the aggies on Capitol Hill. Vilsack probably won’t launch a Nixon-goes-to-China initiative to block environmentally destructive biofuels, but he might not resist that kind of initiative coming out of the White House and EPA.

 

That’s because Vilsack — like Obama and his energy and environment team — has shown an especially deep interest in climate change. He wouldn’t be the first devoted biofuels advocate to change his mind after recognizing they’re making climate change worse, not to mention contributing to food insecurity here and food riots in the Third World. In fact, a climate change task force Vilsack co-chaired for the Council on Foreign Relations recommended “that the United States phase out domestic subsidies for mature biofuels such as conventional corn-based ethanol.” That wouldn’t go over big in Iowa.

 

In January, I chatted with Vilsack about biofuels after a Hillary Clinton campaign event at a soy biodiesel plant in Newton, Iowa. The theme of the day was that biofuels produce jobs, and Vilsack was pushing Iowa as “the clean-energy capital of America.” But he was clearly aware of the new research suggesting that biofuels in general — and corn ethanol in particular — created more carbon emissions by accelerating deforestation than they saved by replacing fossil fuels. “It’s definitely something we need to study,” he said. Vilsack suggested that second-generation biofuels like cellulosic ethanol manufactured from switchgrass could solve the problem, particularly if it was grown on non-productive hillsides so that it wouldn’t displace food crops. “You can get that stuff 25 feet high-and you don’t need as much land or fertilizer or energy to grow it,” Vilsack told me. “If we want to save the rain forest, we’re going to have to invest in these advanced biofuels.”

 

In fact, the jury is still out even on advanced biofuels; switchgrass would clearly be a big improvement on corn, but it’s not yet clear if it would be an improvement over gasoline if there isn’t enough non-productive land. Perhaps advanced biofuels from crop waste or even municipal waste would work better. In any case, it was interesting to see Obama make two references Wednesday to “advanced biofuels,” and none to ethanol. And it’s interesting that Vilsack has thought about this stuff in some detail.

 

The EPA is now devising a “life-cycle” test designed to measure whether various biofuels really reduce overall carbon emissions from the field to the tank; the farm lobby is already pushing for a weak test, because a strict one could halt the biofuel revolution. The position Vilsack’s department takes on this arcane test could signal whether it will really serve, as Obama pledged today, “not big agribusiness or Washington influence peddlers but family farmers and the American people.” But that would require real change — not only for the department, but for Vilsack, and for Obama too.

 

 

About Renergie

Renergie was formed by Ms. Meaghan M. Donovan on March 22, 2006 for the purpose of raising capital to develop, construct, own and operate a network of ten ethanol plants in the parishes of the State of Louisiana which were devastated by hurricanes Katrina and Rita.  Each ethanol plant will have a production capacity of five million gallons per year (5 MGY) of fuel-grade ethanol.  Renergie’s “field-to-pump” strategy is to produce non-corn ethanol locally and directly market non-corn ethanol locally.  On February 26, 2008, Renergie was one of 8 recipients, selected from 139 grant applicants, to share $12.5 million from the Florida Department of Environmental Protection’s Renewable Energy Technologies Grants Program.  Renergie received $1,500,483 (partial funding) in grant money to design and build Florida’s first ethanol plant capable of producing fuel-grade ethanol solely from sweet sorghum juice.  On April 2, 2008, Enterprise Florida, Inc., the state’s economic development organization, selected Renergie as one of Florida’s most innovative technology companies in the alternative energy sector.  By blending fuel-grade ethanol with gasoline at the gas station pump, Renergie will offer the consumer a fuel that is more economical, cleaner, renewable, and more efficient than unleaded gasoline.  Moreover, the Renergie project will mark the first time that Louisiana farmers will share in the profits realized from the sale of value-added products made from their crops. 

 

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Agriculture Secretary Pick Vilsack to Face Farm Bill, Ethanol

Posted on December 17, 2008. Filed under: Hydrous Ethanol, Rural Development | Tags: , , , , |

Agriculture Secretary Pick Vilsack to Face Farm Bill, Ethanol

 

 

By Alan Bjerga

Bloomberg (December 17, 2008)

 

Tom Vilsack, who President-elect Barack Obama may name as his Agriculture secretary choice, will need to act quickly on unimplemented farm subsidies and lower crop prices, commodities and agriculture analysts said.

 

As the 30th head of the U.S. Department of Agriculture, the former Iowa governor, 58, would also be tasked with re-examining the nation’s biofuels policy. He replaces Ed Schafer, who has led the USDA since Jan. 28. Obama plans to make the announcement today at a news conference in Chicago, according to a Democratic official who spoke on the condition of anonymity.

 

Vilsack’s experience as a state legislator and leader of the nation’s largest corn-producing state makes him well-qualified to lead the third-largest Cabinet department in spending, said Senate Agriculture Committee Chairman Tom Harkin, like the former governor an Iowa Democrat. The USDA has a budget of about $100 billion and 110,000 employees.

 

“He knows production agriculture and he knows the changes needed to ensure its profitability and future,” Harkin said in an e-mail. Vilsack will join Obama at the news conference scheduled to begin at 10:45 a.m. Chicago time, where the president-elect may also designate Colorado Senator Ken Salazar as Interior secretary. Both posts are subject to confirmation by the Senate.

 

Vilsack was elected as Iowa’s governor in 1998, the first Democrat to win the office in 32 years. He was re-elected in 2002. Now an attorney at the Dorsey Trial group, he endorsed New York Senator Hillary Clinton during the Democratic presidential primary campaign after ending his own presidential bid in February 2007, before the first contest took place.

 

Overcoming Adversity

In his brief campaign, Vilsack offered his life story as an example of overcoming adversity to rise to high public office. The Pittsburgh native was orphaned at birth and adopted from a Catholic orphanage. He moved to Mount Pleasant, Iowa, his wife’s hometown, to practice law and raise their two sons. He was elected the town’s mayor in 1987 after a disgruntled citizen murdered the previous mayor. Vilsac would bring to the Department of Agriculture experience as the former chief executive of a state heavily reliant on agriculture and related industries. Along with corn, Iowa is one of the nation’s top producers of soybeans, hogs and eggs and is second in crop value to California among all states, according to government statistics.

 

As secretary, Vilsack would face immediate challenges putting into practice a politically popular yet harshly criticized farm bill and determining the direction of ethanol policy. He would also have to manage controversies over trade, food safety and animal welfare, agriculture and commodities markets analysts said.

 

‘Intense Volatility’

“We are in a period now of intense volatility in the agriculture industry,” said Clayton Yeutter, who held the top agriculture job under President George H.W. Bush and is a former U.S. trade representative, at a farm conference earlier this month. “Farmers here and in other countries are really struggling to figure out how to handle this.”

 

The $289 billion, five-year farm bill Congress passed in June over President George W. Bush’s veto largely remains unimplemented, with key decisions on how to tailor crop subsidy programs yet to be made, said David Kruse, a commodity trading adviser at Commstock Investments Inc., in Royal Iowa. The shape of a new subsidy based on farm revenue rather than crop price still hasn’t been determined. Depending on what formula the government chooses, farmers may decide whether to plant corn or soybeans based on how much support they may receive, Kruse said. Under one scenario, “you could receive $200 an acre for corn, and that’s significant,” he said.

 

Renewable Energy

Pressure to make subsidies generous is rising as corn, wheat and soybean prices plunge from records set earlier this year, he said. Farmers’ hopes for higher payments may run afoul of potential trillion-dollar budget deficits anticipated as Obama fights a global economic crisis, said Mark Maslyn, head of public policy for the American Farm Bureau Federation, the largest U.S. farmer group.

 

“Any Cabinet secretary is going to have the overarching problem of the budget,” he said, which may make it more difficult to fund Obama campaign promises such as $150 billion in renewable energy investment over 10 years. Biofuels subsidies themselves may come under attack should they be seen as budget-busters, making ethanol another key issue for the new secretary, he said.

 

Beyond the farm bill, the budget and biofuels, agriculture will continue to be a key part of the Doha round of international trade talks, Maslyn said. Also set for more prominence are food safety and animal-welfare standards, called into question after a series of high profile recalls involving Cargill Inc. beef, General Mills Inc. pizzas and the largest meat scare ever, the 143.4-million-pound Westland/Hallmark Meat Co. recall of February that involved animal cruelty.

 

How the new secretary handles these issues will go a long way toward determining whether the new administration will lead to a new direction for American food policy, said Jim Harkness, president of the Institute for Agriculture and Trade Policy in Minneapolis, Minnesota.

 

“We hope we will have a serious discussion that will be about more than tinkering at the margins,” he said.

 

Renergie was formed by Ms. Meaghan M. Donovan on March 22, 2006 for the purpose of raising capital to develop, construct, own and operate a network of ten ethanol plants in the parishes of the State of Louisiana which were devastated by hurricanes Katrina and Rita.  Each ethanol plant will have a production capacity of five million gallons per year (5 MGY) of fuel-grade ethanol.  Renergie’s “field-to-pump” strategy is to produce non-corn ethanol locally and directly market non-corn ethanol locally.  On February 26, 2008, Renergie was one of 8 recipients, selected from 139 grant applicants, to share $12.5 million from the Florida Department of Environmental Protection’s Renewable Energy Technologies Grants Program.  Renergie received $1,500,483 (partial funding) in grant money to design and build Florida’s first ethanol plant capable of producing fuel-grade ethanol solely from sweet sorghum juice.  On April 2, 2008, Enterprise Florida, Inc., the state’s economic development organization, selected Renergie as one of Florida’s most innovative technology companies in the alternative energy sector.  By blending fuel-grade ethanol with gasoline at the gas station pump, Renergie will offer the consumer a fuel that is more economical, cleaner, renewable, and more efficient than unleaded gasoline.  Moreover, the Renergie project will mark the first time that Louisiana farmers will share in the profits realized from the sale of value-added products made from their crops. 

 

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Ethanol Counting on Campaign Promises

Posted on December 12, 2008. Filed under: Hydrous Ethanol, Rural Development | Tags: , , , , |

Ethanol counting on campaign promises

Obama pledged his support, but policy, interests may collide

By Joshua Boak

Tribune reporter

chicagotribune.com (December 12, 2008)

 

Record corn prices drove VeraSun Energy into bankruptcy. Shares in Aventine Renewable Energy are trading for less than 50 cents, down 99 percent from their peak. Plans for 19 ethanol refineries were recently canceled, including nine in Illinois.

And because of its lower energy content, ethanol blend E85 effectively costs drivers about 30 cents more per gallon than gasoline, hurting its acceptance as an alternative fuel.

Promises of additional government support for ethanol producers from President-elect Barack Obama might not be enough to immediately rescue a business near and dear to farmers. Ethanol is a crucial part of Obama’s pledge to limit the use of foreign oil, a policy that connects energy to national security and economic development.

Government mandates established a demand for ethanol that proved greater than what the corn harvest could provide. That drove up corn prices and slashed the profit margins of refiners. Additional government efforts to strengthen the industry could only prolong that cycle.

“If you just give them more money, it’s just going to make the price of corn higher, which is going to make the situation worse for them,” said Tom Elam, who runs the agricultural consulting firm FarmEcon. “As a result of their unbridled enthusiasm, they have built an industry bigger than the government mandate and the ability of corn growers to provide.”

E85, a blend of 85 percent ethanol and 15 percent gasoline, rings up lower at the cash register for drivers, but gasoline delivers more miles per gallon and a better value to motorists. That puts companies that spent hundreds of millions of dollars constructing ethanol refineries across the Midwest into a bind because higher prices would salvage their profit margins yet make the biofuel less competitive against gasoline.

To restore profits to stable levels, refiners must shut down to cull supplies or have legislation that expands the potential markets for ethanol. Obama ran for president as a friend to the ethanol industry, promising to keep it open for business.

“Now’s not the time to pull the rug out from under the ag policies that help you find profitability in the marketplace,” Heather Zichal, the Obama campaign’s policy director for energy, environment and agriculture, said at the ribbon-cutting of an ethanol refinery in Marion, Ohio, a week before the election.

The Obama campaign platform called for funding research for biofuels and next-generation ethanol made from switch grass and garbage, so that the country would have an annual biofuel supply of 60 billion gallons by 2030, up from roughly 10 billion gallons this year.

His platform also called for every new car in America to be “flex fuel” by 2013, which could improve the ethanol market because drivers could fill up with gasoline or an ethanol blend.

Sanjay Shrestha, an alternative-energy analyst for Lazard Capital, said Obama’s victory was an “incremental positive” for ethanol, but he cautioned, “We shouldn’t draw the conclusion that it’s going to revitalize the corn-based ethanol industry.”

The auto industry plans for half of new vehicles to be flex fuel, running on E85. Introducing flex-fuel vehicles would require installing thousands of pumps across the country to handle E85, at a cost of about $50,000 each.

And in order for motorists to have a genuine choice with flex fuel, E85 must be competitively priced, a challenge because fuel economy with the high-percentage blend is worse than gasoline. A recent study sponsored by the Energy Department and the American Coalition for Ethanol claims that fuel economy improved slightly with 30 percent blends of ethanol, which could narrow the price gap.

Most gasoline bought at filling stations contains some ethanol. The government capped the blend at 10 percent ethanol and 90 percent gasoline. Ethanol currently accounts for about 8 percent of the country’s supply of transportation gasoline, according to the Environmental Protection Agency.

Raising the cap to 15 percent or 20 percent would stimulate more demand for ethanol, restoring higher profit margins to refiners, said Jeff Broin, chief executive of Poet LLC, the South Dakota-based owner of 26 refineries that recently said it was looking for takeover targets.

That solution could give headaches to drivers though, because using an ethanol blend higher than 10 percent would void the warranties for most car engines, said Alan Adler, a spokesman for General Motors. The engines were never designed for a higher ethanol concentration.

As president, Obama will have to parse through these types of conflicting interests to arrive at a policy. That could distance him from the interests of a Corn Belt that helped the former Illinois senator win the White House.

“When you’re governing, you have to make clear choices that are unambiguous in consequences and outcomes,” said John Hofmeister, the retired president of Shell Oil Co. and founder of the non-profit Citizens for Affordable Energy. “It’s different than campaigning, when you can test ideas.”

Obama’s energy plan looks beyond ethanol. It embraces a 2015 deadline for putting a million hybrid plug-ins on the road. The cars would charge their batteries in a wall socket, making them a potential rival to flex-fuel vehicles. Cars also could be powered by hydrogen cells and compressed natural gas, fuels with well-funded advocates.

If Obama wants to truly deliver on the broader goal of reducing dependence on foreign oil, the administration will have to decide which alternative fuel to pursue, Hofmeister said.

“If we only let market forces determine the outcome, 10 years from now we’ll still be debating how many infrastructures to support,” he said.

jboak@tribune.com

 

About Renergie

Renergie was formed by Ms. Meaghan M. Donovan on March 22, 2006 for the purpose of raising capital to develop, construct, own and operate a network of ten ethanol plants in the parishes of the State of Louisiana which were devastated by hurricanes Katrina and Rita.  Each ethanol plant will have a production capacity of five million gallons per year (5 MGY) of fuel-grade ethanol.  Renergie’s “field-to-pump” strategy is to produce non-corn ethanol locally and directly market non-corn ethanol locally.  On February 26, 2008, Renergie was one of 8 recipients, selected from 139 grant applicants, to share $12.5 million from the Florida Department of Environmental Protection’s Renewable Energy Technologies Grants Program.  Renergie received $1,500,483 (partial funding) in grant money to design and build Florida’s first ethanol plant capable of producing fuel-grade ethanol solely from sweet sorghum juice.  On April 2, 2008, Enterprise Florida, Inc., the state’s economic development organization, selected Renergie as one of Florida’s most innovative technology companies in the alternative energy sector.  By blending fuel-grade ethanol with gasoline at the gas station pump, Renergie will offer the consumer a fuel that is more economical, cleaner, renewable, and more efficient than unleaded gasoline.  Moreover, the Renergie project will mark the first time that Louisiana farmers will share in the profits realized from the sale of value-added products made from their crops.

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Ethanol Fumes: After VeraSun, More Trouble for Midwest Ethanol Makers?

Posted on December 10, 2008. Filed under: Hydrous Ethanol, Rural Development | Tags: , , , , |

The Wall Street Journal Environmental Capital Blog (December 9, 2008)

 

Ethanol Fumes: After VeraSun, More Trouble for Midwest Ethanol Makers?

Posted by Keith Johnson

 

There’s one industry that’s definitely not cheering lower oil prices—old-fashioned ethanol. The sector’s latest troubles are a reminder that not even the savviest clean-tech investors have found a way to cash in on first-generation biofuels.

 

After the implosion of VeraSun last month, which sent the Sioux Falls, S.D.-based ethanol producer into bankruptcy, ethanol makers have been braced for more fallout from a collapse in ethanol prices.

 

Another big name appears to be quivering: AltraBiofuels, an Omaha, Neb-based ethanol producer backed by celebrity venture capitalists such as Vinod Khosla and Kleiner Perkins. Altra is suspending production at its plants in Indiana and Ohio in part due to the collapse of ethanol prices.

 

An Indiana paper initially reported that Altra would shutter its two plants; Altra later described the December layoffs at its Ohio plant as a “furlough” and said it aimed to re-start production in January. The Indiana plant isn’t so lucky: “Due to the poor margin environment, we have made the decision to stop producing ethanol at our Cloverdale facility,” Altra said in a statement.

 

U.S corn ethanol makers might be getting a break from lower corn prices, but ethanol prices have also collapsed. Ethanol nearly hit $3 a gallon in June; today it trades just under $1.40 a gallon. That spells zero or even negative margins for most ethanol makers. Spare capital was already spent on higher corn prices earlier in the year, construction of new facilities, or on hedges on corn prices that went south.

 

That leaves much of the industry with little wiggle room to weather a prolonged period of depressed oil and ethanol prices, says David Woodburn, an alternative fuels analyst with ThinkEquity in Chicago. Temporary shutdowns can lower operating expenses, but don’t stanch the bleeding entirely. “What’s the timeframe for resuming production?,” he asks. “The real answer depends on what market conditions look like at that future decision point.”

 

Altra says it hopes to reopen the Indiana plant if the market recovers. “We have and will continue to monitor the margin environment on a daily basis and will assess a restart of the plant as soon as margins improve,” the company said in the statement.

 

Altra is a poster child of sorts for the corn ethanol business, attracting investment from Mr. Khosla and Kleiner Perkins. Former vice president Al Gore touted Altra as an example of the alternative-energy companies that could underpin a green revolution in the U.S.

 

But with oil prices hovering in the $40s, and ethanol prices halved since the summer, biofuel investors are setting their sights now on the next generation of biofuels made from inedible things like switchgrass. The idea is that oil prices will inevitably rebound just as the second-generation biofuel makers finally come to market.

 

 

About Renergie

Renergie was formed by Ms. Meaghan M. Donovan on March 22, 2006 for the purpose of raising capital to develop, construct, own and operate a network of ten ethanol plants in the parishes of the State of Louisiana which were devastated by hurricanes Katrina and Rita.  Each ethanol plant will have a production capacity of five million gallons per year (5 MGY) of fuel-grade ethanol.  Renergie’s “field-to-pump” strategy is to produce non-corn ethanol locally and directly market non-corn ethanol locally.  On February 26, 2008, Renergie was one of 8 recipients, selected from 139 grant applicants, to share $12.5 million from the Florida Department of Environmental Protection’s Renewable Energy Technologies Grants Program.  Renergie received $1,500,483 (partial funding) in grant money to design and build Florida’s first ethanol plant capable of producing fuel-grade ethanol solely from sweet sorghum juice.  On April 2, 2008, Enterprise Florida, Inc., the state’s economic development organization, selected Renergie as one of Florida’s most innovative technology companies in the alternative energy sector.  By blending fuel-grade ethanol with gasoline at the gas station pump, Renergie will offer the consumer a fuel that is more economical, cleaner, renewable, and more efficient than unleaded gasoline.  Moreover, the Renergie project will mark the first time that Louisiana farmers will share in the profits realized from the sale of value-added products made from their crops.

 

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The Monster That Ate Wall Street

Posted on November 25, 2008. Filed under: Field-to-Pump, Rural Development | Tags: , , , , |

The Monster That Ate Wall Street

 

How ‘credit default swaps’—an insurance against bad loans—turned from a smart bet into a killer.

Matthew Philips

NEWSWEEK

From the magazine issue dated Oct 6, 2008

 

They’re called “Off-Site Weekends”—rituals of the high-finance world in which teams of bankers gather someplace sunny to blow off steam and celebrate their successes as Masters of the Universe. Think yacht parties, bikini models, $1,000 bottles of Cristal. One 1994 trip by a group of JPMorgan bankers to the tony Boca Raton Resort & Club in Florida has become the stuff of Wall Street legend—though not for the raucous partying (although there was plenty of that, too). Holed up for most of the weekend in a conference room at the pink, Spanish-style resort, the JPMorgan bankers were trying to get their heads around a question as old as banking itself: how do you mitigate your risk when you loan money to someone? By the mid-’90s, JPMorgan’s books were loaded with tens of billions of dollars in loans to corporations and foreign governments, and by federal law it had to keep huge amounts of capital in reserve in case any of them went bad. But what if JPMorgan could create a device that would protect it if those loans defaulted, and free up that capital?

 

What the bankers hit on was a sort of insurance policy: a third party would assume the risk of the debt going sour, and in exchange would receive regular payments from the bank, similar to insurance premiums. JPMorgan would then get to remove the risk from its books and free up the reserves. The scheme was called a “credit default swap,” and it was a twist on something bankers had been doing for a while to hedge against fluctuations in interest rates and commodity prices. While the concept had been floating around the markets for a couple of years, JPMorgan was the first bank to make a big bet on credit default swaps. It built up a “swaps” desk in the mid-’90s and hired young math and science grads from schools like MIT and Cambridge to create a market for the complex instruments. Within a few years, the credit default swap (CDS) became the hot financial instrument, the safest way to parse out risk while maintaining a steady return. “I’ve known people who worked on the Manhattan Project,” says Mark Brickell, who at the time was a 40-year-old managing director at JPMorgan. “And for those of us on that trip, there was the same kind of feeling of being present at the creation of something incredibly important.”

 

Like Robert Oppenheimer and his team of nuclear physicists in the 1940s, Brickell and his JPMorgan colleagues didn’t realize they were creating a monster. Today, the economy is teetering and Wall Street is in ruins, thanks in no small part to the beast they unleashed 14 years ago. The country’s biggest insurance company, AIG, had to be bailed out by American taxpayers after it defaulted on $14 billion worth of credit default swaps it had made to investment banks, insurance companies and scores of other entities. So much of what’s gone wrong with the financial system in the past year can be traced back to credit default swaps, which ballooned into a $62 trillion market before ratcheting down to $55 trillion last week—nearly four times the value of all stocks traded on the New York Stock Exchange. There’s a reason Warren Buffett called these instruments “financial weapons of mass destruction.” Since credit default swaps are privately negotiated contracts between two parties and aren’t regulated by the government, there’s no central reporting mechanism to determine their value. That has clouded up the markets with billions of dollars’ worth of opaque “dark matter,” as some economists like to say. Like rogue nukes, they’ve proliferated around the world and now lie hiding, waiting to blow up the balance sheets of countless other financial institutions.

 

It didn’t start out that way. One of the earliest CDS deals came out of JPMorgan in December 1997, when the firm put into place the idea hatched in Boca Raton. It essentially took 300 different loans, totaling $9.7 billion, that had been made to a variety of big companies like Ford, Wal-Mart and IBM, and cut them up into pieces known as “tranches” (that’s French for “slices”). The bank then identified the riskiest 10 percent tranche and sold it to investors in what was called the Broad Index Securitized Trust Offering, or Bistro for short. The Bistro was put together by Terri Duhon, at the time a 25-year-old MIT graduate working on JPMorgan’s credit swaps desk in New York—a division that would eventually earn the name the Morgan Mafia for the number of former members who went on to senior positions at global banks and hedge funds. “We made it possible for banks to get their credit risk off their books and into nonfinancial institutions like insurance companies and pension funds,” says Duhon, who now heads her own derivatives consulting business in London.

 

Before long, credit default swaps were being used to encourage investors to buy into risky emerging markets such as Latin America and Russia by insuring the debt of developing countries. Later, after corporate blowouts like Enron and WorldCom, it became clear there was a big need for protection against company implosions, and credit default swaps proved just the tool. By then, the CDS market was more than doubling every year, surpassing $100 billion in 2000 and totaling $6.4 trillion by 2004.

 

And then came the housing boom. As the Federal Reserve cut interest rates and Americans started buying homes in record numbers, mortgage-backed securities became the hot new investment. Mortgages were pooled together, and sliced and diced into bonds that were bought by just about every financial institution imaginable: investment banks, commercial banks, hedge funds, pension funds. For many of those mortgage-backed securities, credit default swaps were taken out to protect against default. “These structures were such a great deal, everyone and their dog decided to jump in, which led to massive growth in the CDS market,” says Rohan Douglas, who ran Salomon Brothers and Citigroup’s global credit swaps research division through the 1990s.

 

Soon, companies like AIG weren’t just insuring houses. They were also insuring the mortgages on those houses by issuing credit default swaps. By the time AIG was bailed out, it held $440 billion of credit default swaps. AIG’s fatal flaw appears to have been applying traditional insurance methods to the CDS market. There is no correlation between traditional insurance events; if your neighbor gets into a car wreck, it doesn’t necessarily increase your risk of getting into one. But with bonds, it’s a different story: when one defaults, it starts a chain reaction that increases the risk of others going bust. Investors get skittish, worrying that the issues plaguing one big player will affect another. So they start to bail, the markets freak out and lenders pull back credit.

 

The problem was exacerbated by the fact that so many institutions were tethered to one another through these deals. For example, Lehman Brothers had itself made more than $700 billion worth of swaps, and many of them were backed by AIG. And when mortgage-backed securities started going bad, AIG had to make good on billions of dollars of credit default swaps. Soon it became clear it wasn’t going to be able to cover its losses. And since AIG’s stock was one of the components of the Dow Jones industrial average, the plunge in its share price pulled down the entire average, contributing to the panic.

 

The reason the federal government stepped in and bailed out AIG was that the insurer was something of a last backstop in the CDS market. While banks and hedge funds were playing both sides of the CDS business—buying and trading them and thus offsetting whatever losses they took—AIG was simply providing the swaps and holding onto them. Had it been allowed to default, everyone who’d bought a CDS contract from the company would have suffered huge losses in the value of the insurance contracts they hadpurchased, causing them their own credit problems.

 

Given the CDSs’ role in this mess, it’s likely that the federal government will start regulating them; New York state has already said it will begin doing so in January. “Sadly, they’ve been vilified,” says Duhon, who helped get the whole thing started with that Bistro deal a decade ago. “It’s like saying it’s the gun’s fault when someone gets shot.” But just as one might want to regulate street sales of AK-47s, there’s an argument to be made that credit default swaps can be dangerous in the wrong hands. “It made it a lot easier for some people to get into trouble,” says Darrell Duffie, an economist at Stanford. Although he believes credit default swaps have been “dramatically misused,” Duffie says he still believes they’re a very effective tool and shouldn’t be done away with entirely. Besides, he says, “if you outlaw them, then the financial engineers will just come up with something else that gets around the regulation.” As Wall Street and Washington wring their hands over how to prevent future financial crises, we can only hope they re-read Mary Shelley’s “Frankenstein.”

 

 

About Renergie

Renergie was formed by Ms. Meaghan M. Donovan on March 22, 2006 for the purpose of raising capital to develop, construct, own and operate a network of ten ethanol plants in the parishes of the State of Louisiana which were devastated by hurricanes Katrina and Rita.  Each ethanol plant will have a production capacity of five million gallons per year (5 MGY) of fuel-grade ethanol.  Renergie’s “field-to-pump” strategy is to produce non-corn ethanol locally and directly market non-corn ethanol locally. On February 26, 2008, Renergie was one of 8 recipients, selected from 139 grant applicants, to share $12.5 million from the Florida Department of Environmental Protection’s Renewable Energy Technologies Grants Program.  Renergie received $1,500,483 (partial funding) in grant money to design and build Florida’s first ethanol plant capable of producing fuel-grade ethanol solely from sweet sorghum juice. On  April 2, 2008, Enterprise Florida, Inc., the state’s economic development organization, selected Renergie as one of Florida’s most innovative technology companies in the alternative energy sector.  On January 20, 2009, Florida Energy & Climate Commission amended RET Grant Agreement S0386 to increase Renergie’s funding from $1,500,483 to $2,500,000. By blending fuel-grade ethanol with gasoline at the gas station pump, Renergie will offer the consumer a fuel that is renewable, more economical, cleaner, and more efficient than unleaded gasoline.  Moreover, the Renergie project will mark the first time that Louisiana farmers will share in the profits realized from the sale of value-added products made from their crops.

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    Renergie created “field-to-pump," a unique strategy to locally produce and market advanced biofuel (“non-corn fuel ethanol”) via a network of small advanced biofuel manufacturing facilities. The purpose of “field-to-pump” is to maximize rural development and job creation while minimizing feedstock supply risk and the burden on local water supplies.

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