Renewable Energy and the Financial Crisis -- Weathering the

Storm

Tony CrooksUSDA Rural Development

SAAS and SRSA Combined Annual MeetingFebruary 2, 2009

Atlanta, Georgia

Committed to the future of rural communities

Agenda

• 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

• A former Major League Baseball player and manager for the New York Yankees and was elected to the baseball Hall of Fame in 1972

• One of only four players to be named the Most Valuable Player of the American League three times

• One of only six managers to lead both American and National League teams to the World Series

• 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 perennialTop Ten Financial Bubbles

1. Dutch tulip bulbs, 1636

2. English South seas, 1720

3. French Mississippi land rush, 1720

4. US stock price, 1927-29

5. Mexican bank loans, 1970

6. Japanese real estate and stocks, 1985-89

7. Scandinavian real estate and stocks, 1985-89

8. Southeast Asian real estate and stocks, 1992-97

9. Mexican surge in foreign investment, 1990-93

10. 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

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Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08

Brent vs Rape Oil

Brent vs Soy Oil

Brent vs Palm Oil

Brent vs Sun Oil

Rolling price correlation VegOils (base Rdam) vs Brent crude oil July 06 - April 08

Rolling correlations -- Vegetable oils and Brent Crude Jul 06 - Apr -08

Kingsman Biodiesel Weekly, used with permission.

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

Source: National Biodiesel BoardUpdated: September 2008

Commercial biodiesel production in the U.S.176 plants ~ 2.61 billion gallons production capacity

176 plants

0.5 2 5 15 20 25

75

250

450

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Source: National Biodiesel BoardUpdated: September 2008

Estimated Biodiesel Production and Sales in the U.S.

Millions of gallons

DOE grants for commercialized CE plants

Municipal green waste

Wheat straw

Bagasse

Wood waste

Corn fiber & stover

Second generation biofuelsAn 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

$1.1 billion to leverage renewable energy industry investments in new technologies and feedstocks• 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

Food, Conservation, and Energy Act ’08Energy Title Programs with Mandatory Funding

“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:

1. Should have a positive energy balance

2. No carbon loans from nature

3. Maintain feedstock biodiversity – no monocultures

4. 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 – 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

Source: Hawkes, “Does Dollar Weakness 'Cause' High Oil Prices?,” St. Louis Federal Reserve Board, Nov ’07.

Daily averages except for Oct. 29

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

• 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

Biodiesel challenges

• 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

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.

Renewable energy proposals outlined in other titlesFood, Conservation and Energy Act ’08 (continued)