Renewable Energy and the Financial Crisis Weathering the Storm

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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

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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

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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.

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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.

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A nickel ain't worth a dime anymore.
The Boom, the Bust, the Aftermath
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Financial Crisis A hearty perennialTop Ten
Financial Bubbles

• 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.
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This time last yearFood 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.
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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.
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Markets moving in tandem
Rolling correlations -- Vegetable oils and Brent
Crude Jul 06 - Apr -08
Kingsman Biodiesel Weekly, used with permission.
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The Boom, the Bust,
Washington Post, The boom, the bust, and the
aftermath
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The Aftermath
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Total Federal debt as a percentage of GDP
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Always go to other people's funerals, otherwise,
they won't come to yours.
Consolidation on a shoestring
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Consolidation on a shoestring
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Ethanol stock prices Pacific Ethanol, Aventine,
VERASUN, Biofuels Energy, and Green Plains RE
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Midwest ethanol valuation
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Commercial biodiesel production in the U.S.176
plants 2.61 billion gallons production capacity
176 plants
Source National Biodiesel Board Updated
September 2008
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Estimated Biodiesel Production and Sales in the
U.S.
Millions of gallons
Source National Biodiesel Board Updated
September 2008
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DOE grants for commercialized CE plants
Corn fiber stover
Wheat straw
Wood waste
Municipal green waste
Bagasse
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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

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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 RD 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

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

• 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

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If you come to a fork in the road, take it.
Energy market pivot points
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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?

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The towels were so thick there I could hardly
close my suitcase.
Never waste a crisis!
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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)

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American Recovery and Reinvestment Plan
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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)

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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

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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
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Smart energy policy

• Value natures services
• Align energy efficiency with climate policy

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Value natures 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

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Align energy efficiency with climate policy

• Four well-recognized premises on sustainable
  biofuels production
• Should have a positive energy balance
• No carbon loans from nature
• Maintain feedstock biodiversity no monocultures
  
• No trading food for fuel at scale

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The future ain't what it used to be.
Rational expectations
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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 worlds biggest problem -- Energy
  Technology revolution
• - WE should build out, not bail out!

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I just want to thank everyone who made this day
necessary.
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I wish I had an answer to that because I'm tired
of answering that question.
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(No Transcript)
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Nobody goes there anymore. It's too crowded.
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Even Napoleon had his Watergate.
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I never blame myself when I'm not hitting. I
just blame the bat and if it keeps up, I change
bats.
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U.S. Counties capable of supporting cellulosic
ethanol
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Value of U.S. dollar, 1970-2008
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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.
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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.
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• Biodiesel demand drivers
• Strong petroleum price expectations
• Biodiesel Blenders 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)
• Degrades rubber and plastic in high
  concentration (B100)
• Supply availability in next 12 - 24
  months

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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

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Renewable energy proposals outlined in other
titlesFood, 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.