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January 3, 2013
Biofuels are among the promising solutions to our energy and climate problems, but fuel production projects are complex, and getting them off the ground requires savvy financing. New Resource is working with several clients on projects that illustrate the challenges and potential.
One, a biomass company in Northern California, produces energy from waste wood, such as bark chips, sawdust, millings, and tree stumps from forestry and construction. After completely retrofitting plant equipment and technology to meet California’s strict air quality standards, the company is talking with New Resource about a long-term loan agreement.
With its expertise in waste-to-energy projects, the bank understands better than most lenders what makes a biofuel business succeed or fail. “Two key components have to be in place: a creditworthy buyer for the output and a reliable source of supply,” says Rob Holden, senior vice president, commercial lending.
Biofuels projects get buffeted by policy winds
The output of biofuels projects is the power they produce. For that power to be worth anything, a biofuel company needs a long-term, guaranteed power purchase agreement (PPA) with an investment-grade company, such as a utility. New Resource client Farm Power Northwest, for example, has solid PPAs in place for its four anaerobic manure digesters in dairy-farming communities in Oregon and Washington. Just as important is an adequate supply of quality biomass material: manure, wood, etc. Those business fundamentals, however, are just part of the story. External factors also play a big role, sometimes positive, sometimes negative, explains Holden.
Working in biofuel companies’ favor are government incentives and policies. Until recently, the 1603 tax credit program, part of the American Recovery and Reinvestment Act, gave upfront cash rebates for 30 percent of funds spent on renewable energy projects. And California’s AB 32, the Global Warming Solutions Act, requires utility companies to deliver 33 percent of the electricity they sell to customers from renewable sources by 2020. That has the utilities scrambling for alternative energy producers to partner with.
On the minus side, biofuel projects are as vulnerable to economic uncertainty and political squabbles as the industries they rely on for biomass supply. One example is California’s milk-pricing system, which keeps the price cheese makers pay for milk low despite rising feed costs and slow economic growth. This contributes to the many challenges dairy farmers face and some say it threatens their business.
New Resource sees renewable energy as way forward
Despite the challenges of biofuels financing, New Resource is forging ahead. Supporting renewable energy projects is closely aligned with the bank’s mission, and New Resource has the in-house knowledge necessary to assess them.
In Holden’s words, the bank approaches every project with “specialized knowledge not only of the financing but also of the business complexities, and a deep commitment to renewable energy.”