‘Policy Uncertainty’ Could Choke Development of Military Biofuels

Biofuel is tested in the fuel lab aboard the aircraft carrier USS Nimitz.
Congressional antagonism toward the Pentagon’s biofuels program is raising concerns about the future of private-sector investments in alternative energy.
Senate and House amendments to the Fiscal Year 2013 National Defense Authorization Act would limit the Defense Department’s authority to purchase biofuels in large quantities until they become cost competitive with petroleum. Some Republican lawmakers regard military biofuels as a cover for the administration’s green-energy agenda. Others simply object to the Defense Department spending funds on alternative fuels when there are ample supplies of domestic and foreign petroleum available at less cost.
To outsiders, the NDAA debate is just one more partisan battle in Washington’s larger political wars. But anti-biofuel sentiments on Capitol Hill are raising serious alarm bells within the alternative-fuel industry and stirring concerns among Pentagon officials who support green energy because of the chilling effect that the political divide could have on private investment.
“If there is a lot of uncertainty, we are going to lose private capital,” said Phyllis Cuttino, director of the Pew Project on National Security, Energy, and Climate.
The Defense Department’s plan to become a consumer of alternative fuels is predicated on the ability of the private sector to scale up production and on commercial airlines transitioning to biofuels so prices become more competitive. All that requires substantial private investments that might be at risk if venture capitalists decide that the politics of biofuels pose too big a financial risk.
Assistant Secretary of Defense for Operational Energy Plans and Programs Sharon Burke said she does have concerns that legislative restrictions could jeopardize the Defense Department’s goals to diversify its sources of energy.
“For the future, our military will need alternatives to petroleum to keep our supplies diverse, especially for our legacy fleet of ships and planes, which will be with us for decades to come,” Burke said in a statement to National Defense. “The private sector will be the leaders in developing a commercially viable alternative fuels industry, and we have concerns that restrictions on the department's ability to obtain the milspec fuel we need to achieve our mission may reduce the development and availability of these alternatives over the long term.”
The Defense Department began to step up its pursuit of alternative fuels in 2007, and over the past two years the Navy and the Air Force have made headlines for their embrace of aviation biofuels as a future hedge against rising oil prices and unreliable foreign oil suppliers.
In the wake of the House and Senate NDAA amendments, Pew has mobilized biofuels supporters andreleased a letter this week that was signed by more than 350 veterans, including retired generals and admirals, as well as former Senate and House Armed Services Committee chairmen Sen. John Warner and Rep. Ike Skelton, urging the president and Congress to support the Pentagon’s initiatives to diversify its energy sources. The letter echoes biofuel producers’ belief that the military is needed as an essential anchor customer.
Lawmakers in the House and Senate have argued that biofuels are cost prohibitive at a time when the military’s budget is stretched. The Navy’s “great green fleet” effort was particularly criticized by members of the House Armed Services Committee as an example of misplaced priorities when the Navy is cutting back on new ship buys and other modernization programs.
The Senate Armed Services Committee agreed to add anti-biofuel provisions to the NDAA. Biofuel supporters’ best hope now lies with Sens. Jeanne Shaheen, D-N.H., and Susan Collins, R-Maine, who vowed in a recent op-ed article that they would fight to protect the Defense Department’s biofuel funds, including a Navy commitment of more than $200 million as part of joint $500 million effort with the Departments of Energy and Agriculture.
Cuttino said the green-energy community has been taken aback by the partisan tenor of an issue that has national security implications.
“We’ve been dismayed by the politicization of these [military biofuel] efforts,” Cuttino said July 24 during a conference call with reporters. “These issues should not be politicized,” she said. “To have these innovations singled out is unfortunate.”
The Pentagon’s financial commitment is being blown out of proportion, she said. Biofuel expenditures are a tiny fraction of what the Defense Department spends on fuel each year, Cuttino said. The Pentagon’s annual energy bill is about $15 billion, three-quarters of which is spent on liquid fuels. Pew estimated that Defense Department biofuel expenditures last year were $1.2 billion, up from $400 million two years ago. A Pew study projects military biofuel purchases will reach $10 billion annually by 2030.
When Congress was fighting a year ago over the nation’s debt ceiling, investors were alarmed. The battle over biofuels creates a similar cloud of policy uncertainty that could be damaging to an industry that is just getting off the ground, Cuttino said.
The trends in private investment in alternative energy in G-20 countries are cause for concern, she said, as they indicate that investors tend to flee when they see policy indecision. “What we know from all our research over several years is that if there is a question of uncertainty when it comes to policy, private investment will move on to another country where there is more policy certainty.”
The United States currently is a world leader in attracting private capital to alternative energy, she said. The European economic crisis might keep the United States in the lead for some time, but venture capitalists also may be souring on U.S. biofuels investments, according to analysts.
Interest in capital-intensive industries such as energy is fading, said a July report by Dow Jones VentureSource. Investors are raising red flags about biofuel investment because of the large amounts of capital needed to build infrastructure. “The second quarter is the worst for investment in energy and utilities start-ups since the first quarter of 2009,” said VentureSource.
The Commercial Aviation Alternative Fuels Initiative — a coalition of airlines, aircraft and engine manufacturers, energy producers and U.S. government agencies — cautions that project financing is still the “biggest remaining challenge to the deployment of alternative aviation fuels.” Nevertheless, CAAFI is “confident that environmentally friendly alternative jet fuel derived from several feedstocks will be available in the next two to five years,” the group said in a statement on its website. The barrier to deployment, said CAAFI, is the availability of capital, as production plants cost on the order of $100,000 per barrel per day.
FlightGlobal.com reported that, since 2007, more than 1,500 passenger flights have been made using biofuels produced from feedstocks such as household waste and algae. “The major challenge now is to work out how to produce large quantities of sustainable biofuel at a cost that is commercially competitive to airlines,” FlightGlobal noted.
Lufthansa, one of the world’s largest airlines, has projected that renewable jet fuel will replace up to 5 percent of the market in the next five to seven years.
In the United States, the biofuel industry needs the military to commit to long-term purchases so it can secure investors, Pew said in a statement. “The military’s leadership, cooperation with the private sector, and early adoption have been critical to the commercialization of many technologies such as semiconductors, nuclear energy, the Internet, and the Global Positioning System,” Pew noted. “Maintaining energy innovation, inside and outside the Defense Department, is critical to our national security.”
The office of the secretary of defense recently unveiled a new policy to guide the military services’ investments in alternative fuels. It states that the Defense Department's "primary alternative fuels goal is to ensure operational military readiness, improve battle space effectiveness, and further flexibility of military operations through the ability to use multiple, reliable fuel sources."
The Obama administration’s most visible champion of biofuels, Navy Secretary Ray Mabus, has been pushing back on congressional attacks. In a Facebook post, he refutes media reports that the Navy will spend $1.8 billion on biofuels. The Navy “will only purchase operational quantities of biofuel blends when they are competitive with petroleum, period,” he says. “The Navy is pursuing alternatives because the nation’s reliance on foreign oil is a significant and well-recognized military vulnerability.”
Turning congressional critics around might be tough. Biofuel detractors have seized on a RAND Corp. study commissioned by the U.S. Air Force that concluded that military investments in biofuels are not a smart use of taxpayer dollars, and casts doubts on the notion that the Defense Department — which accounts for just 1.5 percent of U.S. fuel consumption — can move the market in any significant way.
Countering the advocacy from organizations such as Pew are groups like the Institute for Energy Research, a conservative energy think tank that has characterized the Defense Department’s biofuel program as a case of "waste, fraud and abuse." In a July letter to congressional committees, IER President Thomas Pyle urged lawmakers to investigate the Pentagon’s green agenda. He accused the Obama administration of squandering defense dollars. The Advanced Biofuels Association has sought to counter IER’s attacks by publishing a series of white papers on the merits of biofuels as a matter of national security.

Topics: Energy, Alternative Energy, Energy Security