Des Moines Register
04-08-07
More states want piece of biofuels
Some question why Iowa is cutting incentives for projects
By DONNELLE ELLER
REGISTER BUSINESS WRITER
The scramble for renewable-fuels projects has some farm and alternative-fuels
groups questioning whether Iowa's proposed cutback in incentives for the fastgrowing industry will make the state less competitive.
The Iowa Economic Development Board is considering cutting loans and grants
for biodiesel projects, similar to cuts the group made to ethanol projects a year
ago.
That proposal is also raising bigger questions about the role taxpayers should
take in developing the renewable-fuels industry - especially building traditional
plants - when it's attracting record investment.
"Iowa has been a success story," said Monte Shaw, executive director of the
Iowa Renewable Fuels Association. Iowa is the nation's top producer of ethanol
and biodiesel. "But our advantage won't be what it once was if we take a step
back while other states take a step forward."
Gov. Chet Culver is pushing Iowa lawmakers to set up a four-year, $100 million
fund to develop the next generation of renewable fuels projects.
At the same time, other states are ramping up plans for investment in plants and
emerging technology that could usurp Iowa's place as the nation's renewable
fuels capital.
For example, Illinois Gov. Rod Blagojevich seeks to invest $1.2 billion in
developing the state's renewable-fuels industry over the next decade. The plan,
expected to create 30,000 jobs, would provide $200 million to develop 24 ethanol
plants, including four cellulosic plants, and $25 million to develop five biodiesel
plants.
In Iowa, 68 ethanol and biodiesel projects have received $13.4 million in loans
and grants since 2003, state records show. The projects qualify for a maximum
of $460 million in tax credits, based on $6.7 billion in capital investment.
But about three dozen states are now offering incentives for biodiesel and
ethanol development.
State and federal governments spend between $5.5 billion and $7.3 billion - in
loans, grants, tax breaks and other assistance - annually to support the
renewable-fuels industry, according to the International Institute for Sustainable
Development.
That group is among those calling for an incentives moratorium.
"These subsidies are being piled on top of one another without policymakers
having a clear idea of their potential impact to the environment and the
economy," David Runnalls, president of the group, wrote last month.
Industry's popularity attracts more money
In Iowa, the state development board is looking to cut $400,000 in loans and
grants for biodiesel plants, a perk once provided to ethanol plants. Still, ethanol
and biodiesel projects that use new technology would likely qualify for grants and
loans - and the capital-intensive projects would also qualify for hefty tax credits.
"We've helped the industry get rolling, but now we want to encourage producers
to take the next step," said Jerry Courtney, a financial adviser and member of the
Iowa Economic Development Board. "I don't know how many ethanol and
biodiesel plants we can support here in Iowa, but I do know that technology being
what it is, if you aren't running to stay ahead, you're going to get behind."
States are fighting for renewable fuels projects because money invested in the
industry and the size of the market is skyrocketing.
Venture capital investment in biofuels - ethanol and biodiesel - exploded to $813
million in 2006 from $20.5 million in 2005, according to Clean Edge, a San
Francisco-based research and consulting company.
The global market for biofuels is expected to climb from $20.5 billion in 2006 to
$80.9 billion over the next decade, according to that company's projections.
Renewable-fuels plants are also politically appealing. They bring huge capital
investment, relatively high-paying jobs and corn- and soybean-consuming
production to struggling rural areas.
Ethanol and biodiesel projects getting state assistance have created 2,436 jobs
that pay an average of about $42,000 annually, state records show.
David Swenson, an economic scientist at Iowa State University, calculates
that 28 ethanol plants last year created nearly 4,100 jobs in the state, a number
he expects to grow to 8,700 when 57 plants are up and running. That includes
plant workers and other jobs connected to the industry.
The industry calculates a far greater impact.
A renewable fuels association study shows biodiesel and ethanol spinning off
53,000 jobs and generating $1.8 billion in income for Iowans last year, sending
$390 million to the state coffers.
Debate: Are incentives now needed in Iowa?
Biofuels' recent success, particularly ethanol, may cloud the fact that the
emerging industry will likely undergo growing pains, experts say.
"The industry needs to expand at a rate that's economically sustainable," said
Chuck Hassebrook, executive director of the Center for Rural Affairs in Lyons,
Neb. "If you overbuild, the boom could turn into a bust.
"And I'm concerned that with all the enthusiasm about ethanol - and higher corn
prices - land price inflation will really take off ... and we'll find ourselves laying the
foundation for the next farm crisis," he said.
David Miles, chief financial officer of Countryside Renewable Energy, warned
state development leaders earlier this year to expect some failures.
"There's this growing assumption, which is incorrect, that farmers who have
invested in ethanol - and the plants themselves - are these little gold mines," said
Miles, whose company seeks to consolidate farmer-owned plants into a larger
company, in part to help reduce their risks. "They're extraordinarily valuable to
our rural economy and our state ... but they're not out there printing money.
"It's not going to be golden all the time, but long-term the investment of tax
dollars makes sense," he said, noting that some plants saw losses in February.
Walter Wendland, chief executive of Golden Grain Energy, an ethanol plant in
Mason City, said he can see both sides of the economic development argument.
Ethanol and biodiesel developers are seeing huge spikes in construction costs,
fueled by higher costs of steel and fewer suitable locations for the plants.
Miles said production costs have doubled - from about $1 per gallon to $2 per
gallon and more - in just a few years.
Adding to the uncertainty: The production buildup will push the industry - possibly
this summer - past the federal mandate that 7.5 billion gallons of ethanol replace
gasoline by 2012.
Developers probably need the money more now than ever, said Wendland,
president of the state renewable fuels group.
But, he added, "a $200 million, 100 million-gallon plant isn't going to be built or
not built because of a $400,000" grant and loan.
"But it does give investors confidence," he said.
Shaw, the renewable fuels association director, said he's unaware of investors
deciding to locate in another state because of richer incentives.
But he adds it's frustrating that Iowa has "closed the door" on ethanol projects
and is contemplating similar action with biodiesel, primarily because it has been
successful.
"Has the board done this with any other industry?" Shaw asked. "Did it tell Wells
Fargo the banking industry is doing well ... so you're not qualified?
"We say this is integral to Iowa's future, then turn around and say 'good luck,' "
said Shaw. "We're not going to pick up our marbles and go home, but it's
confusing and disappointing."
Concern about money for 'next generation'
Iowa's development focus on creating the next generation of renewable fuels from corn stalks, switchgrass and other biomass - will benefit the entire
renewable fuels industry, according to Wendland.
Golden Grain hopes the new technology can be "bolted on" - or added to existing
ethanol and biodiesel plants. Miles said the growing infrastructure of plants gives
the state the backbone on which to build the new technology.
Both are concerned the avalanche of investment now could affect future capital.
"We need to have money available to invest in the next generation of
technology," Wendland said.
Mindy Larsen Poldberg of the Iowa Corn Growers Association said Iowa needs to
focus on the development of new technology, but not at the expense of industry
growth.
"We support research and development of cellulosic and other technology there's room enough for everyone - but we'd also like to see a multitiered
approach," said Poldberg, director of government relations for the association.
The state's approach to biofuels isn't all about money, said Doug O'Brien, an
adviser on renewable energy to Gov. Culver.
One reason Iowa needs an office dedicated to renewable energy - which is part
of the $100 million Power Fund - is to coordinate efforts across state agencies and to ensure Iowa remains competitive with other states.
"Because of Iowa's pioneering work in ethanol and biodiesel, we're ahead of the
curve, and the Power Fund is designed to make sure we stay number one,"
O'Brien said.
Reporter Donnelle Eller can be reached at (515) 284-8457 or deller@dmreg.com