[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]


 
        HEARING TO REVIEW THE FUTURE OF NEXT GENERATION BIOFUELS

=======================================================================

                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON CONSERVATION, CREDIT,
                          ENERGY, AND RESEARCH

                                 OF THE

                        COMMITTEE ON AGRICULTURE
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 29, 2009

                               __________

                           Serial No. 111-35


          Printed for the use of the Committee on Agriculture
                         agriculture.house.gov


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                        COMMITTEE ON AGRICULTURE

                COLLIN C. PETERSON, Minnesota, Chairman

TIM HOLDEN, Pennsylvania,            FRANK D. LUCAS, Oklahoma, Ranking 
    Vice Chairman                    Minority Member
MIKE McINTYRE, North Carolina        BOB GOODLATTE, Virginia
LEONARD L. BOSWELL, Iowa             JERRY MORAN, Kansas
JOE BACA, California                 TIMOTHY V. JOHNSON, Illinois
DENNIS A. CARDOZA, California        SAM GRAVES, Missouri
DAVID SCOTT, Georgia                 MIKE ROGERS, Alabama
JIM MARSHALL, Georgia                STEVE KING, Iowa
STEPHANIE HERSETH SANDLIN, South     RANDY NEUGEBAUER, Texas
Dakota                               K. MICHAEL CONAWAY, Texas
HENRY CUELLAR, Texas                 JEFF FORTENBERRY, Nebraska
JIM COSTA, California                JEAN SCHMIDT, Ohio
BRAD ELLSWORTH, Indiana              ADRIAN SMITH, Nebraska
TIMOTHY J. WALZ, Minnesota           ROBERT E. LATTA, Ohio
STEVE KAGEN, Wisconsin               DAVID P. ROE, Tennessee
KURT SCHRADER, Oregon                BLAINE LUETKEMEYER, Missouri
DEBORAH L. HALVORSON, Illinois       GLENN THOMPSON, Pennsylvania
KATHLEEN A. DAHLKEMPER,              BILL CASSIDY, Louisiana
Pennsylvania                         CYNTHIA M. LUMMIS, Wyoming
ERIC J.J. MASSA, New York
BOBBY BRIGHT, Alabama
BETSY MARKEY, Colorado
FRANK KRATOVIL, Jr., Maryland
MARK H. SCHAUER, Michigan
LARRY KISSELL, North Carolina
JOHN A. BOCCIERI, Ohio
SCOTT MURPHY, New York
EARL POMEROY, North Dakota
TRAVIS W. CHILDERS, Mississippi
WALT MINNICK, Idaho

                                 ______

                           Professional Staff

Robert L. Larew, Chief of Staff      Nicole Scott, Minority Staff 
Andrew W. Baker, Chief Counsel       Director
April Slayton, Communications 
Director

                                  (ii)
?

       Subcommittee on Conservation, Credit, Energy, and Research

                   TIM HOLDEN, Pennsylvania, Chairman

STEPHANIE HERSETH SANDLIN, South     BOB GOODLATTE, Virginia, Ranking 
Dakota                               Minority Member
DEBORAH L. HALVORSON, Illinois       JERRY MORAN, Kansas
KATHLEEN A. DAHLKEMPER,              SAM GRAVES, Missouri
Pennsylvania                         MIKE ROGERS, Alabama
BETSY MARKEY, Colorado               STEVE KING, Iowa
MARK H. SCHAUER, Michigan            RANDY NEUGEBAUER, Texas
LARRY KISSELL, North Carolina        JEAN SCHMIDT, Ohio
JOHN A. BOCCIERI, Ohio               ADRIAN SMITH, Nebraska
MIKE McINTYRE, North Carolina        ROBERT E. LATTA, Ohio
JIM COSTA, California                BLAINE LUETKEMEYER, Missouri
BRAD ELLSWORTH, Indiana              GLENN THOMPSON, Pennsylvania
TIMOTHY J. WALZ, Minnesota           BILL CASSIDY, Louisiana
ERIC J.J. MASSA, New York
BOBBY BRIGHT, Alabama
FRANK KRATOVIL, Jr., Maryland
SCOTT MURPHY, New York
WALT MINNICK, Idaho
EARL POMEROY, North Dakota

               Nona Darrell, Subcommittee Staff Director

                                 (iii)


                             C O N T E N T S

                              ----------                              
                                                                   Page
Goodlatte, Hon. Bob, a Representative in Congress from Virginia, 
  opening statement..............................................     2
Holden, Hon. Tim, a Representative in Congress from Pennsylvania, 
  opening statement..............................................     1
    Prepared statement...........................................     2
Latta, Hon. Robert E., a Representative in Congress from Ohio, 
  prepared statement.............................................     4
Peterson, Hon. Collin C., a Representative in Congress from 
  Minnesota, prepared statement..................................     4
Smith, Hon. Adrian, a Representative in Congress from Nebraska, 
  prepared statement.............................................     5

                               Witnesses

Tonsager, Hon. Dallas P., Under Secretary for Rural Development, 
  U.S. Department of Agriculture, Washington, D.C.; accompanied 
  by Todd Atkinson, Senior Advisor, Energy and Environment, Farm 
  Services Agency, U.S. Department of Agriculture................     5
    Prepared statement...........................................     7
Shah, M.D., Hon. Rajiv, Under Secretary of Research, Education, 
  and Economics, U.S. Department of Agriculture, Washington, D.C.    10
    Prepared statement...........................................    12
Rosenthal, Mary, Executive Director, Algal Biomass Organization, 
  Preston, MN....................................................    34
    Prepared statement...........................................    35
Ellerbusch, Susan, President, BP Biofuels North America LLC, 
  Warrenville, IL................................................    36
    Prepared statement...........................................    38
Roe, William J., President and CEO, Coskata, Inc., Warrenville, 
  IL.............................................................    43
    Prepared statement...........................................    45
Jamerson, Bruce A., Chairman, Board of Directors, Mascoma 
  Corporation, Lebanon, NH.......................................    50
    Prepared statement...........................................    51
Shealy, L. Craig, President, CEO, and Co-Founder, Osage Bio 
  Energy, LLC, Glen Allen, VA....................................    54
    Prepared statement...........................................    56

                           Submitted Material

Gray, Ph.D., Kevin Gray, Chief Technology Officer, Qteros, Inc., 
  submitted statement............................................    71
Gutterson, Neal, CEO; and Ikonen, Greg, General Counsel, Mendel 
  Biotechnology, Inc., submitted statement.......................    72


        HEARING TO REVIEW THE FUTURE OF NEXT GENERATION BIOFUELS

                              ----------                              


                       THURSDAY, OCTOBER 29, 2009

                  House of Representatives,
 Subcommittee on Conservation, Credit, Energy, and 
                                          Research,
                                  Committee on Agriculture,
                                                   Washington, D.C.
    The Subcommittee met, pursuant to call, at 10:05 a.m., in 
Room 1300 of the Longworth Building, Hon. Tim Holden [Chairman 
of the Subcommittee] presiding.
    Members present: Representatives Holden, Herseth Sandlin, 
Halvorson, Dahlkemper, Markey, Schauer, Kissell, Boccieri, 
McIntyre, Costa, Murphy, Peterson (ex officio), Goodlatte, 
Moran, Schmidt, Smith, Latta, Luetkemeyer, Thompson, Cassidy, 
and Minnick.
    Staff present: Nona Darrell, Craig Jagger, John Konya, 
Robert L. Larew, James Ryder, Anne Simmons, April Slayton, 
Rebekah Solem, Patricia Barr, Josh Maxwell, Jamie Mitchell, and 
Sangina Wright.

   OPENING STATEMENT OF HON. TIM HOLDEN, A REPRESENTATIVE IN 
                   CONGRESS FROM PENNSYLVANIA

    The Chairman. This hearing of the Subcommittee on 
Conservation, Credit, Energy, and Research to review the future 
of the next generation biofuels will come to order. I would 
like to welcome our witnesses and guests at today's hearing to 
break our nation's dependence on foreign oil.
    It is important to develop a diverse portfolio of energy 
alternatives including renewable, homegrown biofuels. Today we 
hope to hear about these energy programs and initiatives from 
both the Administration as well as industry representatives. In 
order to meet our commitment, it will take a public and private 
partnership. Congress has taken many positive steps to ensure a 
viable biofuels industry. Over the past few decades we have 
also seen an expanding list of Federal, state and local 
incentives, regulations and programs that have helped encourage 
renewable energy production and use.
    I look forward to hearing about these initiatives from the 
Under Secretaries representing USDA this morning. The 
distinguished panel before us today also represents a broad 
cross-section of private companies on the frontier of next 
generation biofuels. While we have four companies represented 
on today's panel, we could have easily had 400, each with 
unique and exciting breakthrough technologies that are being 
advanced in the next generation of biofuel development. I have 
had the opportunity to visit with and learn from many of these 
companies and look forward to continuing that work to highlight 
their good efforts in this field.
    Today we hope to gain an industry perspective on current 
challenges and future opportunities in the renewable biofuels 
market, as well as the current state of public and private 
financing to make certain projects are online and production 
goals remain on track. While the market is rapidly growing and 
changing, significant challenges remain. In addition to a 
global economic downturn, the restrictive definition of 
renewable biomass and the required consideration of emissions 
related to advanced biofuels from indirect land use contained 
in the renewable fuel standard of the Energy Independence and 
Security Act of 2007 are problematic. I think we can do more to 
increase our use of renewable agriculture fuels and become 
energy independent, and I look forward to hearing from the 
witnesses and guaranteeing agriculture's continued role in 
producing renewable fuels and energy.
    [The prepared statement of Mr. Holden follows:]

  Prepared Statement of Hon. Tim Holden, a Representative in Congress 
                           from Pennsylvania

    I would like to welcome our witnesses and guests to today's 
hearing. To break our nation's dependence on foreign oil, it is 
important to develop a diverse portfolio of energy alternatives 
including renewable, home-grown biofuels. Today, we hope to hear about 
these energy programs and initiatives from both the Administration as 
well as industry representatives. In order to meet our commitment, it 
will take a public and private partnership.
    Congress has taken many positive steps to ensure a viable biofuels 
industry. Over the past few decades, we've also seen an expanding list 
of Federal, state, and local incentives, regulations, and programs that 
have helped encourage renewable energy production and use. I look 
forward to hearing about these initiatives from the Under Secretaries 
representing USDA.
    The distinguished panel before us today also represents a broad 
cross section of private companies on the frontier of next generation 
biofuels. While we have four companies represented on today's panel, we 
could have easily had 400, each with unique and exciting breakthrough 
technologies that are being advanced in the next generation of biofuel 
development. I have had the opportunity to visit with and learn from 
many of these companies and look forward to continuing that work to 
highlight their good efforts in the field.
    Today, we hope to gain an industry perspective on current 
challenges and future opportunities in the renewable biofuels market, 
as well as the current state of public and private financing to make 
certain projects are online and production goals remain on track.
    While the market is rapidly growing and changing, significant 
challenges remain. In addition to a global economic downturn, the 
restrictive definition of renewable biomass and the required 
consideration of emissions related to advanced biofuels from indirect 
land use contained in the Renewable Fuel Standard of the Energy 
Independence and Security Act of 2007 are problematic.
    I think we can do more to increase our use of renewable 
agricultural fuels and become energy independent. I look forward to 
hearing from the witnesses and guaranteeing agriculture's continued 
role in producing renewable fuels and energy.

    The Chairman. Now, I recognize the Ranking Member of the 
Subcommittee, the gentleman from Virginia, Mr. Goodlatte.

 OPENING STATEMENT OF HON. BOB GOODLATTE, A REPRESENTATIVE IN 
                     CONGRESS FROM VIRGINIA

    Mr. Goodlatte. Well, thank you, Mr. Chairman, and I would 
like to thank you for holding today's hearing.
    It is important that we review the future of next 
generation biofuels. Over the past couple of years, this 
Committee has thoroughly reviewed energy issues affecting rural 
America. Much of that discussion has been about the growth of 
renewable fuels and its opportunities and consequences for 
agriculture.
    The Federal Government has played a big part in the early 
development of renewable fuels by creating an expanded 
Renewable Fuels Standard along with tax credits for ethanol, 
biodiesel and now advanced biofuels. This Committee worked to 
create a new energy title in the 2008 Farm Bill with the intent 
of helping the biofuels industry move towards the 
commercialization of advanced biofuels. However, the expanded 
RFS creates an unrealistic mandate for conventional corn 
ethanol by prohibiting the use of biomass from new crop acres. 
This restriction will make it difficult, if not impossible, for 
producers to meet the food and fiber demands of our consumers 
while also meeting the mandate set in the RFS.
    We also face a major problem in the transition from grain-
based fuels to cellulosic biofuels if we restrict the 
cellulosic feedstocks from forests and agricultural lands that 
can be used to meet the RFS. To meet the needs of our energy 
consumption and to open more markets for our agricultural 
products, it is essential that we move away from feed-based 
ethanol and develop commercially viable advanced biofuels. This 
technology has enormous potential to create renewable fuels 
across the nation, but these goals can only be accomplished if 
we develop a biofuels policy that works. That is why I 
cosponsored legislation with Chairman Peterson that removes 
indirect land use from the RFS lifecycle analysis and creates a 
new biomass definition, which expands the amount of eligible 
feedstocks that can be used to meet the RFS mandate.
    We must continue to pave the way for second generation 
biofuels to create energy diversity and not limit our homegrown 
feedstocks. The use of forest biomass for biofuels creates 
markets for byproducts of forest improvement products. Almost 
\2/3\ of the Commonwealth of Virginia is forested as is much of 
the southeastern U.S. Trees are an abundant resource and are 
available for conversion into both paper and biofuels year-
round. Let me also add that like forestry biomass, Virginia's 
many agricultural commodities and animal waste products also 
have the potential to be essential and beneficial resources of 
a renewable fuel.
    Additionally, I am also looking forward to the testimony 
from the witnesses about algae biomass. Research in this area 
is taking place in Virginia and, specifically, in my district 
at James Madison University. I have also had the opportunity to 
tour Solazyme, Incorporated in California, a leader in algal 
biotechnology. I believe that algal biomass has the potential 
to be a bridge technology between agriculture, energy and 
biotechnology, and I look forward to hearing more about the 
commercialization of this technology.
    I also look forward to listening to how the USDA is working 
to fund the research and production of advanced biofuels. I am 
interested in learning more about how the private sector is 
investing dollars in the renewable energy sector. Today's 
hearing will help guide us in how we should shape future 
renewable energy programs.
    Again, I thank you, Mr. Chairman, for holding this hearing 
and I look forward to hearing from today's witnesses.
    The Chairman. The chair thanks the gentleman and would ask 
all other Members of the Subcommittee to submit their opening 
statements for the record.
    [The prepared statements of Messers. Peterson, Latta, and 
Smith follow:]

  Prepared Statement of Hon. Collin C. Peterson, a Representative in 
                        Congress from Minnesota

    Thank you, Chairman Holden for holding this hearing today. Advances 
in the biofuels industry are transforming the way we think about energy 
production in the United States and around the world. The next 
generation of renewable fuels will be built on the success of corn-
based ethanol and biodiesel, which means that we must continue to 
support the work of today's biofuels producers in order to give new 
technologies time for development and implementation. While roadblocks 
remain and critics still fail to recognize the improvements and 
advances the industry has already made, the promise of next generation 
biofuels is exciting, and it is my intention to do everything I can to 
see it succeed.
    Government policies can either help or hinder advances in the 
biofuels industry. Right now, there are proposals out there and 
programs in place that do both. We created financing programs at USDA 
and the Department of Energy. However, not all of the funding that 
should be available to support the industry is getting out because of 
delays in rulemaking and regulations in place that put biofuels 
facilities at a disadvantage for some credit programs. The credit 
situation also changed after we wrote the farm bill programs, so access 
may be further limited, and I look forward to working with USDA to fix 
that. I am interested to hear from some of the companies here today 
about the challenges and opportunities they have experienced when 
trying to access the resources they need, both from government and 
private sources.
    Another area where government policy could hinder the industry is 
in the form of ill-advised restrictions on biofuels based on 
international indirect land use calculations and restrictive 
definitions of biomass. We have discussed these issues in previous 
hearings, and I included language in the House-passed climate change 
bill to prevent such restrictions from stifling this growing industry. 
We can't expect the next generation of biofuels to materialize if we 
don't allow the industry to succeed in the first place.
    Despite some roadblocks and challenges, there is some exciting 
research being done that can turn the promise of next generation 
biofuels into reality. Working together, government, academic and 
private research have made great strides in this area, and today we'll 
hear more about what this means for the future of the industry.
    Thank you to our witnesses for joining us today, and I look forward 
to the testimony.
                                 ______
                                 
    Prepared Statement of Hon. Robert E. Latta, a Representative in 
                           Congress from Ohio

    Good morning, Chairman Holden and Ranking Member Goodlatte.
    I would like to welcome our two distinguished panels of witnesses 
from the private sector and the USDA to discuss America's future on 
next generation biofuels. A simple premise in this day and age is that 
we cannot predict with any certainty what energy prices will be, what 
the supply and demand will be, or what our economy will look like in 
the future. Energy is plays a central role in our economy and 
alternative energy such as biofuels will directly impact the 
availability of jobs, our incomes and the quality of our lives for many 
years to come.
    These sources of alternative energy are an important step towards 
energy independence. If we do not use these resources and address these 
issues now, the rest of the world will pass us by. The Fifth 
Congressional District in Ohio is ahead of the curve in alternative 
energy sources as it is home to solar panel manufacturing, wind 
turbines, ethanol, geothermal, and biodiesel. There is also a process 
for coal gasification and development of a hydrogen engine is also 
occurring in the Fifth Congressional District.
    We are all aware that one source of energy is not one answer to our 
energy challenges. Our country needs not only biofuels, but also wind, 
solar, hydro in addition to nuclear, clean coal technology and more 
domestic oil and natural gas production. If we are going to achieve 
energy independence, we must use all available sources in a manner that 
is economically viable and environmentally sound.
    I hope that today's hearing will help start moving our future use 
of biofuels and other sources of alternative energy in the right 
direction towards bringing jobs back, and bringing more alternative 
sources of energy to America and further developing the ones already in 
existence. The panelists who have been invited to testify have varied 
backgrounds will speak about various aspects.
    Northern Ohio has a future in this country to be a leader in 
alternative energies such as biofuels. I look forward to hearing from 
our witnesses and thank you for your insight and testimony.
    Thank you and I look forward to working with my colleagues on the 
House Committee on Agriculture on this very important issue.
                                 ______
                                 
 Prepared Statement of Hon. Adrian Smith, a Representative in Congress 
                             from Nebraska

    Thank you, Mr. Chairman:

    In 2008, I supported a farm bill which promoted the critical, 
timely development of our nation's biofuels industry and confirmed 
Congress is serious about decreasing our dependence on foreign oil.
    I have long advocated an all-of-the-above approach for America's 
energy policy. Advancing our nation's biofuels industry will have 
significant environmental benefits, promote energy independence, create 
jobs, and stimulate local economies across the nation at a time when 
our country needs it most.
    I appreciate the Subcommittee holding this hearing to review issues 
facing the advanced biofuels industry. I look forward to hearing the 
observations and recommendations of our witnesses.
    Thank you. I yield back.

    The Chairman. We now welcome our first panel, Mr. Dallas 
Tonsager, Under Secretary for Rural Development in the United 
States Department of Agriculture, and Dr. Shah, Under Secretary 
for Research, Education, and Economics, U.S. Department of 
Agriculture. We also have Mr. Atkinson from FSA who is here 
with us today. We did not ask Mr. Atkinson to testify because 
the majority of jurisdiction will be with Rural Development but 
some Members of the panel might have a question or two for you, 
Mr. Atkinson.
    Mr. Tonsager, you may begin when you are ready

          STATEMENT OF HON. DALLAS P. TONSAGER, UNDER
      SECRETARY FOR RURAL DEVELOPMENT, U.S. DEPARTMENT OF 
 AGRICULTURE, WASHINGTON, D.C.; ACCOMPANIED BY TODD ATKINSON, 
                   SENIOR ADVISOR, ENERGY AND
            ENVIRONMENT, FARM SERVICES AGENCY, U.S.
                   DEPARTMENT OF AGRICULTURE

    Mr. Tonsager. Thank you, Mr. Chairman, and Members of the 
Subcommittee. I appreciate this opportunity to talk about 
second and third generation biofuels.
    Accelerating the deployment of advanced biofuels is a high-
priority for President Obama and for USDA. I know that this 
Subcommittee, and the Congress as a whole, share that 
commitment. You gave us a clear mandate in the 2008 Farm Bill 
and we look forward to working with you to get the job done.
    I am privileged today to be testifying with Dr. Rajiv Shah, 
Agriculture Under Secretary for Research, Education, and 
Economics. Dr. Shah will describe REE's cutting edge research 
in both basic and applied science related to advanced biofuels.
    There is exciting work going on as well elsewhere in the 
government, in the private sector, in the universities and 
abroad. The potential of advanced biofuels is widely 
recognized. The question that we all have, of course, is how 
rapidly can this potential be unlocked? Over the past decade, 
the United States became the world leader in biofuels, 
principally in corn ethanol. All of us recognize, however, that 
we have a remarkable opportunity today to diversify the 
feedstock base and add second and third generation biofuels to 
the nation's fuel mix. I am confident that this will happen.
    This is essentially a story of converging cost curves. 
Since the beginning of this decade, we have witnessed the price 
of oil march from around $20 a barrel to nearly $150 a barrel 
18 months ago and down to $78 a barrel yesterday. I do not know 
what the price of oil will be 5 or 10 years down the road, but 
I do know the recession is ending. Global energy and demand 
will continue to rise; environmental constraints will continue 
to intensify, and for all these reasons the need to 
commercialize advanced biofuels will continue to mount.
    Our task is to help accelerate that transition. On May 5, 
2009, the President's directive on biofuels and economic 
development mandated implementation of most of our new, 
renewable energy farm bill programs within 30 days. We met that 
target. In the Biorefinery Assistance Program, we have 
completed two application rounds, two awards have been 
announced and two more applications from initial rounds remain 
under consideration. As potential applicants gain familiarity 
with this program and as the national economy continues to 
recover, we anticipate continued growth and interest in 
applications in this program.
    The Repowering Assistance Program is also on track. The 
farm bill made available $35 million in mandatory funding to 
remain available until expended. Of this total, $20 million was 
allocated for the initial funding round which was advertised in 
June of 2009, with the application window closing on November 
1. As of October 28, one application has been received. We 
anticipate that a proposal and final rule be published in late 
2010, with the remaining funds to be available at that time.
    The Bioenergy Program for Advanced Biofuels provides 
payments for eligible agricultural producers to expand 
production of advanced biofuels. Funds are distributed for the 
previous year's production. We received 180 applications for 
Fiscal Year 2009 production, and of these 160 were deemed 
eligible. Thiry million dollars was allocated to Fiscal Year 
2009, and production will be paid as a one-time payment during 
the first quarter of Fiscal Year 2010.
    While not targeted specifically to advanced biofuels, the 
Rural Energy for America Program is also available as a 
potential source of support. From Fiscal Year 2001 through 
2008, Rural Development invested over $195 million in 96 
ethanol and biodiesel projects. Twenty-seven of these projects 
were funded through the Section 9006 Program. Biofuels are 
already an area of concentration and expertise and the 
transition to advanced biofuels is a logical evolution of the 
existing program.
    Finally, as advanced biofuel technologies develop, we 
anticipate that many will become eligible for more conventional 
forms of financing including the Business and Industry Loan 
Guarantee Program. In the long run, our expectation is that 
successful technologies will graduate to full private 
financing. We will have succeeded fully when our assistance is 
no longer needed.
    In the short run, we still face an economic recession 
compounded by an unprecedented credit crisis. These factors 
have affected capital investment in all sectors including 
investment in new and emerging technologies, but these factors 
are inherently temporary. In the long run, all of us understand 
that advanced biofuels are a critical priority. The President 
and USDA are fully committed to the goal and we look forward to 
working with you to keep this vital initiative on track.
    Thank you.
    [The prepared statement of Mr. Tonsager follows:]

  Prepared Statement of Hon. Dallas P. Tonsager, Under Secretary for 
  Rural Development, U.S. Department of Agriculture, Washington, D.C.

    Mr. Chairman and Members of the Subcommittee, thank you for this 
opportunity to appear before you to discuss the future of second and 
third generation biofuels.
    President Obama and the Department believe that the research and 
commercialization of second and third generation has enormous potential 
to reduce our dependence on fossil fuels. The Department is anxious to 
work with other Federal agencies as well as the private sector the make 
this potential a reality.
     I know that this Subcommittee, and a bipartisan majority in the 
Congress as a whole, share that commitment, as reflected in the Food, 
Conservation, and Energy Act of 2008 [2008 Farm Bill]. I therefore want 
to begin by commending your vision and leadership in this effort, and 
by acknowledging the critical contributions made by our partners 
elsewhere in government and in the private sector as well.
    Today I will be discussing USDA Rural Developments advanced 
biofuels programs but I would be remiss if I failed to note that we are 
one part of much broader departmental and Federal effort. Secretary 
Vilsack has articulated a strategic vision for rural America that 
emphasizes a safe, abundant, and secure food supply; rural communities 
that are vibrant, self-sustaining, and repopulating; an emphasis on 
local and regional food networks; a commitment to economic opportunity 
and wealth creation in rural America; and a recognition of the 
importance of our nation's farms and forests in the global battle 
against greenhouse gas emissions. The transition to second and third 
generation biofuels is a key part of that strategy.
    Advanced biofuels hold the potential to transform America's fuel 
supply, enhance our national security and energy security, reduce our 
carbon footprint, and foster economic growth in rural America. This is 
an enormous opportunity, and it will require the best efforts of many 
parties in many sectors--the Federal Government, national and 
university labs, state and local governments, and the private sector--
to ensure that these multiple potentials are realized.
    USDA is a leader in this area, on several fronts. I am privileged 
today to be testifying with Dr. Rajiv Shah, Agriculture Under Secretary 
for Research, Education, and Economics (REE). Dr. Shah will describe 
described REE's cutting edge research in both basic and applied science 
related to advanced biofuels.
    At USDA Rural Development, in addition to our other economic 
development activities, we begin with the challenge of helping emerging 
renewable energy technologies become commercially viable. Once 
commercial feasibility is demonstrated, we support the build out of the 
advanced biofuels industries in rural communities. We work to ensure 
that agriculture producers, rural entrepreneurs, rural businesses, and 
rural communities share fully in the economic rewards of rural 
renewable energy.
    America's--and the world's--energy systems are changing. This will 
be a long process requiring vision, determination, and leadership--but 
it is within our reach to give our children and grandchildren a 
cleaner, domestically produced, environmentally sustainable, and secure 
energy system. The Obama Administration is committed to that goal. We 
are laying the foundation now, and advanced biofuels are among the most 
important near-term deliverables in this long-term transformation.
    Congress initially recognized this potential by providing, in the 
Farm Security and Rural Investment Act of 2002 [2002 Farm Bill] a 
first-ever energy title, which charged USDA with supporting the 
development of renewable energy in rural America. The 2008 Farm Bill 
built on that foundation and significantly expanded our authorities.
    From Fiscal Year 2001 through Fiscal Year 2008, USDA Rural 
Development funded 2,489 grants and loans totaling over $860 million 
for renewable energy and energy efficiency projects. More than 100 of 
these projects and over $200 million of the funding were investments in 
biofuels. We are still validating the 2009 figures, which will--in a 
single year--add over 1,500 projects and more than $100 million in 
aggregate investment to the tally. No fewer than ten separate Rural 
Development programs contributed to these totals. Technologies funded 
ranged from biofuels and other biomass to wind, solar, geothermal, 
hydro, ocean, digesters, and landfill gas recovery systems.
    This is already paying dividends. Since the beginning of this 
decade, the United States has become a leader in biofuels, wind energy, 
geothermal, solar thermal, solar photovoltaics and biomass.
    Our topic today is advanced biofuels. A wide range of technologies 
are in play. These are at various stages of development. Some are 
maturing now and, [as Dr. Shah will discuss], we anticipate a 
continuous stream of innovation for the foreseeable future. Our task at 
USDA Rural Development is to identify viable technologies as they 
emerge from the labs and accelerate their deployment across the private 
sector.
    In the 2008 Farm Bill, the Congress provided a powerful suite of 
programs to support this effort. On May 5, 2009, the President's 
Directive on Biofuels and Economic Development required USDA to 
implement many of our new renewable energy farm bill programs within 30 
days. We met that target and are beginning to show results. I would 
like to give you a snapshot of where we stand today:

Section 9003: Biorefinery Assistance Program.
    The Biorefinery Assistance Program (Section 9003) is targeted 
directly to the commercialization of second and third generation 
feedstocks. It provides loan guarantees for the development, 
construction and retrofitting of viable commercial-scale biorefineries 
producing advanced biofuels, and authorizes grants, subject to annual 
appropriations, to help pay for the development and construction costs 
of demonstration-scale biorefineries producing advanced biofuels.
    Two application rounds have been completed to date. Two awards have 
been announced for a total of $105 million and two more applications 
from the initial rounds remain under consideration.
    For Fiscal Year 2010, the farm bill provided $245 million in 
mandatory budget authority an estimated (approximately $691.6 million 
in loan guarantees). As potential applicants gain familiarity with this 
program and as the national economy continues to recover, we anticipate 
continued growth in interest and applications in this program.

Section 9004: Repowering Assistance.
    The Repowering Assistance Program (Section 9004) provides payments 
for biorefineries (that were in existence at the time the 2008 Farm 
Bill was passed) to replace fossil fuels used to produce heat or power 
to operate the biorefineries with renewable biomass. The farm bill made 
available $35 million in mandatory funding to remain available until 
expended. Of this total, $20 million was allocated for the initial 
funding round, which was advertised in June 2009 with the application 
window closing November 1, 2009. As of October 20, one Section 9004 
application had been received. We anticipate that a proposed and final 
rule will be published in late 2010 with the remaining funds to be made 
available at that time.

Section 9005: Bioenergy Program for Advanced Biofuels.
    The Bioenergy Program for Advanced Biofuels (Section 9005) provides 
payments for eligible agricultural producers to expand production of 
advanced biofuels. The farm bill made available $55 million in 
mandatory funding for FY 2009, of which $30 million was allocated.
    Of the 180 applications that were received for Fiscal Year 2009 
production, 160 applications were deemed eligible. The contract period 
was from October 1, 2008 through September 30, 2009. We anticipate that 
the $30 million available to support Fiscal Year 2009 production will 
be paid as a one-time payment to eligible producers during the first 
quarter of Fiscal Year 2010. The remaining $25 million in unexpended FY 
2009 funding plus the $55 million in mandatory funding for Fiscal Year 
2010 will be available for payment in the first quarter of Fiscal Year 
2011 once the public has commented on a proposed rule and a Final Rule 
has been issued.

Section 9007: Rural Energy for America Program.
    The Rural Energy for America Program (Section 9007) expands and 
renames the program formerly called the Renewable Energy Systems and 
Energy Efficiency Improvements Program (Section 9006). This program has 
provided grants and loan guarantees for energy efficiency and renewable 
energy projects ranging from biofuels to wind, solar, geothermal, 
methane gas recovery, and other biomass projects. Under the 2008 Farm 
Bill, hydroelectric and ocean source technologies were added as 
eligible purposes.
    For Fiscal Year 2010, the farm bill provided $60 million in 
mandatory budget authority. The Fiscal Year 2010 agriculture 
appropriation, Public Law 111-80 provides an additional $39, million in 
discretionary budget authority.
    While not targeted specifically to advanced biofuels, the Section 
9007 Program is a potential source of support once advanced biofuels 
technologies mature. To be eligible, a project must be commercially 
viable. From Fiscal Year 2001 through 2008, Rural Development invested 
over $195 million in 96 ethanol and biodiesel projects. Twenty-seven of 
these projects were funded through the Section 9007 program.

Other Rural Business Programs.
    Looking ahead, as advanced biofuels technologies develop, we 
anticipate that many will become eligible for more conventional forms 
of financing once they become commercially viable, including USDA Rural 
Development's flagship business development program, the Business and 
Industry Loan Guarantee Program (B&I). In the long run, our expectation 
is that successful technologies will graduate to full private 
financing. We will have fully succeeded when our assistance is no 
longer needed.
    In the short run, we still face an economic recession compounded by 
an unprecedented credit crisis. These factors have affected capital 
investment in all sectors, including investment in new and emerging 
technologies.
    At the same time, commodities prices have been unstable. The 
conventional ethanol industry has been impacted over the past year, 
first by a spike upwards in feedstock prices and then by a recession-
induced collapse of oil prices. Stability and profitability is 
returning to that industry, but we are still working our way through a 
difficult period.
    Finally, there is a degree of policy uncertainty that is affecting 
current investment decisions. The President is committed to vigorous 
and effective action to reduce the nation's carbon footprint. The time 
is now for the United States to lead in the effort to reduce greenhouse 
gas emissions. Enactment of the President's climate change initiative 
is important for many reasons. Acceleration of the deployment of 
advanced biofuels is one of them.
    In closing, it is important to note that these challenges and 
uncertainties are inherently temporary. In the long run, all of us 
understand that we will continue to face the national security 
imperative of diversifying away from oil. We will continue to face the 
environmental imperative of reducing greenhouse emissions. And as the 
global economy rebounds, we will potentially face the supply 
constraints that pushed the price of oil from less than $20 a barrel a 
decade ago to nearly $150 a barrel just over a year ago.
    We will continue to live in global economy, which will place ever-
increasing pressure on commodities prices and legacy business 
structures. The need to diversify our energy choices and explore new 
technologies is clear, and advanced biofuels will play a strategic role 
in ensuring our competitiveness and prosperity in the years to come.
    For all these reasons, we are investing now in new technologies 
that will pay dividends for decades to come. There are always 
uncertainties. There will always be surprises. Neither markets nor 
technologies are static. But we are clearly reaching the point at which 
biofuels will soon be cost competitive with conventional oil, and the 
trend lines are clear.
    This is an area where the United States is already a world leader. 
We are operating from a position of strength. The Congress clearly 
defined the objective in the 2008 Farm Bill, and the Obama 
Administration is fully committed to the goal. The present difficulties 
notwithstanding, I am optimistic about the future, and I look forward 
to working with you to keep this vital initiative on track. Thank you.

    The Chairman. Thank you, Mr. Tonsager.
    Dr. Shah.

    STATEMENT OF HON. RAJIV SHAH, M.D., UNDER SECRETARY OF 
            RESEARCH, EDUCATION, AND ECONOMICS, U.S.
          DEPARTMENT OF AGRICULTURE, WASHINGTON, D.C.

    Dr. Shah. Chairman Holden, Ranking Member Goodlatte and 
distinguished Members of the Committee, I appreciate the 
opportunity to discuss the future of second and third 
generation biofuels with you.
    I am pleased also to share this panel with my colleague, 
USDA Under Secretary for Rural Development Dallas Tonsager. I 
appreciate his remarks and I believe we are building a strong 
partnership in this area.
    Mr. Chairman, Congress has laid out a significant challenge 
in producing 36 billion gallons of biofuel by 2022. This is a 
substantial goal but one that we can meet or beat. However, I 
believe to achieve this goal we will need to dramatically 
expand our focus on second and third generation fuels, and 
dramatically expand our research portfolios in these areas. In 
particular, we will need to focus on third generation fuels. 
These are fuels that can directly substitute for gasoline, jet 
fuel and diesel and take advantage of America's tremendous 
existing fuel infrastructure.
    Today more than 9 billion gallons of biofuel are produced 
annually by first generation technologies that turn corn grain 
starch into ethanol. This is a compliment to American farmers 
in the ethanol industry. Ethanol has rapidly grown from meeting 
one percent of U.S. gasoline supply in 2000 to seven percent in 
2008. A number of factors contributed to this outcome. American 
farmers knew how to efficiently produce corn and technology for 
producing corn ethanol already was available. Also, increased 
corn acreage supported greater ethanol output.
    The forward-looking legislation that Congress passed in the 
Energy Independence and Security Act of 2007, stipulated that 
only 15 billion gallons of the 36 billion can be provided by 
ethanol produced from grain. This means that 21 billion gallons 
of biofuel will need to come from sources other than grain. 
Second generation technologies could turn crop residue and 
dedicated energy crops such as perennial grasses or woody 
biomass into ethanol. And third generation technologies would 
turn a variety of feedstocks directly into advanced fuels that 
can directly substitute for existing fuels.
    To meet these targets, we will have to accelerate our 
efforts to create and deploy these technologies. Our research 
portfolio has funded thousands of worthy projects, but there 
has been less effective integration of these efforts across 
government agencies, and there has not been sufficient focus of 
partnering public and private resources to develop economically 
viable biofuel supply chains. For example, we are not doing 
enough to create high-performing, dedicated feedstocks that are 
regionally advantaged in order to maximize yields and minimize 
the cost of biomass transport, as well as provide farmers 
opportunities to capture more of the value chain and hence earn 
greater profits. In addition, market incentives may be 
necessary to encourage innovation in business models for second 
and third generation fuels.
    Our current research programs are important, but are not 
sufficiently focused on the key gaps in the supply chain for 
second and third generation fuels. We are in an active process 
of reviewing our research portfolio and making significant 
changes. In this spirit, I am committing significant resources 
from both our intramural and extramural research assets to 
those areas where science can make significant contributions, 
and where USDA has important core competencies primarily in the 
areas of dedicated feedstocks and conversion byproducts. In 
fact, the amounts of biomass and other dedicated energy crops 
that are needed to produce second and third generation biofuels 
amount to the creation of an entirely agriculture commodity 
sector, and we are not doing nearly enough to bring this along. 
Our research priorities will accelerate in perennial grasses, 
sorghum, woody biomass, energy cane and oil sea crops including 
algae.
    As markets for some U.S. commodities decline, farmers and 
foresters are seeking new opportunities for wealth. Dedicated 
energy feedstocks are amongst the most promising. There are 
many agronomic, geographic, economic and environmental 
uncertainties that need to be addressed to promote each of 
these new energy crops. We intend to focus on and address these 
uncertainties. Our Agricultural Research Service scientists in 
the private sector have made significant yield improvements in 
a number of crops, most notably corn and soybeans. This 
knowledge along with important recent discoveries in genomics 
can be leveraged for energy crops.
    As land use patterns respond to increasing use of farm and 
forestland for biofuel feedstock production, ancillary actions 
may also be necessary to avoid serious impacts on food, feed 
and fiber prices and environmental quality. The Agricultural 
Research Service, the Economic Research Service and our 
university partners supported through the National Institute of 
Food and Agriculture are conducting research and developing 
decision tools that will help design the most economic ways to 
produce and harvest biofuel feedstocks while protecting natural 
resources. Recent research has produced guidelines for 
harvesting crop residue so that we protect against soil and 
water erosion, and ensure soil carbon levels are maintained at 
high enough levels to ensure that genetically improved 
varieties can reach their productive potential. In addition, 
new kinds of contracts between energy crop producers and 
conversion facility operators will be needed to provide markets 
for feedstocks to encourage the investment for building 
biorefineries, and to ensure that uninterrupted supplies of 
feedstock are available.
    As more and more of our fuel supply comes from biofuels, we 
will need to continually improve the production practices in 
order to produce more on the same amount of land, and enhance 
the production of high-value co-products in feedstocks that are 
then recovered as part of the biofuel production process. Along 
with my colleagues at USDA, we have begun dialogues with our 
counterparts at the Department of Energy about ways in which we 
can better coordinate our programs and our research grants. 
Already, NIFA and DOE's Office of Biomass Programs have worked 
together to award up to $25 million in biomass research and 
development initiative grants. We also together award $6.3 
million in genomics-enabled research for biofuels.
    I appreciate the opportunity to testify before this 
Subcommittee today and I look forward to working with you, Mr. 
Chairman, Ranking Member and all the Members of this 
Subcommittee as we continue to work hard to meet the goals that 
you have set and we appreciate your support.
    Thank you.
    [The prepared statement of Dr. Shah follows:]

    Prepared Statement of Hon. Rajiv Shah, M.D., Under Secretary of 
Research, Education, and Economics, U.S. Department of Agriculture, 
                        Washington, D.C.

    Chairman Holden, Ranking Member Goodlatte, and distinguished 
Members of the Subcommittee, I am Rajiv Shah, Under Secretary for 
Research, Education, and Economics. I oversee four agencies: the 
Agricultural Research Service; the Economic Research Service; the 
National Agricultural Statistics Service; and the National Institute of 
Food and Agriculture (NIFA). I appreciate the opportunity to discuss 
the future of second- and third-generation biofuels with you.
    I appreciate the opportunity to share this panel with my colleague, 
USDA Under Secretary for Rural Development, Dallas Tonsager. He has 
taken a leadership role in helping to ensure that people throughout 
rural America can build this new capability to produce and deliver 
biofuels to the market. He will share with the Committee the various 
mechanisms the Department has to support bioenergy commercialization so 
I will not repeat them, except to say that our work with Under 
Secretary Tonsager is fully complementary and fully aligned with the 
same goals of U.S. energy security.
    Without their work in commercializing biofuels and developing 
markets to realize rural wealth, our research on biofeedstock 
development and cultivation won't ensure the energy security biofuels 
can bring. Promising developments in the laboratory or inventions by a 
farmer or an aspiring entrepreneur will simply never see the light of 
day. Innovation and our ability to meet the food, fuel and fiber needs 
of the country will come from all sorts of places and we need to 
incubate those technology breakthroughs as well.
     Mr. Chairman, Congress has laid out a significant challenge to 
produce 36 billion gallons of biofuels by 2022 to power our cars, 
trucks, jets, ships and tractors. This is a substantial goal, but one 
that the United States, with the help of American agriculture, can meet 
or beat. However, I believe to achieve this goal the Federal Government 
needs to expand our focus on drop-in or third generation fuels. These 
are biofuels that can directly substitute for gasoline, jet fuel, and 
diesel.
    Today more than 9 billion gallons of biofuels are produced annually 
by first-generation biofuel technologies that turn corn grain starch 
into ethanol. This is a significant accomplishment and a compliment to 
American farmers and the ethanol industry--ethanol biofuel has rapidly 
grown from meeting 1% of the U.S. gasoline supply in 2000, to 7% in 
2008.
    A number of factors contributed to this outcome. American farmers 
knew how to efficiently produce corn, the technology for producing corn 
starch-based ethanol already was available, and--very importantly--
increased corn acreage supported greater ethanol output. Also, ethanol 
quickly solved an environmental problem by being a suitable replacement 
for a gasoline additive called methyl tertiary butyl ether (MTBE) that 
created water quality concerns and was taken off the market. All of 
these factors combined helped to establish corn grain ethanol in the 
market.
    The forward-looking legislation that Congress passed in the Energy 
Independence and Security Act of 2007 (EISA) stipulated that only 15 
billion gallons of the 36 billion can be provided by ethanol produced 
from grain, or what is called first-generation biofuel. This means that 
21 billion gallons of biofuels will need to come from sources other 
than corn grain. Second-generation biofuel technologies that turn crop 
residue such as corn stover or dedicated energy crops such as 
switchgrass into ethanol, and third-generation biofuel technologies 
that turn these feedstocks into advanced biofuels--synthetic 
substitutes for gasoline, jet fuel, and diesel--will have to come 
rapidly into commercial use.
    If we are to reach our target of 36 billion gallons of biofuels by 
2022, we will need to change the way we do business. The U.S. has 
funded thousands of worthy projects, but there has been little 
effective integration of these efforts across government research 
agencies, and there has not been a focus of partnering with public and 
private resources to develop biofuel supply chains capable for 
achieving Congress's goals. Significant parts of the supply chain have 
been ignored or have received too little attention such as sustainable 
feedstock production systems, solutions to lower the cost of biomass 
transport, and efforts to enhance compatibility with America's existing 
fuel distribution and utilization systems.
    To accomplish the Congressional Mandate we need to accelerate the 
establishment of a sustainable commercial biofuels industry. This will 
require that we create an overall strategy that builds on the core 
competencies of all contributors, and integrates all Federal-funded 
project activities across all supply chain elements.
    We need this now more than ever, so that we can unleash the 
creativity and skills of people in government, in college laboratories, 
in the garages of aspiring entrepreneurs, and in the R&D facilities of 
the private sector.
    When last I came before this Committee in September, I pledged that 
I would use my role as Chief Scientist of USDA to sharpen our focus and 
leverage our expertise and our resources where they would make the most 
difference. In this spirit, I am allocating significant resources from 
both our intramural and extramural research assets where scientific 
breakthroughs can make significant contributions to the emerging 
biofuels industry, and where our core competencies can have the most 
impact.
    For example, the use of biomass and other dedicated energy crops to 
produce second- and third-generation biofuels could potentially create 
an entirely new agricultural commodity sector. There are many economic 
and environmental uncertainties to be expected as this potential sector 
emerges. We intend to focus on feedstock development for a range of 
first-, second-, and third-generation bioenergy crops. We will continue 
to work in corn--where our Agricultural Research Service scientists 
have made important recent discoveries in genomics. And we will build a 
robust research portfolio in perennial grasses (like switchgrass and 
miscanthus), energy cane, sorghum, and other potential dedicated 
feedstocks. The Federal Government must also invest in technologies 
that improve the economics for producers and consumers alike, and lead 
to greater wealth creation in rural communities.
    As land use patterns respond to increasing use of farm and 
forestland for biofuel feedstock production, ancillary actions may be 
necessary to avoid serious impacts on food, feed, and fiber prices, and 
environmental quality.
    The Agricultural Research Service, the Economic Research Service, 
and our university partners supported through the National Institute of 
Food and Agriculture (NIFA), along with other Federal and state 
departments and agencies, are conducting research and developing 
decision tools that will help design the most economical ways to 
produce and harvest biofuel feedstocks, while protecting natural 
resources. Recent research has produced guidelines for harvesting corn 
stover residues so that not only is the soil protected from water 
erosion, but also to ensure soil carbon levels are maintained at high 
enough levels to ensure genetically improved varieties can reach their 
productive potential.
    As more and more of our fuel supply comes from biofuels, we will 
need to continually improve the genetics of the feedstocks grown and 
the production practices we use to not only produce more on the same 
amount of land, but to enhance the production of high-value co-products 
in feedstocks that are then recovered as part of the biofuel production 
process.
    Along with my colleagues at USDA we have begun dialogues with our 
counterparts at the Department of Energy and other Federal Departments 
about ways in which we can better coordinate our programs and our 
grants to realize the full potential of biofuels. For example, NIFA and 
DOE's Office of Biomass Programs have worked together to award up to 
$25 million in Biomass Research and Development Initiative competitive 
grants to support the development of feedstocks, biofuels, and biobased 
products.
    Also, to ensure continued genetic improvement of bioenergy crops, 
NIFA and DOE Office of Science have partnered to fund seven projects 
totaling $6.3 million for fundamental science to accelerate plant 
breeding programs by characterizing the genes, proteins, and molecular 
interactions that influence biomass production.
    I appreciate the opportunity to testify before this Subcommittee 
today, and I look forward to working with you, Mr. Chairman, Ranking 
Member, and all the Members of this Subcommittee as we in Agriculture 
Research, Education, and Economics continue to work hard and make our 
contributions to help meet the goal of 36 billion gallons of biofuels 
in 2022. And we appreciate the support you have given us to accomplish 
that. This concludes my statement.

    The Chairman. Thank you, Dr. Shah.
    Mr. Tonsager, during the last farm bill, Chairman Peterson, 
Mr. Goodlatte, myself and Mr. Lucas, and Members of the 
Committee worked hard to make sure that the Loan Guarantee 
Program was administered by USDA because quite frankly, we knew 
of the nightmare that was going on in DOE. We didn't want this 
loan guarantee program to suffer the same bureaucratic 
nightmare. But, we are hearing complaints about the 
implementation of the loan guarantee program. So is there 
anything that we can further do to help you and how much money 
has been obligated? How many Loan Guarantee applications have 
you processed and how many are in the pipeline?
    Mr. Tonsager. There are some aspects I would like you to 
consider. I have had some time in the credit world having been 
on the board of the Farm Credit Administration. The current 
credit circumstances nationally are very challenging. We, of 
course, have a corn-based ethanol industry that I am pleased to 
say is starting to turn around and looking better. I think we 
have seen some fundamental shifts that have occurred in this 
area. There are significant amounts of credit extended to the 
corn-based industry that helped take it off the ground. Risk 
was taken at the time.
    At this point, as we develop the cellulosic and biofuels 
industry, as we look at how we take risk and how much it is a 
challenge. How do we persuade this credit industry that is 
looking at how they have gotten through the ethanol industry, 
and the ups and downs we have gone through this past year, to 
look at these new technologies and gauge the amount of risk 
that we are willing to ask these lenders to take, as opposed to 
the risk we are willing to take with them. And quite frankly, 
at this moment very few credit providers, even with loan 
guarantees, are willing to take much risk at all. I think we 
may need to review this and seek some additional broadening of 
our ability to take risk if we are going to get some of these 
projects off the ground. We may be coming back to you to 
explore some of those individual calculations that we look at 
such as the percentage of risk we take and so forth.
    I would suggest that, as is recognized in the Biorefinery 
Assistance Program, there is a recognition of the need for 
taking greater risk, and for a greater budget authority made 
available to support that risk-taking. But at this point it is 
very difficult to find creditors who are willing to step up 
even with our loan guarantee programs to take substantial risk.
    The Chairman. Has there only been one loan guarantee 
granted? Is that the one in Georgia?
    Mr. Tonsager. We have issued two conditional commitments 
for loan guarantees. One was for $80 million and another for 
$25 million, where we have issued conditional commitments and 
said we will make this guarantee if you meet our conditions.
    The Chairman. And one is in Georgia and where is the other 
one at?
    Mr. Tonsager. In Minnesota.
    The Chairman. In Minnesota.
    Dr. Shah, you talked about your relationship with DOE 
regarding research. Can you expand on that a little bit? How 
closely are you working together with them?
    Dr. Shah. Thank you. We certainly can. I would start by 
noting that the GAO had a study on this topic in R&D Biomass 
and noted that DOE spent in 2008, $460+ million compared to 
USDA's approximately $40 million. And while I think that 
underestimates our current investments, for a number of 
technical reasons we felt early on it was important to partner 
with DOE to make sure that we were, together, setting the right 
biomass and bio-feedstock priorities, driving our investment 
into those areas where we have real core competencies and 
frankly, steering some of their investments into those same 
areas with us. So we have had an ongoing dialogue with the 
Department of Energy both the Office of Science and the office 
that oversees biofuel, biomass. We have come to some 
preliminary conclusions that we should each focus on some of 
our core competencies, so if they accelerate their investments 
and conversion, we would accelerate our investments and be more 
focused on feedstock.
    We would like to work in closer concert to make sure that 
we are doing that hand-in-hand, especially in the second and 
third generation and dedicated feedstock business model, so 
that the conversion technologies that are created are 
specifically adapted to the types of crops, including the ones 
that I mentioned, that we are accelerating our development of. 
Working together we can try to bring in, in the next 5 to 7 
years some very meaningful and cost-efficient models that 
integrate both bio-feedstock production, conversion and 
actually testing of business models that would deal with issues 
like the transport costs of the biomass.
    The Chairman. And finally for both of you, we hear the 
Administration talk an awful lot about alternative energy. I am 
a little more partial to coal then they are but we hear them 
talk about wind and solar. I am just curious, how much of a 
seat at the table does agriculture have when you are talking to 
people in the Administration to get a commitment, a real 
commitment from them?
    Dr. Shah. I think we have a significant seat at the table. 
Secretary Vilsack and Secretary Chu and EPA Administrator 
Jackson are the Co-Chairs of the Biofuel Task Force at the 
Cabinet-level. Through that task force the Department of 
Agriculture has had the opportunity to work very closely with 
the Department of Energy on thinking through the broad 
strategic approach. And I also believe that the very specific 
focus on the quantitative targets in biofuels has created a lot 
of space for us to work with them in a more expansive way about 
how we would achieve that.
    Mr. Tonsager. I would agree. I think Secretary Vilsack has 
been an extremely strong advocate both internally and in the 
Administration. I will be co-chairing the Biomass Research 
Development Board along with a representative from the 
Department of Energy, and Dr. Shah will be my partner in that 
as we get that effort refocused and moving forward again.
    The Chairman. Thank you.
    Mr. Goodlatte.
    Mr. Goodlatte. Well, thank you, Mr. Chairman.
    Gentlemen, welcome to you all. I have had the opportunity 
to meet with Dr. Shah recently, and he has also testified 
before the Committee earlier. I am very excited about his 
interest in research, particularly in this field that we are 
talking about today. He also brings a unique background with 
his previous work for the Bill and Melinda Gates Foundation and 
we are very appreciative of his efforts now on behalf of 
research in the Department of Agriculture. And thanks to 
Congresswoman Herseth Sandlin, I have had the opportunity to 
know Mr. Tonsager for a number of years, and you are now 
responsible for an organization that I am very fond of. You 
have done great work in Virginia, particularly in the rural 
areas and small towns in my Congressional district in helping 
with economic development, so thank you for undertaking that 
task, as well.
    I want to start out by asking you why only two awards have 
been made under the Biorefinery Assistance Program. Is there a 
lack of interest in the program or just a lack of financing due 
to the current credit environment?
    Mr. Tonsager. I think there are several challenges that we 
are faced with and one is very much the current credit 
environment. We had great energy and motivation in the creation 
of the corn-based ethanol industry. There was a real tie-in 
with the producers who managed it. From my perspective the Farm 
Credit System at that point, and certainly other lenders in 
rural America as well, had great emphasis, a great driving 
desire to build the industry. It was built. It was successful 
for awhile. It has been through a huge up and a huge down so 
those same credit providers who carry these skill sets are 
reluctant to really step forward at this point.
    Additionally, the proposals we are seeing are highly 
capital-intensive. The corn-based ethanol industry was built to 
a large degree for about $2 to $2.50 per gallon on construct 
cost. We are seeing proposals that are several multiples of 
that for the capital investment necessary to do cellulosic 
plants. And so, of course, you are taking larger, greater risk 
on larger projects. So, we have to be measured and we are 
looking for business plans that can be highly successful.
    We don't want to come out of the chute and not have a 
success, so we very aggressively want to take risk. We want to 
assert ourselves. We are looking for the opportunities because 
we want to get this industry off the ground, but we have to 
look carefully at the projects that are proposed. We have to 
think strategically to make sure, as we go forward, that we 
have some confidence that they can be successful.
    Mr. Goodlatte. Is there anything more that your agency or 
the Congress needs to do to make this program successful?
    Mr. Tonsager. I think we are going to be aggressively 
looking for ways to have that dialogue. Well, we know we can 
have that dialogue, but we are aggressively looking for ways to 
make that work. I think the experience of building the ethanol 
industry originally was producers at that time stepped up, got 
together with farm cooperatives and formed other business 
associations. There was wide investment by many individuals 
into the ventures. The risks that were taken by lenders were 
widely distributed through the economy, and we have to look for 
ways to make that same kind of environment occur now. 
Obviously, we will have large companies that want to do 
projects and we will support that. I think all of us would 
really like to see, if we are successful, the success 
distributed widely through our rural economy with other people 
that can participate. I am advocating that we want to build 
this industry. We want to look for ways to spread the 
opportunity for people to be part of that industry, and to do 
that we have to develop mechanisms where risk-taking can be 
answered.
    Mr. Goodlatte. Let me ask you about the two projects that 
have been funded. Are they demonstration projects or 
commercialized projects?
    Mr. Tonsager. They are demonstrations with a focus of 
moving to commercialization. We have grants from the Department 
of Energy involved with them in some cases, and we have some 
risk-taking on the part of USDA in one case or both cases. So 
the question becomes how far do you go? At what point do you 
take 100 percent of the risk of creation of the project? Do you 
have an expectation that the investors in this take some 
portion of the risk?
    Mr. Goodlatte. Are they commercialized projects or 
demonstration projects?
    Mr. Tonsager. The goal of one is to demonstrate and then 
commercialize. They have to go to a commercially-viable scale, 
when we look at them, they have to become commercially viable 
as part of the process.
    Mr. Goodlatte. And let me ask you about the 20 applications 
that you indicated were ineligible. Now, is there a common 
criteria that these applicants fail to meet?
    Mr. Tonsager. Two things occured: one is that several of 
them did not meet the technical requirements that we put on 
them to look at. Seven of them did not actually have a lender 
in place. They made an application and part of the process is 
our applicant is usually the lender. In this case, they put 
forward applications without lenders.
    Mr. Goodlatte. Thank you very much, Mr. Chairman.
    The Chairman. The chair recognizes the Chairman of the full 
Committee, Mr. Peterson.
    Mr. Peterson. Thank you, gentleman, and I thank the 
Chairman and Ranking Member for their leadership in calling 
this hearing.
    Dr. Shah, I don't want to pick on you but you were accurate 
when you said that there was an increase in corn acres. But, I 
want to put this in perspective, because virtually there wasn't 
and this is a myth that has been put out there by some people, 
I think.
    You go back to 1977, and we had the 84.3 million planted 
acres and in 2009, it was 86.4 so we are virtually using the 
same corn acres that we did way back in 1977. The big 
difference is we had a 100 bushel average or actually 90.8 in 
1977, 101 bushels in 1978, and today we are up to 164 bushels. 
Now, anybody that knows anything about what is going on 
understands that we are going to have a significant increase in 
yields here in the next number of years, a few years. So we are 
not going to increase acres.
    The way we are going to provide these feedstocks in corn 
ethanol, and a lot of these guys are going to be going into 
cellulosic, is by this increased yield. So all of this 
foolishness about international land use and what is going on 
in Brazil and all this other negative stuff that is being put 
out by different interest groups that have different agendas, 
God only knows, there might be 20 different agendas going on 
here that are after us for different reasons. I mean it is no 
damn wonder that nobody is investing. I wouldn't put money in 
with all of this stuff that is going on, and I think that is a 
lot of what is happening here. People that want cellulosic 
ethanol have to get real about this and realize that we are the 
people that went in corn ethanol. That created the opportunity 
for us to even do this, and a lot of these plants are going to 
be the first ones that do cellulosic on a commercial scale.
    We are converting our plants to use biomass for energy and 
so forth, and that word is not getting out to the public. All 
they hear about is how terrible it is, how we are going to 
starve everybody, and all this other baloney that is out there. 
So, I just think that there are some positive signs that are 
happening here all of a sudden and hopefully we will be able to 
turn this around.
    It doesn't help that we are having such a struggle to try 
to get the blame all up and all these other things, so I 
wouldn't blame you folks for what the problem is. I think you 
are doing what you can do, but I am glad to hear that you are 
not going to go out and make investments in projects that have 
too much risk. I think there are a lot of snake oil salesmen 
out there. There is a lot of due diligence that you guys need 
to do to make sure we are doing the right kind of projects and 
eventually we are going to get there. But for people that are 
listening that have been on the other side of this, I think 
that if you want to get to the next generation, you are doing 
us all a disservice by ginning up all of these bogus arguments 
that we have been hearing. I guess that is not a question, I am 
just getting it off of my chest.
    The Chairman. I thank the Chairman, and recognize the 
gentleman from Nebraska, Mr. Smith.
    Mr. Smith. Thank you, Mr. Chairman, and I thank you today, 
the Chairman of the full Committee for elaborating on some 
concerns that I would share, as well.
    But to another more specific topic though, Dr. Shah, you 
mentioned in your remarks that there are some infrastructure 
setbacks relating to biomass transport, and certainly I share 
that concern. I shared that concern actually during the farm 
bill debate in Committee, and I was grateful that the Committee 
accepted an amendment that I offered relating to R&D for the 
byproducts of the biofuel industry. Can you elaborate, perhaps, 
on the steps that the USDA is taking in terms of improving 
industry-wide infrastructure and the cooperation along the way?
    Dr. Shah. Well, thank you for that. I think as we look 
industry-wide we take a supply chain analysis to either first, 
or second and third generation systems, we look at feedstock, 
at conversion, at byproducts, and at transportation and 
logistics, of course, and it is part of every step of that 
process. So what the Economic Research Services is trying to do 
is creating a business model to understand what do the 
economics of these different systems look like? Where are the 
biggest and the highest cost points with respect to transport 
and logistics, and then how would that potentially guide our 
research investments, whether you might make accelerated 
investments in pretreatment or farm-based treatment of biomass 
to reduce the cost of transport, or whether you would promote 
business models that are more geographically focused so that 
you actually have less physical transport to deal with. And 
then you are working on conversion technologies that can 
operate at different levels of scale, particularly lower levels 
of scale so that you don't have to deal with the high cost of 
transporting biomass through large distances.
    As we do this work, there are two things I would just add, 
one is you mentioned partnerships and we are working very 
closely with the private sector to identify how we can pursue 
research in these areas in a more effective way. And I am glad 
that you have a number of private sector firms speaking with 
you today since we have been working with many of those same 
firms to make that joint identification.
    What we tend to be hearing is that people are asking us to 
work especially aggressively on the feedstock and the byproduct 
side but especially in the feedstocks. If we are going to have 
viable second and third generation systems, we actually need 
viable crops. We need more adapted varieties of the various 
feedstocks that I mentioned, and currently we are not doing 
nearly enough in that area. Even in the $25 million 9008 
Program that I mentioned, a very small percentage of that, only 
about $5 million of that is going directly to feedstock 
improvement. So, we are trying to reassess how we can focus 
more aggressively on feedstocks to help bring the risks down 
for some of these projects and to do that in a way that is 
consistent with the transport and logistics concerns.
    Mr. Smith. Thank you very much. I appreciate that. Now, I 
do want to add emphasis, or maybe repeat what the Chairman of 
the full Committee mentioned in terms of indirect land use. I 
don't think we should defer our regulatory say to other 
countries, and I am grateful that USDA is on top of things 
relating to that. Perhaps we can convince some other agencies, 
as well.
    Thank you.
    The Chairman. The chair thanks the gentleman and recognizes 
the gentlewoman from South Dakota.
    Ms. Herseth Sandlin. Thank you, Mr. Chairman, and I would 
first like to associate myself fully with the comments of the 
full Committee Chairman, Mr. Peterson. I want to thank all of 
you for being here today.
    Dr. Shah, if I could start with you, I want to thank you 
and your staff for recently meeting with the leadership of the 
Sun Grant Initiative with whom I have worked for a number of 
years now. As you know, the Sun Grant Initiative was 
reauthorized with the help of both Mr. Peterson and Mr. 
Goodlatte in the 2008 Farm Bill. I raised the work that the Sun 
Grant Initiative was doing with Secretary Vilsack when he was 
recently in South Dakota earlier this month, and as you also 
know, the program received $2.25 million in Fiscal Year 2010 
Agriculture Appropriations. They are conducting important 
research that holds tremendous potential to improve the 
domestic supply of renewable energy. Much of that research, of 
course, is focused on feedstocks. They are a competitive grant 
program and I was wondering how you see the Sun Grant 
Initiative fitting in with the research priorities at USDA in 
light of the coordination that you are doing with DOE and your 
agency, specifically focusing on feedstock research?
    Dr. Shah. Well, I would make a few points. The first is 
thank you for those comments. I had the chance to meet with 
them myself and my staff has also met with them specifically. I 
also hope in the very near future to get out to South Dakota 
and to visit, and I potentially have a host here to my right 
who may enable that and so I look forward to that.
    Our goal is to dramatically expand the investment in 
feedstocks and a broad range of feedstocks, and to use 
competitive vehicles for doing that. And so what we hope to do 
is use the AFRI-window of the National Institute of Food and 
Agriculture, and we are fortunate to have Dr. Robert Beachy 
leading this as the Director of NIFA, the National Institute. 
Through that we would have broad competitive opportunities for 
a broad range of market participants to significantly expand 
their work in feedstocks. But we want to implement that in a 
way that is very regional in its focus so that we know that we 
are targeting regions with crops that are most interesting to 
and most effective, potentially, in future second and third 
generation systems. I think many of the partners of that effort 
would be able to compete and would be able to be a part of that 
initiative.
    We are also looking very carefully and more specifically at 
the Sun Grant Initiative as it is currently structured. And 
while I don't have a direct answer to it yet, we will probably 
get there in the next month or two in terms of knowing how we 
will take that forward.
    Ms. Herseth Sandlin. Thank you, Dr. Shah.
    Mr. Tonsager, it is great to have a fellow South Dakotan 
and good friend as the head of Rural Development. And I thank 
you for the work that you have already done in the timely 
implementation of the new energy programs and the farm bill, 
2008 Farm Bill as well as the significant investments that you 
are making in renewable energy and the energy efficiency 
programs throughout rural communities.
    If I could focus on the blend wall issue that Mr. Peterson 
referenced. Can you confirm for me, I know that Secretary 
Vilsack is optimistic that we will have a favorable decision 
and it will be by December 1. Can you confirm for me the role 
of USDA in that decision to move from E10 to E15, and that that 
decision is on, and continues to be on, a time-frame of 
December 1?
    Mr. Tonsager. I am unsure of the decision time-frame. 
Secretary Vilsack has been personally engaged with advocating 
for that change and, of course, those of us who want to see a 
progression of the ethanol industry hope that that can happen. 
We are looking forward to it. I see the role of my agency in 
these matters as to constantly trying to assert ourselves in 
whatever situation evolves. Science has served agriculture 
extremely well. Science has served the cause of ethanol and the 
development of ethanol. So whatever decisions come, you can be 
assured in our agency that we are going to be continuing to 
move forward aggressively on all fronts related to biofuels 
production.
    Ms. Herseth Sandlin. Thank you, and then finally the issue 
of indirect land use that both Mr. Peterson and Mr. Smith 
mentioned. Could you elaborate either one of you, on the role 
that you USDA had in the peer review process, and whether or 
not USDA is involved with the EPA as they are moving forward 
with the RFS2 rulemaking, in light of the concerns raised about 
this issue?
    Dr. Shah. I do know I am not able to answer the specific 
question about the specific nature of the involvement, but we 
have been involved both through our Economic Research Service 
and I believe the Office of the Chief Economist and other 
aspects of USDA in working with them on the issue and the 
rulemaking overall. As you know, the core issue and some of 
them are around how they define baselines and other aspects of 
that. I would just say that I will take this opportunity to 
agree largely with the Chairman's comments about the potential 
for yield and the potential for more micro-agronomic 
improvements that are not often factored into the generic 
discussion. And so we are trying to help offer that technical 
guidance and expertise that there are different types of 
production systems. When you look at this with a more careful 
analysis of the baseline, and a more careful analysis of the 
specific production systems and specific areas, you sometimes 
come to very different conclusions.
    Mr. Tonsager. And if I could, the Chief Economist at USDA 
has been leading the charge in that relationship.
    Ms. Herseth Sandlin. Mr. Chairman, thank you. I think it is 
important that USDA's technical expertise and knowledge be 
highlighted in this process. As we have seen from earlier 
testimony from officials at EPA, their understanding of 
agriculture and familiarity with what has been happening and 
the technological advancements heightens the concerns that we 
all have. It is good to hear that our folks who are at USDA 
have been aggressive in being involved in that process. Thank 
you.
    The Chairman. The chair thanks the gentlewoman and 
recognizes the gentleman from Louisiana.
    Mr. Cassidy. Thank you, Mr. Chairman.
    A couple questions, the Biomass Crop Assistance Program, 
the question is, is it going to be adequately funded and do we 
have a sense of when the funding will come and how much the 
funding will be for that?
    Mr. Tonsager. Which program? I am sorry.
    Mr. Cassidy. The Biomass Crop Assistance Program.
    Mr. Tonsager. I have not considered the adequacy of the 
funding. We have done the first round of financing and thus 
far, I would say we seem to be in pretty good shape.
    Mr. Cassidy. How much? I am sorry. How much total has so 
far been allocated?
    Mr. Tonsager. I am sorry. Here, go ahead.
    Mr. Atkinson. So far, the allocation has been--first 
apportionment from OMB has been $25 million and we now have 
another apportionment request of $500 million that is pending.
    Mr. Cassidy. Now, the $500 million, any idea about the 
prospects for that being afforded at that level?
    Mr. Atkinson. We are very hopeful.
    Mr. Cassidy. Because $25, well that is--I am very hopeful 
for a nice Christmas but I am not quite sure it is going to 
happen. In all seriousness, you are hopeful. Does that mean 
optimistic?
    Mr. Atkinson. Optimistic.
    Mr. Cassidy. Okay, thank you. The other thing I am not 
quite sure, as I am reading about the Collection Harvest 
Storage Transportation Program, are title I crops eligible for 
this?
    Mr. Atkinson. No.
    Mr. Cassidy. Now, it seems a little counterintuitive 
because it seems as if you are already aggregating the material 
from rice, for example, or from sugarcane, it seems like it is 
a natural place instead of asking the cane farmer to burn it 
that you would extend this assistance to them. In a sense it is 
meeting two priorities. Does that make sense?
    Mr. Atkinson. It does make sense. Residues would be an 
eligible material.
    Mr. Cassidy. It would be eligible?
    Mr. Atkinson. The residues would be.
    Mr. Cassidy. So the rice grain itself would not be but the 
stalk would be?
    Mr. Atkinson. That is correct.
    Mr. Cassidy. Got you. Now, energy cane, if that ever comes 
about, that I presume would be entirely eligible?
    Mr. Atkinson. It would be.
    Mr. Cassidy. Okay, thank you.
    I yield back.
    The Chairman. The chair thanks the gentleman and recognizes 
the gentleman from North Carolina.
    Mr. Kissell. Well, thank you, Mr. Chairman.
    And, Mr. Tonsager, it is good to have you here and see you 
again and, Dr. Shah, we appreciate you coming also.
    Mr. Tonsager, beyond the credit issues and we have talked 
about this a little bit back and forth, what are the biggest 
challenges that we face in seeing the second and third 
generations of biomass energy being accepted?
    Mr. Tonsager. I think the technical challenges are probably 
the largest challenges at this point, because the bottom line 
is the economics of it. We have to be able to produce an energy 
product that is sellable, that is available readily. To do 
that, to make the economics work, we really have to overcome 
some of the challenges associated with breaking material down 
and making it in an effective, efficient way. So I would have 
to ask Raj if he would care to comment on that but to me, 
overcoming those technical challenges will lead us to greater 
confidence in our ability to produce an energy product that we 
can make some money out of.
    Mr. Kissell. Well, that was going to be my next question 
so, Dr. Shah, you talked about how we need to get to the third 
generation of biomass energy and the numbers I have picked up 
now, ethanol is like seven percent of our fuel energy at 9 
billion gallons a year. In looking towards this third 
generation, I guess the basic question is: when will this be 
happening or what will it be? What do we need to do to get 
there?
    Dr. Shah. Well, thank you for the question. I think the 
answer to when would this be happening is highly dependent on 
our ability to invest in and develop together, with the private 
sector, the right technological breakthroughs to bring the cost 
down at different points of the value chain which I will 
mention. But we are optimistic that in a 5 to 7 year time 
horizon, you will see significant improvements in the economics 
of second-generation and perhaps a few years after that, 
significant improvements in the economics of third-generation 
systems.
    On the question of what are the key barriers, I would agree 
with Dallas' comment that certainly that conversion technology 
and the amount of the initial capital cost related to those 
conversion systems is quite high. As we make progress against 
enzymatic pathways and others to improve the efficiency of that 
conversion process, we can bring that cost down, both for very 
large scale systems and for smaller scale conversion 
facilities. So that is an important barrier, as you think about 
it, but that is an important short-term barrier. If you think 
about the long-term system, probably \1/2\ to \2/3\ of the 
total cost of production will be based on the feedstock.
    So our ability to generate large volumes of appropriate 
feedstocks in an environmentally sound way and economically 
viable way will be critical to standing up this industry over a 
10, 20, 30 year period and meeting the big targets that have 
been set out there. To do that, we probably need to leverage 
all of the science we can on the genomic side. We need to 
invest in significant adaptive research to test and develop new 
dedicated feedstocks in a broad range of agro-ecologies, and we 
need to work with the private sector so we can develop 
feedstocks that fit into their supply chains.
    They can provide the types of unique contracting back to 
farmers and producers so that people have the economic strength 
to convert or to engage in these new production opportunities 
and these new opportunities to gain wealth. So, we have quite a 
lot to do on the feedstock side as well, and that is an area 
where we have a long and proud tradition--as the Chairman of 
the full Committee mentioned--in helping to support a system 
that has very significant yield improvements and production 
improvements year on year. But we are not there yet in the 
dedicated feedstocks that would be required for this and that 
would be a big area of focus for our research portfolio.
    Mr. Kissell. One last question, Dr. Shah, if we are at 
seven percent now and I know that this is a tough number to 
give exactly but if we are at seven percent now, where do you 
think percentage-wise of our total fuel demands that we could 
get to some 15 years down the road if we do engage in the type 
of activities both within government and private industry that 
you were talking about?
    Dr. Shah. Well, I am thrilled that you asked that question 
because I think that answer is highly conditioned on our 
ability to make third-generation systems work. And the reason I 
say that is the likelihood that we can invest and create--in 
the hundreds of billions of dollars--to create an entire 
domestic infrastructure for transport fields around ethanol 
compared to the economic opportunity to leverage the existing 
infrastructure for advanced fuels. This gives a high degree of 
confidence that third-generation systems could in fact break 
through and become very high percentages of total aggregate 
fuel. I don't actually have the numbers but we can actually 
model that out, and I can get back to you in a letter that has 
the answer to that.
    Mr. Kissell. I would appreciate that and thank you.
    Thank you, Mr. Chairman.
    The Chairman. The chair thanks the gentleman and recognizes 
the gentleman from Pennsylvania.
    Mr. Thompson. Well, good morning.
    Let us start out with Mr. Tonsager. You made it clear that 
biofuels will play an important role in diversifying and 
expanding our domestic energy supplies. I am a strong advocate 
of converting wood waste into woody biomass, and in my district 
timber harvesting generates a significant number of jobs and 
helps create that woody biomass. It needs to be pointed out 
that the increased timber harvesting is a key component to 
proper forest management and probably a properly managed forest 
becomes a stronger carbon sink. Now, specifically what role 
will timber harvesting play in the Administration's plans to 
utilize more biofuels?
    Mr. Tonsager. I think we must look at every potential 
biofuel, and certainly woody biomass makes a lot of sense. From 
my perspective what I would like to see occurring is for us to 
engage from the economic side, to constantly press forward with 
feasibility studies, business plans, and focus specifically on 
particular projects. As the technologies evolve that allow us 
to break down woody biomass or other biomass products, we need 
to be looking at the best opportunities for making that 
economically successful.
    So from my side of it what I would love to see happen is 
groups form or companies form up that are queuing up, looking 
constantly at the components of a particular project site and 
looking for the economic opportunities associated with that so 
we fund and give confidence to people who invest in those 
areas. So I want to look at all forms, and I want to look at 
them as widely as possible, going forward, and seeking that 
economic opportunity. Sometimes you really hit the right chord 
in the right spot and you might have the technology that really 
works, and so we would love to be working with the people in 
Pennsylvania and other places to evolve a plan towards project 
development.
    Mr. Thompson. Well, that would be great. I know that in 
Pennsylvania, as well as across the nation, where these forests 
are and specifically national forests, there is a lot of 
economic need. I know in terms of harvest in the Allegheny 
National Forest there is a need, it is down from 95 million 
board feed a year. I think we are down to about 20, so the 
production utilization there is just a lot of potential there 
from all my sides.
    Now, relating to that, are you familiar with the 
alternative mixture tax credit?
    Mr. Tonsager. I am sorry, I am not.
    Mr. Thompson. Okay, it is paper mills and companies that 
have been able to claim this credit for utilizing what is 
called black liquor. It is a byproduct of the pulping process 
as a form of onsite energy. However, the credit for this is set 
to expire this year and some in Washington have been hesitant 
to reauthorize it. I think presumably because paper companies 
can claim this credit, and I would like to and if you don't 
know, if this is something if you could get back to me. Is the 
Administration supportive of reauthorizing the mixture credit 
as it exists?
    Mr. Tonsager. Okay, we will.
    Mr. Thompson. I appreciate that.
    Dr. Shah, you have stated that we must improve upon the 
genetics of the feedstocks grown and the production practices 
we use to not only produce more but to enhance production. Is 
the Administration intending to encourage this kind of 
innovation solely through grants, or are there any new methods 
of encouragement being considered?
    Dr. Shah. Thank you for that question and if I might just 
add to Dallas' answer to the prior one that we have done some 
estimates around how different sources of biomass could 
contribute to the broader targets. We believe you can get about 
9.1 billion gallons out of woody biomass if we make the right 
technology investments, and so we are moving forward against 
that strategic framework which is a pretty significant amount 
of fuel from that.
    Mr. Thompson. Very good.
    Dr. Shah. And on the grants question, that is a great 
question. We do a lot of distributed grant-making as it 
currently stands, and I think the two opportunities we have 
are: number one, to engage in a more strategic consortia-based 
programmatic approach so that if we are trying to introduce and 
develop, say dedicated feedstocks like energy cane, we might 
invite some private sector firms in. We might work with a 
number of different potential representatives of different 
agro-ecologies and geographies and universities, and say, 
``Okay, what is the best way to expand on germplasm 
collections,'' test and develop new varieties in a number of 
different contexts and leverage some of the great innovation 
that is happening right now in the private sector. So that is 
one approach where we would like to go beyond the traditional 
grant tool and build these kind of public-private consortia. A 
second thing that we would like to think about is how can you 
use large-scale financial incentives from long-term buyers of 
advanced biofuels to create a huge amount of market pull so 
that the private sector will simply do more. We have had 
conversations with major airlines, with the Air Force and with 
others. This is a model that has been used in other industries 
of course, but if you could get a guaranteed purchase contract 
for very large amounts of advanced biofuel that would, and it 
had a lot of credibility as to your point, that would stimulate 
a significant amount of private investment and it wouldn't cost 
us in the public sector nearly as much. So we are actively 
looking at can we put those kinds of financial market 
incentives in place to create this whole new sector.
    Mr. Thompson. Okay, very good.
    Thank you, Mr. Chairman.
    The Chairman. The chair thanks the gentleman and recognizes 
the gentleman from New York, Mr. Murphy. The gentleman passes. 
I will recognize the gentleman from Colorado. He is not here 
either, okay, the gentlewoman from Illinois.
    Mrs. Halvorson. Thank you, Mr. Chairman.
    Mr. Atkinson, if we are going to and thanks to the panel. 
It is great to see all of you.
    If we are going to hit our target of 36 billion gallons of 
biofuels by 2022, we have to meet that. How are we going to? We 
need to change the way we do business. Does that mean we are 
going to have to change some of our Federal policies? If so, 
which ones and how would you go about doing that?
    Mr. Atkinson. I don't believe we would need to change any 
Federal policies in any sort of a radical sense. The biggest 
challenge, I believe, in the early years of the renewable fuel 
standard is meeting the production targets for advanced 
biofuels. We know right now, and those of us involved in this 
issue, we hear quite often that the technology is just 1 year 
away or it is just around the corner. We might want to take a 
look at policies that can help push that forward a little bit 
further so that we actually have the construction and movement 
forward on commercialized advanced biofuel facilities.
    Mrs. Halvorson. So you think we will be okay? We will meet 
36 billion gallons of biofuels by 2022?
    Mr. Atkinson. By 2022, yes, I think we absolutely have the 
technology to move forward on that and to meet that goal.
    Mrs. Halvorson. Dr. Shah.
    Dr. Shah. If I might just expand on that, I am optimistic 
that we can get there. I don't believe we are currently on the 
appropriate technology and systems pathway to get there.
    Mrs. Halvorson. And what would you do to change that?
    Dr. Shah. I think the two biggest gaps for us are focusing 
public incentives and research investments in those areas where 
we can bring to bear a significant second and third-generation 
biofuel system. For us that means feedstock conversion and 
byproducts. We need the Department of Energy to do a lot more 
in a more effective and focused way on conversion, and we need 
to do a lot more in a more focused and effective way on 
feedstock and byproducts. I also think we need to think about 
some of the investment, some of the financial incentives we 
were just talking about to create the kind of large scale 
market incentive for commercialization. Secretary Vilsack has 
asked us to, on behalf of the President's task force on which 
he is a part, think more expansively about what kind of policy 
framework and what kind of program implementation framework 
would get us to those targets. So I would agree with the fact 
that I am very optimistic we can get there and respect our 
Secretary's leadership in bringing us all together to say what 
needs to happen in order to hit that target, and we are 
actively working on that.
    Mrs. Halvorson. So it is in your notes to take back that 
you are going to do something about that.
    Dr. Shah. We are, yes.
    Mrs. Halvorson. The reason I bring this up is I don't want 
you in the year 2020 to come back and say well we are nowhere 
near our goal. We have to do something now. That is not the 
time to start worrying about it.
    Dr. Shah. I agree and Secretary Vilsack has made that quite 
clear to all of us and we are working together to help support 
that.
    Mrs. Halvorson. Some people may not think they will be 
around in 2020. I plan on being here and I don't want to come 
back and say I didn't talk about it in 2009.
    Dr. Shah. Wonderful.
    Mrs. Halvorson. Okay and one other question for Mr. 
Tonsager, the President's energy bill you said it was very 
important to offer the acceleration of the advanced biofuels. 
What kind of concerns do you have if it doesn't go anywhere? 
How difficult would it be to advance your ideas and the 
biofuels industry if we don't get an energy bill passed or a 
climate change bill passed?
    Mr. Tonsager. I tend to look at it from a financial 
perspective, of course, and for those engaged in development of 
these kinds of ventures, they are going to look for clearness, 
for definition, for consistency. So as much as wanting to know 
what the answer is, they want an answer. So, laying the 
pathway, knowing what the pathway is, bringing stability to one 
component of what we have to deal with is very important.
    Mrs. Halvorson. And the people in my district, and being in 
Illinois I have quite a few located and headquartered there, 
the people tell me they want certainty. They just want to know 
one way or another, and we owe it to them. One way or another, 
we must bring certainty to this market. So I think that we need 
to all work together to bring that certainty, so I look forward 
to working with you to get that done.
    Thank you, Mr. Chairman, I yield back.
    The Chairman. The chair thanks the gentlewoman and 
recognizes the gentleman from Kansas.
    Mr. Moran. Mr. Chairman, thank you. Thank you to you and 
Mr. Goodlatte for hosting this hearing and for our witnesses on 
this panel and the next for being with us today.
    Dr. Shah and I had a conversation, largely on my part at 
the last hearing, and it is Mr. Tonsager that I really did need 
to address my question. Section 9005 of the farm bill, 
Bioenergy Program for Advanced Biofuels, section A, says the 
definition of an eligible producer: ``In this section, the term 
eligible producer means a producer of advanced fuels.'' And 
yet, USDA in June published a notice of contract proposal for 
payments to eligible advanced biofuel producers that said that 
any recipient corporation must be at least 51 percent owned by 
persons who are citizens or nationals of the United States. 
Nowhere in the farm bill is that requirement outlined. USDA's 
rule disqualifies a legitimate biofuels producer located in the 
United States, and in this case in Kansas.
    While I am not necessarily here to advocate for a 
particular company, Abengoa is operating an ethanol plant in 
our state and it qualifies for advanced biofuels because it 
uses grain sorghum to produce that ethanol, but because of your 
definition they would be ineligible. Perhaps even more 
importantly, Abengoa is soon expected to be the first producer 
of cellulosic ethanol in the United States. The plant is being 
constructed, and, yet, under your definition they would not be 
eligible as an advanced biofuels producer. In my way of 
thinking, this is Kansas jobs, Kansas grain, Kansas ethanol. My 
question is the same one that I asked Dr. Shah at the last 
hearing, USDA have a theory for which they reached this 
conclusion, this definition? What can we do to get it changed 
so that Kansas crops, Kansas jobs and the Kansas economy is not 
harmed by this regulation, this definition?
    Mr. Tonsager. Sure. While we are reflecting on this, I note 
that this has come up in recent times, I was a state director 
in the 1990s. It was kind of the standard for most of our 
programs at that time to have the 51 percent ownership by U.S. 
citizens. And the question comes up is, ``Okay, are we going to 
throw the definition out entirely? Or drop it to 49, or drop it 
to 25, or just drop it all together as a requirement?'' I think 
it is important that we find out from the public their view on 
this subject. So as we go about rulemaking during this coming 
year we will be requesting input from the public regarding 
their views on this subject. We will be working towards a final 
rule on the program. In our notification we will be requesting 
the public to offer us comments about whether they think that 
is an important factor anymore or not.
    Mr. Moran. Mr. Tonsager, as I understand your answer, it is 
that is the way we have done it in the past. That is our plan 
at the moment for the future, but we are reassessing or we are 
taking input to see whether we should reassess?
    Mr. Tonsager. We are going to take input. We will be 
looking at the responses from the public very closely on the 
matter. Again, I think it is a question of what is the right 
point, or is there one at all anymore? I think it is useful for 
all of us to explore that question and understand how the 
public might view it.
    Mr. Moran. Well, it does seem to me that in this case it is 
a subsidiary that is in Kansas and is owned 100 percent by a 
Spanish company, but the benefits accrue to people of the 
United States.
    Mr. Tonsager. Sure.
    Mr. Moran. In large part, almost exclusively it is. They 
are the ones who are developing the technology, the new 
science. We are the beneficiaries of that and, particularly, as 
a Kansan, tremendous opportunities. We, USDA was there when we 
announced the arrival of Abengoa. You were there when we broke 
ground. This is a great development for agriculture and for the 
biofuels industry and it is something we ought to be 
applauding, in my opinion, as compared to hindering. Is there 
specific statutory authority to write the rule the way you 
wrote it?
    Mr. Tonsager. No, it is not. It was regulatory.
    Mr. Moran. And it is, I guess, then possible that this 
decision will be determined as you write the rules for this 
program?
    Mr. Tonsager. Yes, we are publishing it as it is or we will 
be. We are developing that, of course, at this point, but we 
will be seeking public comment and will consider comments and 
look for the perspectives from the public on that matter.
    Mr. Moran. Thank you very much. Thank you for Dr. Shah 
letting me have this conversation with him a month or so ago.
    Dr. Shah. Thank you.
    Mr. Moran. And, Mr. Tonsager, you are a very important 
person to me. What happens at Rural Development at USDA matters 
a lot in Kansas. We have had a great working relationship with 
your predecessor and previous Administrations as well, and we 
welcome you to your job and look forward to developing that 
close working relationship with you. We appreciate your 
commitment to rural America.
    Mr. Tonsager. And I am very happy. I appreciate that very 
much and very much look forward to it as well, sir.
    Mr. Moran. Thank you, sir.
    Thank you, Mr. Chairman.
    The Chairman. The chair thanks the gentleman and recognizes 
the gentleman from California.
    Mr. Costa. Thank you very much, Mr. Chairman, for this 
hearing. It is timely as we look at trying to reset a 
comprehensive energy policy in this country, and the role that 
biofuels will play in the second and third generation.
    I want to touch on some of the areas that some of the 
Members spoke on earlier, but what I don't think we have 
covered here yet, at least since I have been here, is the role 
that methane digesters play as a part of this overall effort on 
renewable fuels where agriculture has potential. We have had a 
number of pilot projects that you may be aware of in 
California. The dairy industry is a significant part of our ag 
economy and some 1,600 dairies, many of them large dairies have 
the capability of producing significant fuel for their use and 
to sell. You may be aware that in California, and maybe in 
other parts of the country, we have run into a host of barriers 
that put strict limits on emissions without taking into account 
the benefit of these digesters. Is there some way to get a 
positive net reduction of what is considered the GHGs in the 
mix as we move to the next generation of fuel, so that we don't 
have to repeat the situation of digesters being turned off 
because of local NOX issues, especially when you 
have air basins where you have nonattainment and there are 
sanctions by either the Federal EPA or by state laws?
    Dr. Shah. I don't have a very specific answer to the 
digesters question specifically, but I can look into that and 
send some thoughts via letter as follow up. I do believe that 
as we talk about second and third generation fuel systems and, 
especially, dedicated feedstocks and tools that will enable the 
use of those feedstocks to be more efficient.
    Mr. Costa. Has USDA looked at what the potential is of 
these digesters?
    Mr. Tonsager. Yes, I was fortunate to be in Sacramento some 
months ago and spoke to the biomethane conference that occurred 
there. I am very familiar with the issues associated with it.
    Mr. Costa. What do you believe is the potential?
    Mr. Tonsager. Yes, absolutely.
    Mr. Costa. No, I said what do you believe? I mean do you 
have a comparative? Do you have a scale of the potential?
    Mr. Tonsager. Of what? I couldn't quantify it right off the 
bat. My sense is some of the challenges are not challenges but 
opportunities. Much of it is evolving with rural electric 
generation as to how we can get that generation from those 
facilities onto the grid. I think that is an opportunity that 
we have to work at to make sure that works. I don't have a 
sense of the scale. I would suggest that there is probably 
concentration.
    Mr. Costa. Well, let me go because of my time and you can 
get back to me on the sense of the scale.
    Mr. Tonsager. Sure, okay.
    Mr. Costa. Do you think they are comparable, incentives and 
programs available to livestock farmers to participate in the 
next generation of biofuels?
    Mr. Tonsager. Yes, there are opportunities within our 
programs.
    Mr. Costa. Yes, can you enumerate those?
    Mr. Tonsager. Well, we have a particular program, the REAP 
Program, the Rural Energy for America Program that is being 
used today to finance biomethane digesters.
    Mr. Costa. Can you give us a snapshot in terms of the 
biofuel development on projects that have received funding to 
the loan guarantee program so far?
    Mr. Tonsager. I can provide you that. I don't have it.
    Mr. Costa. Please do for the Subcommittee. What are the 
differences between your program under USDA and the Department 
of Energy under your loan guarantee programs?
    Mr. Tonsager. That is unclear to me, the DOE programs and 
how they are functioning. I don't think they have moved forward 
yet.
    Mr. Costa. But isn't there a collaboration supposed to be 
taking place with Carol Browner between USDA and the Department 
of Energy and the other appropriate agencies on this whole 
comprehensive energy effort?
    Mr. Tonsager. Yes, my staff does meet with the DOE and 
there has been dialogue about the structure of our programs 
with them, but to this point I don't know that they have 
established a framework for their program.
    Mr. Costa. Well, I would like to have some light shed for 
the Members of the Subcommittee on applications that are coming 
in from one sector to another, and how well you guys are 
working in this collaborative effort.
    Mr. Tonsager. Okay.
    Mr. Costa. I keep hearing about it but I don't see any 
examples of it.
    Mr. Tonsager. Okay, I will have to forward that to you.
    Mr. Costa. I hear this thing that you guys are having 
meetings and that is wonderful that you are having meetings, 
but we have, in my sense, way too damn many meetings in this 
town. I would like to see some work product come out of some of 
these meetings.
    Mr. Tonsager. Okay.
    Mr. Costa. You know, takeaways, you know what I mean?
    Mr. Tonsager. Yes.
    Mr. Costa. And I would like to know what those takeaways 
are.
    My time has expired but I have a couple more questions.
    The Chairman. The votes have been called so if the 
gentleman doesn't mind, we will proceed with the gentleman from 
Missouri.
    Mr. Costa. All right, thank you, Mr. Chairman.
    Mr. Luetkemeyer. Thank you, Mr. Chairman.
    I have four biodiesel plants in my district, biofuels 
plants, two ethanol, two biodiesel so this is an extremely 
important issue to me and my constituents. Mr. Tonsager, you 
have mentioned in your testimony that you are working very 
closely with a lot of government agencies. How is your 
relationship with EPA and what are you guys doing with those 
folks to minimize the impact of their rulemaking on what we 
want to do with biofuels?
    Mr. Tonsager. The conversations thus far have occurred 
between the Secretary's office and the Chief Economist's office 
with EPA and other parties. I have not personally been engaged 
in the dialogues with them.
    Mr. Luetkemeyer. What is their view of biofuels in your 
judgment? Are they going to be somebody that you can work with? 
Are they going to try and throw roadblocks up to some of the 
expansion of your programs and some of the research that is 
going on? Are they going to push for it? Where are we at?
    Mr. Tonsager. You know, the EPA is of course in the process 
of reviewing their position regarding the blend wall and the 
combination of percentages. The position I have taken from our 
agency is that we will aggressively pursue the development of 
these energy sources whatever the rules are. I have not 
personally had a dialogue related to the EPA or advocated with 
them. The Secretary's office and the Chief Economist have had 
that relationship.
    Mr. Luetkemeyer. Well, I think it is important that we work 
with those folks because I know that every time they are before 
our Committee we can't get an answer out of them. I don't know 
maybe you can, but I know it is disappointing for us to see 
them come, at least it is for me personally, from the 
standpoint that every time I ask them a question I never get an 
answer. So hopefully you can work with those folks to make sure 
that they don't impact in a negative way the ability of our 
farmers to produce the corn, the beans, whatever the product is 
to be able to be able to utilize these things because this is 
an important industry. It is something that is going to help 
down the road and have an incredible impact on our fuel 
consumption as well as energy usage.
    Mr. Tonsager. Yes.
    Mr. Luetkemeyer. Dr. Shah, in your testimony you indicate 
research that should invest in technologies, improve economics 
for producers and consumers alike. In my district, I have the 
University of Missouri which is one of the leading agriculture 
research institutions in the country, as well as Monsanto who 
just sits outside my district which of course does a tremendous 
amount of research. What is the percentage that we have with 
regards to a government-funded research versus private sector 
research?
    Dr. Shah. Just can I ask for clarification, is that overall 
or with respect to second and third generation biofuels?
    Mr. Luetkemeyer. Well, let us take the biofuels industry as 
a whole.
    Dr. Shah. All right, well, certainly if you look at first 
generation fuels, the great preponderance of productivity 
research on corn and soybeans goes in from the private sector 
and from firms that you mentioned that are located in your 
district. So one of our goals has been how can we reorganize 
our research portfolio in a way that leverages the technologies 
they are developing and is complementary to that, but not 
trying to replicate or duplicate what they are already doing. 
They invest in, like Monsanto alone invested around $980 
million a year of R&D, and most of that is focused on a few 
prompts and a few traits. They are able to leverage a germplasm 
collection and a system for breeding that uses advanced 
molecular genetics that has germplasm from all over the world 
very easily available to their scientists.
    Mr. Luetkemeyer. Right, right.
    Dr. Shah. We are trying to emulate that in crop categories 
that are not corn and soybean so that we can build up the 
potential for second and third generation fuels where there is 
still a lot of innovation happening in the private sector, but 
not nearly at that scale. We believe we can work with the 
private sector and play a far more significant role to bring to 
bear some of these dedicated feedstocks.
    Mr. Luetkemeyer. What percentage of your support though is 
for university-type research versus private sector research?
    Dr. Shah. Well, it would depend on which program we 
reference. For example, in the 9008 Program we had 190 full 
proposals and we will be making ten awards from that and that 
is with DOE but at around $25 million. Most of that will be 
targeted to universities and public research institutions, 
there are some awards in there for the private sector, I 
believe it is less than 40 percent. I could be more specific 
and note that.
    Mr. Luetkemeyer. That is fine. Thank you.
    Thank you, Mr. Chairman.
    The Chairman. The chair thanks the gentleman. There are 
less than 10 minutes remaining for three votes but we have time 
to recognize the gentleman from Ohio.
    Mr. Boccieri. Thank you, Mr. Chairman. I will be very, very 
brief.
    Very quickly I just wanted to pound on my chest for the 
16th Congressional District in Ohio. Ohio State Agricultural 
Research and Development Center is doing much research on this 
on these topics that we are discussing here today and we 
appreciate the support from the Department. Real quickly and 
the Air Force as well, Dr. Shah, had mentioned that the Air 
Force is beginning to test this. Wright-Patterson Air Force 
Base is already beginning to test the use of biofuels and 
blended fuels, et cetera, on aircraft, flying aircraft. I would 
like to highlight you to that research that we are doing in 
Ohio. It is my opinion that farmers have yet remained very 
skeptical about the investments in the alternative energies, 
and judging from their tepid response on the energy bill that 
passed the House, I want to know what measures you are taking 
at Agriculture and Department of Energy to do this outreach, if 
you could quickly respond.
    Mr. Tonsager. We do have a plan that we are evolving on the 
process of outreaching to producers on the projects involved. 
We have been talking as we speak around the country and 
aggressively advocating for biofuels. We understand that there 
is a mixed view in some cases regarding biofuels. I think what 
needs to be done is to focus on the needs of particular areas 
and the economies of particular areas and the availability of 
resources because the bottom line is, people are going to look 
for economic opportunity. So, as we identify those economic 
opportunities, we will advocate in the areas where it might be 
possible to put together projects.
    Mr. Boccieri. Thank you it is my opinion that the only 
thing that is preventing our country from producing robust 
alternative fuels and alternative energy is the energy that we 
invest in it. I believe that with these type of grants that you 
are awarding and the research that we are doing we can make a 
difference.
    Last question real quickly, tell me if you are getting 
resistance or help working intra-agency between the Department 
of Energy and Agriculture. Are you working in tandem, hand-to-
hand to bring this because I have heard different stories and I 
want to hear it from you.
    Dr. Shah. You know, up to this point there have been a 
large number of committees and meetings and organizing groups 
that do that at different levels. This Administration has been 
committed to a stronger partnership at the Cabinet level and so 
it is Secretary Vilsack and Secretary Chu and Administrator 
Jackson all co-chairing this biofuel task force. We are finding 
that it is far more productive to have conversations. We are 
having real discussions about how to bring each agency's and 
each organization's core competencies to the program, and we 
are having real conversations about how to reduce the 
duplication that sometimes exist across those agencies. 
Everybody is very focused on the very specific quantitative 
goals established by Congress for 36 billion gallons and even 
larger ones farther out established by the President during the 
campaign, so I think it is improving significantly.
    Mr. Boccieri. It is my opinion that this will not work 
without a vibrant and good partnership that is fostered between 
the two agencies, so I hope that to that end that you will work 
together.
    Thank you, Mr. Chairman, I yield back.
    The Chairman. The chair thanks the gentleman and recognizes 
the gentleman from Idaho.
    Mr. Minnick. My state has substantial resources in both 
traditional agriculture and forest products for biofuels of 
almost all types. As I talk to the producers and potential 
producers, the problem is not that the technology doesn't 
exist, or can't be developed with reasonable surety, or that 
they can't find funding. The main problem is that most of these 
technologies are very economic when the price of gasoline is $5 
but if it falls to $3 or $2, they are out of luck and bankrupt. 
If we are really serious about jump-starting some of these 
technologies, it seems to me that we need a guaranteed program 
that would be limited in time, that would be keyed to the price 
of alternative fuels for the period of time necessary to 
recover the capital invested in these capital-intensive 
projects. Do you have underway or do you contemplate a program 
that would provide, essentially, a price protection against 
alternative fuels for these producers who make a capital 
investment for the period of time required to recoup that 
investment in the event that prices decline and leave these 
fuels temporarily noncompetitive?
    Mr. Tonsager. I agree completely with you on the idea of 
the instability creating problems for us. I think the 
significant movements in the all, in several market areas have 
created some of the great uncertainty we are faced with 
investment at that time. I am more than happy to explore 
options that you might want to talk about that might alleviate 
the stress of starting up a project. I think we have to look 
for every opportunity. I have not contemplated that particular 
kind of an approach yet, but I do spend a lot of time thinking 
about how we try to create certainty, stability and 
circumstances where investors and creditors would be willing to 
step up and take risks.
    Mr. Minnick. I would like to urge you to contemplate that 
kind of program.
    Mr. Tonsager. Okay.
    Mr. Minnick. Because without it we can do a lot of talking 
and have a lot of committee meetings, but we are not going to 
attract the significant private capital required to 
commercialize that scale these kinds of projects needed to meet 
the ambitious goals that you speak about and spoke about 
earlier. I would be happy to work with you on that effort. 
Thank you very much.
    Mr. Tonsager. Thank you.
    The Chairman. The chair thanks the gentleman. The chair 
thanks the witnesses for their testimony today, and the 
Subcommittee will be in recess until the three votes are cast 
and then we will have panel two. Thank you.
    [Recess.]
    The Chairman. The Subcommittee will come back to order.
    We would now like to welcome our second panel. Ms. Mary 
Rosenthal, Executive Director of Algal Biomass Association, 
Preston, Minnesota; Ms. Susan Ellerbusch, President, BP 
Biofuels North America, Warrenville, Illinois; Mr. William J. 
Roe, President and CEO of Coskata, Incorporated, Warrenville, 
Illinois; Mr. Bruce Jamerson, Chairman of the Board of 
Directors of Mascoma Corporation, Lebanon, New Hampshire; and 
Mr. Craig Shealy, President and CEO of Osage Bio Energy, Glen 
Allen, Virginia.
    Ms. Rosenthal, you may begin when you are ready.

STATEMENT OF MARY ROSENTHAL, EXECUTIVE DIRECTOR, ALGAL BIOMASS 
                   ORGANIZATION, PRESTON, MN

    Ms. Rosenthal. Good morning and thank you for allowing us 
the privilege to testify here in front of this Subcommittee on 
Conservation, Credit, Energy, and Research.
    My name is Mary Rosenthal. I am the Executive Director of 
the Algal Biomass Organization.
    The Algal Biomass Organization represents stakeholders 
involved in the use of algae biomass for the production of next 
generation biofuels. The ABO, as an industry trade association, 
is focused on facilitating the commercialization and market 
development of algal biomass to produce fuels that have 
significantly reduced carbon emissions compared with petroleum-
based fuels while beneficially reusing carbon dioxide from 
industrial and atmospheric sources. Algae are a sustainable, 
renewable feedstock that will help America become energy 
independent and make our nation significantly reduce its carbon 
footprint.
    Third generation algae-based fuels are different from first 
and second generation fuels. Unlike first and second generation 
biofuels algae-based fuels are easily refined into hydrocarbons 
including gas, diesel and jet fuel and thus serves as a direct 
fossil fuel replacement. Algae-based fuels are also compatible 
with existing oil and pipeline infrastructure and engines. 
Additionally, algae-based fuels are competitive with other 
biofuels which can be blended with algae-based hydrocarbon 
fuels making algae-based fuels a compatible, not competitive, 
technology.
    Right now, algae-based fuels are being successfully 
produced and tested today. Production timelines for the 
industry range from the near, 1 to 2 years, to the midterm, 5 
to 8 years proving that algae-based fuels industry is ready to 
commercialize. So the question is why algae and why now? Algae 
holds tremendous potential to play a key role in the 
development of a new energy economy, one driven by 
environmentally and economically sustainable fuel and power 
generation. Any commercially viable energy feedstock must be 
able to scale to meet national and to global energy needs. 
Algae are one of the nation's most photosynthetic organisms 
meaning that algae do not waste time doing anything but 
producing oil and growing. A single crop of algae can mature in 
as little as 7 days making algae one of the fastest growing and 
most scalable energy feedstocks available.
    Algae are enormous consumers of CO2, 
consequently algae require abundant atmospheric industrial 
source CO2 in order to scale to significant levels. 
Algae beneficially reuses CO2 by turning it into 
fuels and other important commodities thus strengthening our 
green economy while increasing America's energy security. Algae 
can be grown on non-arable desert land using non-potable water 
or brackish water, consequently, algae preserves precious 
agricultural resources while providing exciting new 
opportunities for rural development.
    Algae fuels range from ethanol to biodiesel to drop-in 
transportation fuel such as jet, diesel and gasoline, and thus 
can help the rest of the biofuel community meet our renewable 
fuel mandates. Significant process has been made to the 
commercialization of algae among companies, scientists and 
broader interests. Interest in algae as a resource continues to 
grow, and technological advances in the production of algae 
biomass combined with hundreds of millions of dollars invested 
just this year in research and production, and brought the 
industry much closer to commercialization and cost efficient 
production.
    Unfortunately, there many of the Federal Government's 
existing policies that exempt algae from benefits similar to 
those enjoyed by other biofuels. These include financial 
parity. Algae should receive the same tax incentives, subsidies 
and other benefits that other renewable fuels, particularly 
cellulosic biofuels receive. RFS parity, algae is currently 
excluded from the majority of the renewable fuel standard due 
to the 16 VAT gallon carve out for cellulosic biofuels. This 
carve out should be changed. Finally, beneficial CO2 
reuse recognition: Algae's unique ability to turn 
CO2 into renewable fuels will allow the organism to 
play a significant role in abating carbon emitted by industrial 
sources. Consequently, algae's beneficial reuse of 
CO2 should be acknowledged and counted for in carbon 
capture and sequestration legislation. Algae fuels will play a 
significant near-term role in helping our nation meet its goals 
in transitioning to sustainable renewable fuels, improving our 
green economy and increasing our nation's energy independence.
    [The prepared statement of Ms. Rosenthal follows:]

Prepared Statement of Mary Rosenthal, Executive Director, Algal Biomass 
                       Organization, Preston, MN

    The Algal Biomass Organization represents stakeholders involved in 
the use of algal biomass for the production of next generation 
biofuels. The Algal Biomass Organization, as an industry trade 
association, is focused on facilitating the commercialization and 
market development of algal biomass, to produce fuels that have 
significantly reduced carbon emissions, compared with petroleum-based 
fuels, while beneficially reusing carbon dioxide from industrial and 
atmospheric sources. Algae are a sustainable, renewable feedstock that 
will help America become energy independent, and help our nation 
significantly reduce its carbon footprint.
    ``Third generation'' algae-based fuels are different from first and 
second-generation fuels. Unlike first and second-generation biofuels, 
algae-based fuels are easily refined into hydrocarbons--including gas, 
diesel and jet fuel--and thus serve as a direct fossil fuel 
replacement. Algae-based fuels are also compatible with existing oil 
and pipeline infrastructure and engines. Additionally, algae-based 
fuels are not competitive with other biofuels, which can be blended 
with algae-based hydrocarbon fuels, making algae-based fuel a 
compatible, not competitive, technology.
    Algae-based fuels are being successfully produced and tested today. 
Production timelines for the industry range from near- (1-2 years) to 
mid-term (5-8 years), proving that the algae-based fuel industry is 
ready to commercialize.

Why algae and why now?
    Algae hold tremendous potential to play a key role in the 
development of a new energy economy--one driven by environmentally and 
economically sustainable fuel and power generation.

   Any commercially viable energy feedstock must be able to 
        scale to meet national--and eventually global--energy needs. 
        Algae are one of nature's most efficient photosynthetic 
        organisms, meaning that algae do not waste time doing anything 
        but producing oil and growing. A single crop of algae can 
        mature in as little as 7 days, making algae one of the fastest 
        growing and most scalable energy feedstocks available.

   Algae are enormous consumers of CO2. 
        Consequently, algae require abundant atmospheric and 
        industrial-source CO2 in order to scale to 
        significant levels. Algae beneficially reuse CO2 by 
        turning it into fuels and other important commodities, thus 
        strengthening our green economy while increasing America's 
        energy security.

   Algae can be grown on non-arable desert land, using non-
        potable salt or brackish water. Consequently, algae conserve 
        precious agricultural resources, while providing exciting new 
        opportunities for rural development. Algae can be grown using 
        non-food energy sources such as cellulosic material and waste 
        chemicals. These methods of cultivating algae can provide a new 
        agricultural crop without large scale change in land use or 
        imposing unsustainable demands on potable water supplies.

   Algae-based fuels range from ethanol to biodiesel to drop-in 
        transportation fuel, such as jet, diesel and gasoline, and can 
        thus help the rest of the biofuel community meet our nation's 
        renewable biofuel mandates. Some companies in the industry have 
        produced and tested these drop-in fuels already.

    Significant progress has been made toward the commercialization of 
algae-based renewable fuels and their resultant co-products. Among 
companies, scientists, and the broader public, interest in algae as a 
resource for renewable energy continues to grow--and technological 
advances in the production of algal biomass combined with hundreds of 
millions of dollars invested this year in research and production have 
brought the industry much closer to commercialization and cost-
efficient production of algal biomass.
    Unfortunately, many of the federal government's existing policies 
exempt algae from receiving benefits similar to those enjoyed by other 
biofuels. Such oversight can be easily remedied if the government takes 
the following actions:

    1. Financial parity--Algae should receive the same tax incentives, 
        subsidies and other financial benefits that other renewable 
        fuels, particularly cellulosic biofuels, receive.

    2. RFS parity--Algae is currently excluded from the majority of the 
        Renewable Fuel Standard, due to a 16 billion gallon carve out 
        for cellulosic biofuels. The carve out should be changed so 
        that it is technology neutral, thus allowing algae-based and 
        other environmentally sustainable fuels to contribute to our 
        nation's efforts to become energy independent.

    3. Beneficial CO2 reuse recognition--Algae's unique 
        ability to turn CO2 into renewable fuels will allow 
        the organism to play a significant role in abating carbon 
        emitted by industrial sources. Consequently, algae's beneficial 
        reuse of CO2 should be acknowledged and accounted 
        for in carbon capture and sequestration legislation.

    Algae-based fuels will play a significant, near-term role in 
helping our nation meet its goals of transitioning to sustainable 
renewable fuels, improving our green economy, and increasing our 
nation's energy independence.

    The Chairman. Thank you.
    Ms. Ellerbusch.

  STATEMENT OF SUSAN ELLERBUSCH, PRESIDENT, BP BIOFUELS NORTH 
                  AMERICA LLC, WARRENVILLE, IL

    Ms. Ellerbusch. Good afternoon.
    My name is Susan Ellerbusch and I am the President of BP 
Biofuels North America. I am one of 29,000 employees of BP 
working in the United States. I want to thank the Chairman, 
Ranking Member and all other Members of this Subcommittee for 
the opportunity to present BP's views on the opportunities and 
challenges facing us in the advanced biofuels industry.
    BP believes there must be an all of the above energy 
strategy in the U.S. This strategy will allow us, as a country, 
to explore for and develop a diverse array of new domestic 
energy sources that are secure and reliable. BP is committed to 
its alternative businesses and holds them as an integral part 
of our BP group. Our alternative energy business is on track to 
deliver $8 billion in investments over 10 years. In the 
biofuels business alone, BP has committed more than $1.5 
billion on research, development and production. BP believes 
that advanced biofuels will play a material role in the U.S. 
energy future. BP will not only purchase biofuels but we will 
produce them in the U.S. BP has made a strategic choice to 
pursue advanced biofuels because it appreciates the opportunity 
to invest in a new and high-growth industry. We also recognize 
our ability to leverage our capabilities and insights into the 
energy markets logistics, projects, and operational management.
    BP does have a focused biofuel strategy. First, we intend 
to produce cellulosic biofuels in the U.S. from dedicated 
energy crops. Second, we have established an Advanced Biofuel 
Molecule Program and last, we have begun production of ethanol 
in Brazil using sugarcane as a feedstock.
    The U.S. business model is built on several key strategic 
beliefs. First, that a new value chain within the U.S. must be 
created to enable the growth of advanced biofuels and second, 
that advanced biofuels will be cost and performance competitive 
with incumbent products by 2022. Last, that transitional 
incentives and support structures need to be in place to allow 
this industry to develop.
    In developing a U.S. cellulosic business BP has made two 
critical choices. First, we have chosen to utilize dedicated 
energy crops, and second, we have chosen to deploy a 
biochemical conversion process for our production. Both choices 
are difficult routes in the short term but are likely to be 
optimal paths in the long run.
    To date, BP has invested $90 million in a technology 
partnership with Verenium Corporation, a leading advanced 
biofuels player. This partnership is advancing Verenium's 
original cellulosic technology and supports advancements of 
Verenium's 1.4 million gallon a year proof of concept 
demonstration facility that is currently up and running in 
Jennings, Louisiana. Also, with Verenium, BP has built the 
first, is planning to build the first U.S. commercial scale 
cellulosic facility in Highlands County, Florida. This joint 
venture which we have named Vercipia Biofuels combines BP's 
project design and engineering expertise with Verenium's 
biotechnology expertise. We intend to complete construction of 
a 36 million gallon a year facility by 2012. This plan also 
includes adding additional capacity. The joint venture will 
look at a second possible site in the U.S. Gulf Coast and going 
forward, BP hopes to progress other cellulosic facilities of 
this nature in the U.S.
    In the area of advanced molecules, BP has focused on 
biobutanol. Biobutanol is an advanced molecule that can be 
produced from the same feedstocks as ethanol through modest 
retrofits to existing facilities. This advanced molecule offers 
benefits such as higher energy content and the ability to blend 
at higher rates, while still using an industry's existing 
distribution infrastructure. We have created a joint venture 
with DuPont called Butamax for the development and 
commercialization of this better biofuel molecule. We are 
currently building a demonstration facility for the technology 
in the UK, and hope to be able to commercially deploy the 
technology here in the U.S. in the 2012 to 2013 time-frame.
    However, our path of development in advanced biofuels is 
not an easy one. There are a number of critical supply side 
challenges facing the advanced biofuels industry that were not 
necessarily present for the current generation of biofuels. 
First, a value chain for cellulosic biofuel feedstock supply 
must be developed. The value chain for dedicated energy crops, 
forest waste, and agricultural residue is simply not ready for 
scale and to meet the requirements by the government mandates. 
Second, there remains technology challenges related to the 
scale and cost competitiveness of the technologies available 
today. These conversion technologies have not been proven at 
commercial scale. Last, we lack the access to financing in the 
present industry due to the current situation in the financing 
industry. The current financial crises have prevented venture 
capitalists and bankers from investing in many worthwhile 
investments. On the demand side it is worth noting that there 
does exist a significant challenge to the blend wall that is 
the markets ability to absorb these ever-increasing volumes of 
biofuels. BP believes that a combination of time, technology 
development, and policy support and infrastructure investment 
will solve this problem. We believe that advanced molecules 
like biobutanol can lessen the effect of the blend wall in the 
marketplace.
    However, while these challenges are significant, they are 
not insurmountable. A stable industry with multiple 
technologies and multiple forms of partnership will best enable 
stability in the long run. Government support structures: The 
industry and investors must see a secure market. Transitional 
support mechanisms managed well by critical government agencies 
such as the USDA and DOE will also ensure continued development 
in the industry.
    In closing, BP appreciates the pursuit of solutions to 
energy security, economic and environmental challenges faced by 
the U.S. BP wants to be part of the solution. Biofuels done 
well can play a key role in delivering these major policy 
goals. Thank you.
    [The prepared statement of Ms. Ellerbusch follows:]

 Prepared Statement of Susan Ellerbusch, President, BP Biofuels North 
                      America LLC, Warrenville, IL

    My name is Susan Ellerbusch, and I am the President of BP Biofuels 
North America LLC.
    BP appreciates the opportunity to appear before this Committee and 
present our views on the opportunities and challenges in the advanced 
biofuels industry. The needs of our country require that we explore for 
and develop a diverse set of new domestic sources of energy that are 
secure and reliable in good times and in tough times. We believe 
advanced biofuels will play a material role in the U.S. energy future.

BP Overview
    I am one of the 29,000 employees at BP working in the United 
States. We are not only the largest oil and gas producer in the United 
States, but also the company that invests in the most diverse energy 
portfolio in the industry. Over the last 5 years, we have invested 
approximately $35 billion in the U.S. to increase existing energy 
sources, extend energy supplies and develop new low-carbon 
technologies.
    BP's investments stretch from the Gulf of Mexico to the North Slope 
of Alaska and from the East Coast to the Midwest and the West Coast. 
Our 11,700 service stations--most of them locally owned and operated--
are a familiar part of the American landscape.
    BP is 100 years old this year--a history that began with striking 
oil in the Persian desert after 6 years of toil and has continued 
through wars, oil shocks, globalization and growing environmental 
awareness. The company's major spending programs touch every major 
segment of the energy industry, from exploration and production of oil 
and natural gas through refining and distribution of fuel products, as 
well as renewables. Persistence and innovation have been two of the 
company's hallmarks, along with an ability to anticipate and adapt to 
external trends, whether political, social, economic or environmental.

BP Alternative Energy
    We've recognized the changing nature of the world's energy needs. 
As an energy supplier we are faced with the need to meet consumers' 
growing consumption demands and at the same time ensure secure sources 
of energy that offer solutions to climate change.
    So it is not surprising that BP has been an early mover in the low-
carbon world, setting up a solar business over 30 years ago and leading 
the oil and gas industry in acknowledging the risks of climate change 
and urging precautionary action.
    Today, BP's alternative energy businesses are integral to the BP 
Group. Our alternative energy businesses aim to be commercially, as 
well as environmentally, sustainable. Launched in 2005, BP Alternative 
Energy is on track to achieve its objective to invest $8 billion over 
10 years on renewable and alternative energy. In the biofuels space 
alone, BP has committed more than $1.5 billion to biofuels research, 
development, and production in response to increasing energy demand and 
the need to reduce overall greenhouse gas emissions from transport 
fuels.
    BP is focusing its alternative energy investments on areas where it 
believes it can create the greatest competitive advantage. It has 
chosen to focus on the technologies of wind and solar power, biofuels 
and carbon capture and storage.

Biofuels
    BP has relished the opportunity to invest in a new high growth 
industry. In biofuels, there are many potential options for feedstocks, 
molecules and processes. BP is prioritizing what it identifies as the 
strongest biofuels options for increasing energy security, reducing 
greenhouse gas emissions and supporting sustainable agriculture.
    In the longer term, through developments in feedstock and process 
conversion technologies, we believe biofuels offer the potential to 
comprise a material share of the transport fuels market in key regions. 
For example, the U.S. Department of Energy has forecast that biofuels 
could serve 20-30% of the U.S. transportation market by 2020. 
Additionally, the International Energy Agency has estimated that 
biofuels could form up to 30% of the global road transportation market 
by 2050, in work done in cooperation with the World Business Council 
project on Sustainable Mobility.
    Importantly, biofuels offer the potential to deliver lower overall 
greenhouse gas (GHG) emissions compared with conventional fuels. 
Biofuels reduce GHG emissions entering the atmosphere on a total well-
to-wheels or crop-to-car basis. That is, the carbon dioxide 
(CO2) emitted when the biofuel is burnt in the vehicle is 
offset by the CO2 absorbed during the growing of the crop. 
Future technology developments in the area of advanced biofuels offer 
the potential for biofuels to deliver GHG emission savings on a well-
to-wheels basis of up to 90% versus conventional fuels. This can 
potentially be achieved through a combination of using less energy-
intensive crops, or waste materials, and highly efficient/high yielding 
conversion processes.

BP Biofuels
    BP has made a strategic choice to participate in biofuels. BP has 
identified biofuels, in particular advanced biofuels, as one of the 
most compelling options to reduce GHG emissions and address energy 
security and supply diversification needs. As one of the largest 
transportation fuel providers in the U.S., BP has long been one of the 
most significant blenders and marketers of biofuels in the nation. For 
example, last year BP blended over 1 billion gallons of ethanol with 
gasoline. In addition, biofuels are complementary to vehicle 
technologies which increase fuel economy, leading to a more sustainable 
transport fleet.
    We believe BP is a natural leader in this space. BP has a long 
history of addressing the issue of increasing CO2 emissions, 
offering increasingly cleaner fuels to customers and identifying new 
growth opportunities to develop our business. Biofuels serve markets we 
are familiar with and have incumbent positions in, and applications in 
which we have extensive expertise. It leverages our capabilities and 
insights into energy markets and logistics and project and operational 
management.
    In 2006, BP decided to move beyond blending biofuels to also 
develop and manufacture our own biofuels. We formed a separate business 
within BP charged to develop this business opportunity. At the heart of 
our business is a desire to continually advance our ability to produce 
biofuels and advanced biofuels in a sustainable manner.
    BP's Biofuels business has a focused strategy. We have three 
primary programs. First, we intend to produce cellulosic biofuels from 
dedicated energy crops in the U.S. Second, we are developing an 
advanced biofuels molecule called biobutanol that can be deployed in 
existing and new ethanol production units. Lastly, we are producing 
biofuels in Brazil using sugarcane as a feedstock.
    Our U.S. business model is built on five strategic beliefs:

    (1) We must create a new value chain within the U.S. to enable the 
        growth of advanced biofuels. New partnerships are required to 
        bring capabilities from agriculture, biotechnology, 
        engineering, manufacturing and fuel distribution together in a 
        unique way.

    (2) There are multiple approaches to producing advanced biofuels, 
        but we believe the fermentation of sugars from a variety of 
        sources is one of the winning technology platforms for 
        delivering this industry at scale.

    (3) Technology development will make biofuels cost competitive and 
        performance competitive with incumbent products by 2022.

    (4) Transitional incentives and support structures need to be in 
        place to bridge this nascent industry as the value chain forms 
        and technology cost improvements are realized.

    (5) Regulation, technology and good operating practice will enable 
        a sustainable industry to form.

    Our focus in the U.S. was catalyzed by the Energy Independence and 
Security Act of 2007. Through EISA, Congress created significant 
opportunities to develop and grow the contribution of biofuels to the 
U.S. transportation fuels market. EISA also served to move the industry 
beyond the good start the U.S. has had with corn ethanol. New support 
for the next generation of biofuels such as cellulosics and advanced 
molecules such as biobutanol created the opportunity for the 
development of a differentiated biofuels industry sooner than anyone 
had previously envisioned.
    Our commitment to a public-private partnership in the area of 
advanced biofuels is very real. BP is investing $500 million over 10 
years in the Energy Biosciences Institute (EBI). The EBI brings BP 
together with experts from the University of California at Berkeley, 
The University of Illinois at Urbana Champaign and the Lawrence 
Berkeley Labs. We have created an institute at which biotechnologists 
are able to investigate many possible applications of biotechnology to 
energy, including advanced fuels. The EBI's work also includes research 
into the social and economic impacts of biofuels.

BP Biofuels Programs
    BP intends to produce cellulosic biofuels in the United States. Our 
cellulosic biofuels program is focused on two key technology pathways. 
First, we intend to utilize dedicated energy crops, such as high-
yielding perennial grasses, as feedstocks. Second, we intend to utilize 
a biochemical conversion process to produce the biofuel from the 
feedstocks.
    BP has created a joint venture company called Vercipia Biofuels 
with Verenium Corporation to build the first commercial scale 
cellulosic biofuels facility in the U.S. To date, BP and Verenium have 
made a total commitment of $45 million to the venture. The joint 
venture company is led and supported by a team comprised of employees 
from both BP and Verenium.
    The formation of the Vercipia Biofuels joint venture builds on the 
$90 million investment made by BP in 2008, which allowed the two 
companies to further advance Verenium's original cellulosic technology 
and ensure delivery of Verenium's 1.4 m gallon/year proof-of-concept 
demonstration facility in Jennings, Louisiana.
    BP and Verenium's proprietary technology enables conversion of 
nearly all the sugars found in cellulosic biomass, including both 5-
carbon and 6-carbon sugars into ethanol. This technology is a reality 
today. Our focus, going forward, is to enhance and improve the 
efficiency of the technology so that it can be deployed at pace and 
scale.
    Vercipia Biofuels is progressing the design and engineering 
required to develop one of the first commercial scale cellulosic 
ethanol facilities in the U.S., located in Highlands County, Florida. 
The estimated construction cost for this 36 million gallon per year 
facility is between $250 and $300 million. The Vercipia Biofuels joint 
venture plans to break ground on the facility in 2010 and be fully 
operational in 2012. With plans to add additional capacity, the joint 
venture company intends to develop a second site in the Gulf Coast 
region.
    The ethanol produced in our first facility in Florida will be 
developed with energy grass feedstocks such as energy cane. We believe 
energy grasses will be an essential part of the future U.S. feedstock 
mix, given their high yield, yield improvement potential and reduced 
pressure on land resources. Going forward BP intends to progress other 
cellulosic facilities in the U.S. and broaden our energy grass 
feedstock portfolio. BP's intent is to continue to scale up the 
production capacity of future units as we move toward a cost structure 
that can compete with traditional transport fuel sources.
    In the area of advanced molecules, BP is focusing on biobutanol. 
Biobutanol is an advanced biofuel molecule that builds on the benefits 
of the ethanol molecule and adds additional strengths. These additional 
strengths include:

   It can be produced from the same feedstocks as ethanol 
        through modest upgrades of existing facilities.

   It is less susceptible to separation in the presence of 
        water than ethanol/gasoline blends, and therefore can use the 
        industry's existing distribution infrastructure without 
        requiring modifications.

   A 16% blend can be used in all existing vehicles and 
        infrastructure, offering consumers better fuel economy than E10 
        and double the GHG benefit as E10 making it an efficient 
        enabler of the renewable fuels objectives set out by Congress 
        in the EISA.

    BP believes biobutanol will help to accelerate the adoption of 
biofuels and assist in overcoming the blend wall, so that the U.S. can 
meet targets for reducing greenhouse gas emissions from transport more 
quickly. We have created a joint venture with DuPont called Butamax for 
the development and commercialization of this fuel molecule. We are 
currently building a demonstration facility in the UK and hope to be 
able to commercially deploy our technology in the U.S. during the 2012 
to 2013 time-frame.
    Outside of the U.S., BP has focused its current investments in 
biofuels production on Brazilian ethanol made from sugarcane. Brazilian 
sugarcane ethanol has a wells-to-wheels GHG footprint that is at least 
50% less than conventional gasoline. BP has made the largest investment 
to date by an international oil company in the Brazilian ethanol 
production industry by taking a 50% stake in the Tropical BioEnergia 
joint venture, which already has one refinery producing ethanol.
Advanced Biofuels Industry Challenges
    BP is a strong supporter of advanced biofuels. However, we do 
recognize there are challenges to advancing the biofuels industry in 
the U.S. Biofuels is about bringing together our two most important 
value chains--agriculture and energy. We do not take this challenge 
lightly.
    Our nation's initial focus in the biofuels industry was on making 
ethanol and biodiesel from existing agricultural commodities using 
existing, well established and proven manufacturing technology. 
Financing for this first wave of the industry came from the 
agricultural community and later from a large infusion of financial 
capital from private investors and the banking sector. The ethanol and 
biodiesel markets formation benefited from readily available 
feedstocks, off-the-shelf technology and a vibrant investment climate. 
With limited barriers to entry the first generation industry rapidly 
expanded to meet and exceed the targets set out by Congress.
    With the rapid development and success of the corn ethanol 
biofuels, the biofuels industry began focusing on ways to produce more 
sustainable biofuels with strong environmental thresholds. However, the 
development and deployment of an advanced biofuels industry would not 
have been as quick were it not for passage of the EISA in 2007.
    To properly evaluate policy options for the advanced biofuels 
industry, one must consider several critical differences between 
current generation biofuels and advanced biofuels. First, advanced 
biofuels are the largest portion of fuels in the 2007 EISA. Advanced 
biofuels in general, and cellulosic biofuels specifically, do not have 
existing or well developed feedstock supply value-chains. Whether the 
feedstock is high yield energy grasses or various waste products from 
forestry or agriculture, these value chains need development. This 
market development will take time and will include participation from 
land owners, farmers, seed companies, agricultural and forestry 
equipment OEMs, agricultural banking sectors and insurers, and 
transportation companies. We need to continue to nurture and stimulate 
the development of this value chain.
    Second, the technology for conversion of the feedstocks to biofuels 
is still being developed. Yes, we can produce advanced biofuels today, 
but they are not cost competitive with current biofuels. Many 
technologies are not yet readily available to the market. Most of the 
companies in this space are technology startups. Generally speaking, 
the companies are good at developing technology, but lack the 
capabilities to scale the technology into major capital projects. As 
unit capacities increase over time, these projects could cost upwards 
of $500 million each. This industry will therefore be enabled by 
partnerships that bring together small technology companies and large 
processing companies--such as BP--who have the project management, 
engineering, and operational skills to bring to scale the technology.
    Third, private investors and the banking sector are in a very 
different state than during the surge of funding for biofuels in 2006 
and 2007. Venture capitalist funding supports the development of start-
up technology companies and much of that investment is limited until 
they see proof-of-concept in the industry. The banking sector's support 
is required for investments in the scale-up of commercial facilities. 
Given the recent recession and the banking sector's financial 
difficulties, lending has become scarce in the biofuels space. New 
investments in advanced biofuels are having difficulties gaining 
financing even with current government support structures due to the 
evolving technology state of the industry.
    Even if the recession and banking sector challenges had not 
occurred, the business risk for advanced biofuels is not the same as it 
was corn for ethanol. The banking sector does not yet view the advanced 
biofuels value chains as proven and reliable or new conversion 
technologies as low risk investments. Even though government 
initiatives such as the Renewable Fuels Standard, tax credits, USDA and 
DOE grants and loan guarantee programs are in place to stimulate and 
mitigate the risk of investments, the banking industry still does not 
see them as low enough risk at this point in the national economic 
recovery. Thus capital markets are frozen for major advanced biofuels 
capital projects.
    The confluence of these factors has led to slower progress for 
advanced biofuels in the U.S. than otherwise expected. However daunting 
these challenges may seem, they are not insurmountable.

Advanced Biofuels Industry Solutions
    To achieve the national goals on energy security, progress on GHG 
emissions, and further rural development, BP supports a robust biofuels 
industry where many players will bring forward a variety of technology 
and commercial solutions. Partnerships between different types of 
companies--large and small, technology and manufacturing, agricultural 
and energy, financial and operational--through extended value chains--
will be needed to make this industry work.
    Specifically, we need the stability of a long-term governmental 
support structure to de-risk the investment in advanced biofuels. 
Congressional support that is short, has uncertain time-frames or is 
continually evolving creates uncertainly which translates into 
financial risk. Stability and certainty in the existing EISA programs 
are vital to mitigating the risk associated with investing billions of 
dollars in evolving technology. Investors and developers must see a 
secure market. A stable framework to support the evolving industry will 
go a long way to accelerating the industry toward achieving national 
energy and environmental goals.
    The framework in BP's view must continue to include a set of 
transitional support mechanisms that bridges today's nascent industry 
and allows companies such as BP, our partners Verenium and DuPont and 
other leading players in the industry the time and space to deliver at 
scale a cost efficient, sustainable solution for U.S. transport energy 
needs. Transitional support mechanisms such as the cellulosic biofuels 
production tax credit and the biomass crop assistance program are very 
important as we make initial investments in technology that is yet to 
be competitive with traditional fuel sources.
    We believe the USDA and the DOE must continue to play a pivotal 
role in developing the advanced biofuels industry. We look to the 
USDA's leadership in helping to support feedstock development and the 
formation of the upstream portion of the value chain. We look to the 
DOE's leadership in helping to support the downstream conversion 
technology portion of the value chain. Importantly, the DOE will need 
play a key role in the initial funding of advanced biofuels, as the 
initial commercial-scale facilities will be more expensive to build 
than current generation biorefineries. The USDA and DOE along with 
other policymakers must recognize the developmental nature of the 
advanced biofuels industry and help to manage the risks that companies 
such as BP and the other early leaders in this field are facing as we 
attempt to create this new industry. In this effort, the government can 
and will play a critical role.
    Assuming supply side dynamics are addressed, there remain demand 
side barriers to be resolved. The most pressing issue is solving the 
so-called blend wall issue--the market's inability to absorb additional 
biofuel volumes. The blend wall results from well intentioned but 
disconnected energy policy and legal frameworks. BP believes that a 
combination of time, technology development, and policy support and 
infrastructure investment will solve this problem. We believe advanced 
molecules such as biobutanol can assist in lessening the effects of the 
blend wall in the marketplace. But, as fuel suppliers and policymakers, 
we need to be sensitive to these dynamics to ensure that consumer 
expectations continue to be met.

Closing Comments
    I want to thank the Committee for giving me the opportunity to 
share our thoughts on the issues and challenges facing the advanced 
biofuels industry. BP appreciates the energy security, economic, and 
environmental challenges faced by the U.S., and wants to be a part of 
the solution.
    I am convinced that the biofuels industry has the potential to make 
a positive contribution to energy security, climate change mitigation 
and rural development. Biofuels today play a key role in delivering 
sustainable transport fuels to U.S. motorists and will continue to do 
so well into the future.
    BP is committed to working with Congress and others to address the 
energy and environmental needs of this nation through comprehensive 
energy policy solutions. BP believes we must have an all the above 
strategy to meet the growing demand for energy around the world and 
biofuels is a key component to that strategy.

    The Chairman. Thank you.
    Mr. Roe.

STATEMENT OF WILLIAM J. ROE, PRESIDENT AND CEO, COSKATA, INC., 
                        WARRENVILLE, IL

    Mr. Roe. Thank you, Mr. Chairman.
    My name is Bill Roe and I am the President and CEO of 
Coskata, an Illinois-based company that has developed and is 
commercializing a process to produce lower cost fuel-grade 
ethanol from a wide variety of non-food raw materials. I thank 
the Subcommittee for the opportunity to speak with you today 
about the future of biofuels in this country. My comments and 
recommendations here are being delivered on behalf of my 
company.
    In my opinion, there are three fundamental questions that 
any developer and producer of next generation biofuels must be 
able to answer affirmatively. First, can the alternative fuel 
compete with gasoline without need for long term government 
initiatives and subsidies? Two, can the technology scale 
commercially and create sustainable jobs in the process? And 
three, does the alternative fuel have a lifecycle environmental 
footprint that is significantly better than that of petroleum-
based fuels? Now, there is fact and there is fiction in terms 
of how some would answer these fundamental questions, and if 
there is one thing that I would like to be able to convey today 
it is that there are companies that can answer these questions 
affirmatively. We all need to be able to discern some of the 
positive realities from the often incorrect critical rhetoric 
that surrounds the subject of biofuels.
    So a little bit of industry landscape, first let me suggest 
that the biofuel industry is best thought of as one in 
transition. First generation of biofuels in the U.S. has 
consisted principally of ethanol produced from corn and 
biodiesel derived substantially from materials like soybeans. A 
really remarkable job was done, particularly over the past few 
years, in getting somewhere between 10 and 12 billion gallons 
of production capacity in place. That said, there are 
restrictions and limitations, some real, some imaginary that 
are impeding the further expansion of first generation 
capacity. The current RFS caps conventional biofuels at 15 
billion gallons per year, which is just slightly over the 
current U.S. capacity. So the key to the future of biofuels is 
going to be the feedstock flexibility of emerging technologies 
and the availability of alternative feedstocks.
    There are a host of cellulosic and other advanced biofuel 
technologies that have emerged over the last 2 to 3 years, and 
I describe and categorize them for you in my written testimony. 
Several are showing early commercialization potential and 
others appear technically sound but will be slower to scale. My 
company, Coskata, is commercializing a process to produce low 
cost ethanol with a feedstock flexible process that can use as 
the raw material woody biomass, agricultural waste, waste wood 
and construction and storm debris, purpose-grown energy crops, 
and even municipal solid waste and old tires. The efficiency of 
the process and the low cost of some of the feedstocks allow us 
to produce fuel-grade ethanol that can compete with gasoline at 
today's oil prices even without subsidies.
    Furthermore, the greenhouse gas footprint of our process 
was calculated by Argonne National Laboratories and was found 
to be up to 96 percent lower in lifecycle greenhouse gas 
emissions than the well-to-wheel analysis of that of gasoline. 
And to shatter the myth that biofuels consume more energy in 
their production then they generate, Argonne also calculated 
that the Coskata bioethanol process produces up to 7.7 times as 
much fuel energy as it consumes. The technology is in place. We 
are proving the process at significant scale in our 
demonstration facility in the Commonwealth of Pennsylvania, and 
we have designed the first full-scale plant which we hope to 
finance and begin constructing in the next months. We are not 
alone here. There are a number of other companies in a similar 
position to commercialize promising new production processes.
    So what can you do to help? Everything that I have heard 
this morning suggests that you are really on a lot of these 
points. First of all, ensure that we have a consistent and 
inclusive biomass definition. The Energy Policy Act of 2005, 
ACES of 2007 and the farm bill in 2008 all have different and 
conflicting definitions. Number two, help address the blend 
wall issue. Congress mandated the use of 36 billion gallons of 
renewable fuel by 2022 which can't be realized until the EPA 
lifts the arbitrary blending limit of ten percent in gasoline. 
We urge you to use your influence with the EPA. Third, adopt 
carbon legislation that expressly recognizes biofuels as a 
solution to reduce greenhouse gas emissions and to specifically 
recognize biomass-based fuels as carbon offsets. Four, 
establish a green bank. We commend Congress for including the 
Clean Energy Deployment Administration in the ACES bill but 
believe this Administration should be independent and not under 
the authority of the DOE as suggested in the Senate version. 
Five, extend the cellulosic producer tax credit, this expires 
in January of 2012 and consequently would provide little or no 
impact to even the earliest industry movers. Six, create 
flexibility and modernization of tax credits allowing the 
option to take them as an up-front credit or grant, as was done 
with the solar and wind tax credits, this would help the 
industry to use these to finance projects. And last but not 
least, more needs to be done to develop and promote the 
production of renewable feedstocks.
    So in summary, the biofuel industry is at a tipping point 
with a number of companies on the verge of commercializing 
alternative fuel platforms that are going to reduce our 
dependence of foreign oil, create jobs here that can't be 
exported and dramatically improve the environmental 
sustainability of liquid transportation fuels, and your help in 
creating consistent and enduring policies to facilitate this is 
needed and appreciated. Thanks for allowing me the time.
    [The prepared statement of Mr. Roe follows:]

Prepared Statement of William J. Roe, President and CEO, Coskata, Inc., 
                            Warrenville, IL

    Mr. Chairman and Members of the Subcommittee, thank you for the 
opportunity to appear today to testify about the future of biofuels. My 
name is Bill Roe and I'm the President and CEO of Illinois based 
Coskata, Inc. and my comments and recommendations are being delivered 
on behalf of my entire company. If there is one thing I would like to 
be sure to convey today, it is that there are technologies to allow 
non-grain based biofuels to be produced that will compete with 
gasoline. The United States has been working on non-grain based 
biofuels for more than 20 years, and we believe that a scalable and 
sustainable ethanol solution is now available.

I. About Coskata and its technology
    Coskata is a biology-based renewable energy company, whose 
technology enables the low-cost production of ethanol from a variety of 
input material, including wood biomass, agricultural and municipal 
wastes, new energy crops, and other carbonaceous material.
    We employ a simple, three-step process that can convert these 
feedstocks into ethanol in an extremely energy and cost efficient way, 
while addressing many of the constraints of current renewable energy 
options, including environmental, transportation and land use concerns.

   The first step is gasification: The feedstock is thermally 
        broken down to form synthesis gas (syngas), a mixture of carbon 
        monoxide, hydrogen and carbon dioxide molecules.

   The second step is fermentation: The syngas is sent to a 
        proprietary bioreactor where patented microorganisms consume 
        the gas as food and produce ethanol.

   The third step is separation: Using conventional 
        distillation and dehydration technology, the ethanol is 
        separated from the water, resulting in fuel-grade ethanol.

    Our technology gives us many advantages over conventional gasoline. 
In addition to being able to reduce greenhouse gases by up to 96% over 
conventional gasoline, Coskata's process is among the industry's most 
efficient ethanol conversion technologies. We can produce approximately 
100 gallons of ethanol per dry ton of biomass material. In addition, we 
believe our ethanol will be able to compete directly with gasoline 
without long-term government subsidies. Our feedstock flexibility is a 
key to sustainability, in that the Coskata process is capable of 
utilizing all of the feedstocks named in the Department of Energy's 
``Billion Ton Study''.
    We are currently demonstrating this technology on a significant 
scale at our demonstration facility, located in Pennsylvania. The 
facility represents the successful scale-up of our technology and 
allows Coskata to start building and licensing commercial facilities. 
This is a major accomplishment for our company, and was a critical step 
that was necessary before bringing the process to full commercial 
scale.

II. Biofuel Industry Landscape
    The biofuel industry in late 2009 is best thought of as an industry 
in transition. The first generation of U.S.-manufactured biofuels that 
have been derived from corn, sugar cane, soybean oil, etc., have been 
defined both in terms of present and potential future impact. Further 
expansion of ethanol produced from corn or biodiesel produced from 
soybeans is unlikely to be substantial, the limitations primarily 
stemming from the availability and cost of the actual feedstock 
materials. However, next-generation technologies are being developed 
and commercialized, using a much wider variety of input materials that 
will be available at a lower cost than materials grown primarily for 
food.
    In 2007, a mandate was created by Congress in the form of the 
Energy Independence and Security Act, which defines the requirements 
for the production of 36 billion gallons of renewable fuel by 2022. 
That 36 billion gallon requirement breaks down to:

   15 billion gallons of ``conventional'' renewable biofuel.

   16 billion gallons of cellulosic biofuel.

   5 billion gallons of other ``advanced'' biofuel.

    At this juncture in late 2009, there is an estimated capacity to 
produce ``conventional'' renewable biofuel (for the most part ethanol 
derived from corn) in the range of 12 billion gallons, not all of which 
is operating. At this same point in time, there is essentially no 
material production capacity on line for either cellulosic biofuel or 
other advanced biofuels. That said, since the EISA mandate came into 
being, there has been tremendous activity in both the private and 
public sectors to develop the technology platforms necessary to meet 
the requirements, and some of the more promising are now beginning to 
scale to commercial levels.
    The technologies that are emerging include, but are not limited to, 
the following:

   Cellulosic biofuel technologies

    Ethanol from enzymatic hydrolysis of cellulose + fermentation

    Ethanol from acid hydrolysis of cellulose + fermentation

    Ethanol from biomass gasification + catalytic conversion of

    syngas

    Ethanol from gasification + biological conversion of syngas

    Butanol from enzymatic hydrolysis of cellulose + fermentation

    Synthetic diesel from gasification + catalytic conversion of syngas

    Synthetic crude oil from biomass catalytic cracking or pyrolysis

    Hydrocarbon fuels from bio-fermentation of sugars

   Other advanced biofuel technologies

    Synthetic hydrocarbons or alcohols from algae

    Hydrocarbon fuels from conversion of animal waste or by-products

    Hydrocarbon fuels from food waste including recycled oils/greases

    Ethanol from fermentation of sugars from non-corn feedstocks

    In our opinion, many of these emerging technologies are showing 
promise, and some will commercialize faster than others. None, however, 
will scale quickly enough to enable the industry to meet the current 
requirements of the RFS in the early years. There are several companies 
with technologies that are sufficiently advanced that are going to 
commercial scale now, and can have a significant impact on meeting the 
requirements for cellulosic and other advanced biofuels in the 2016-
2017 time-frame.
    The commercialization of ``next-generation'' biofuels was expected 
to be faster, and there are several factors that have slowed progress. 
First, the incubation and maturation of some of the technology 
platforms has taken longer than many anticipated. Second, the collapse 
of the credit markets all but stopped the advancement of early 
commercial projects. While the DOE and USDA have sponsored grant and 
loan guarantee programs to assist companies in the alternative energy 
space to finance their endeavors, very few awards have gone to biofuel 
companies, and the few that did have not yet been acted upon. And 
third, the commercialization rate of new biofuel technologies has been 
hampered in some measure by the lack of consistent government policy. 
For example, the current blending limit established by the EPA for 
ethanol in gasoline for use in conventional automobiles is ten percent, 
which has created the so-called ``blend wall,'' and is inconsistent 
with the mandate established in the current Renewable Fuel Standard. 
Biofuel developers have been therefore unable to plan future projects 
in the absence of a more consistent and long-range policy from the 
government.
    While there have been challenges, we believe that despite those 
challenges the U.S. is at the cusp of being able to move forward 
rapidly in the near term. It has been our belief that any developer of 
new alternative transportation fuels has to be able to answer three 
fundamental questions affirmatively:

    1. Can the process compete with gasoline economically, without the 
        aid of long-term government incentives and subsidies?

    2. Can the technology commercially scale in a sustainable manner?

    3. Does the production and use of the alternative fuel have a 
        significant positive environmental impact over the entire 
        lifecycle of the fuel?

III. Building a Sustainable Biofuels Industry
    There are technologies that are scalable today that allow 
affirmative answers to the above questions. And there are companies 
that are capable of scaling new technologies that will:

   Compete with oil and allow the U.S. to reduce our dependence 
        on foreign oil

   Scale effectively and sustainably while creating new jobs 
        around the country

   Replace petroleum-based fuels with alternatives that are 
        environmentally sustainable over their entire lifecycle
Advanced biofuels can compete with and reduce the consumption of oil
    When taking into account a few assumptions, cellulosic biofuels can 
compete directly with oil when prices are in the $70-$90 per barrel 
range.\1\ With oil prices currently around $80 per barrel and the 
Energy Information Administration (EIA) predicting the price per barrel 
to settle around $130 over the next 20 years,\2\ the industry is 
feeling confident in its ability to compete with oil without long-term 
government subsidies.
---------------------------------------------------------------------------
    \1\ Sandia National Laboratories, 90-Billion Gallon Biofuel 
Deployment Study. February 2009.
    \2\ Information Administration (EIA), Annual Outlook 2009. DOE/EIA-
0383. Washington, D.C., June 2009
---------------------------------------------------------------------------
    By economically competing with oil, advanced biofuels have a real 
opportunity to reduce our dependence on oil by reducing imports. In 
fact, advanced biofuel production under the RFS could reduce U.S. 
petroleum imports by approximately $5.5 billion in 2012, $23 billion in 
2016, and nearly $70 billion by 2022. The cumulative total of avoided 
petroleum imports over the period 2010-2022 could exceed $350 
billion.\3\
---------------------------------------------------------------------------
    \3\ BIO Economic Research Associates, U.S. Economic Impact of 
Advanced Biofuels Production: Perspectives to 2030. February 2009.
---------------------------------------------------------------------------
    In addition to the obvious economic benefits, this enormous 
reduction would provide tremendous socioeconomic and geopolitical 
benefits. Given that the U.S. imports more than 65% of our oil--much of 
it from countries who don't share our same political and economic 
beliefs--being able to produce fuel from materials we grow and/or 
gather within our borders will keep dollars in the United States, as 
well as serving to create and maintain jobs.
    The biggest hurdle we face as an industry is the lack of project 
finance to start building early-stage facilities. The issue is no 
longer that advanced biofuels are 5-10 years away from being cost 
competitive. They are competitive today, but we need help getting the 
first facilities off the ground in the face of difficult capital 
markets.
Advanced biofuels can scale effectively and sustainably while creating 
        jobs
    For biofuels to make a meaningful impact, it's critical that we're 
able to scale rapidly and sustainably. As I stated earlier, it is 
unlikely the industry will meet the mandate of 100 million gallons of 
cellulosic ethanol by 2010. However, because several feedstock-flexible 
companies in the industry are ready to go to commercial scale now, it's 
very conceivable that the industry will still meet the full RFS mandate 
by 2022.
    Feedstock flexibility is a major component of why we believe the 
industry will not only be able to scale rapidly, but more importantly, 
will be sustainable over time. One major lesson we have learned from 
the corn ethanol and biodiesel businesses is that being dependent on 
only one feedstock can not only lead to a volatile price structure, but 
it also places geographic production restrictions that lessen the 
overall environmental profile of the fuel.
    This is why it is essential for the biofuel industry to be early 
adopters of a feedstock flexible approach toward conversion 
technologies. Only by using a diverse array of feedstocks will the 
industry be able to convert the 1.3 billion tons of renewable biomass 
that is available each year \4\ and do so without significant land use 
changes.\5\ This approach affords two main benefits:
---------------------------------------------------------------------------
    \4\ U.S. Department of Energy and U.S. Department of Agriculture, 
Biomass as Feedstocks for a Bioenergy and Bioproducts Industry: The 
Technical Feasibility of a Billion-Ton Annual Supply. April 2005.
    \5\ Sandia National Laboratories, 90-Billion Gallon Biofuel 
Deployment Study. February 2009.

    1. It helps reduce the exposure to commodity price volatility, 
        which has recently been a major problem for grain-based fuel 
        producers. This reduction in exposure is essential to keep 
---------------------------------------------------------------------------
        prices steady and ensure long-term viability.

    2. It allows for geographic flexibility and therefore a wider 
        distribution of the economic benefits associated with its 
        adoption. Companies with feedstock agnostic technologies can 
        build facilities all over the country: the Southeast, where 
        wood biomass is abundant; the Midwest, where they produce ample 
        amounts of agricultural waste; or large urban areas, with high 
        volumes of municipal solid waste. That way, when the advanced 
        biofuels industry grows to the levels established in the 
        Renewable Fuel Standard, the more than 800,000 new jobs that 
        will be created \6\ can be spread from coast-to-coast in 
        sectors of the economy that have experienced the highest rates 
        of job losses over the past year, including agriculture and 
        construction.
---------------------------------------------------------------------------
    \6\ Ibid.
---------------------------------------------------------------------------
Advanced biofuels are environmentally beneficial over their entire 
        lifecycle
    It is no surprise that one of the main reasons government policy is 
being established to promote the growth of the biofuel industry is 
because of its clear environmental superiority over petroleum. In fact, 
cellulosic ethanol on average has the ability to reduce GHGs by 
anywhere from 50-96%. That means 60 billion gallons of ethanol could 
provide annual GHG savings of 260 million tons of CO2e per 
year. This is equivalent to shutting down 45 coal-fired power 
plants.\7\
---------------------------------------------------------------------------
    \7\ Sandia National Laboratories, 90-Billion Gallon Biofuel 
Deployment Study. February 2009.
---------------------------------------------------------------------------
    For Coskata, Argonne National Labs performed a ``Well-to-Wheel'' 
analysis to determine the true carbon reductions possible with our 
technology. They found that our technology has the ability to reduce 
greenhouse gas emissions by up to 96% versus conventional gasoline when 
looking at the entire lifecycle of the process. As we've learned from 
our grain-based pioneers, viewing the environmental impact through the 
prism of the entire ``lifecycle'' is fundamental.
    Another important area not to be overlooked is water use in the 
industry. According to a water study performed by Argonne National Labs 
in 2009, 3-6 gallons of water are used for every gallon of gasoline 
produced in the U.S. We believe that we will be able to produce a 
gallon of ethanol using less than 2 gallons of water from a wet ton of 
biomass, and that our industry partners are not far away. Water issues 
are only growing in importance, and as an industry we remain committed 
to utilizing water in a sustainable way.

IV. We need enduring government policy
    Congress has been prolific in recognizing the tremendous benefits 
that advanced biofuels can contribute. The passage of EISA in 2007 and 
the 2008 Farm Bill have allowed significant progress for our industry 
in establishing market demand for our product and providing various 
incentives for its production. However, we believe Congress has a great 
opportunity, and indeed an obligation, to establish enduring policy 
that will catapult our industry forward, and ensure that it can deliver 
on these promises. We believe the focus of such an enduring policy 
should be three-fold:

    1. Ensure consistent, transparent and fair regulatory regimes 
        governing our industry.

    2. Establish alternative financing mechanisms for the impending 
        technology roll out.

    3. Ensure the entire supply chain is ready for scale up.
Consistent, transparent and fair regulatory regimes
    Biofuels producers have had a hard time planning future projects 
because of the lack of a consistent, transparent and fair government 
policy toward biofuels. This includes a consistent and inclusive 
biomass definition, an easing of the current ``blend wall,'' and a 
uniformly applied methodology to calculate carbon benefits.

   Ensure consistent and inclusive biomass definition-- The 
        EPAct 2005, EISA 2007 and Farm Bill 2008 all have different 
        definitions for acceptable ``Renewable Biomass.'' In order to 
        avoid roadblocks down the road, we urge Congress to set an 
        inclusive definition of biomass to be used by all Federal 
        agencies and set a level playing field allowing the best 
        technologies to compete. Such a definition should be as 
        inclusive as possible, so as to not artificially limit the 
        potential supply of advanced biofuels. Specifically, the 
        Renewable Biomass definition across regulations should include 
        all forms of wood and waste, including those produced on 
        Federal Lands, Construction and Demolition Debris (C&D), and 
        Municipal Solid Waste (MSW). Congress should also limit the 
        record keeping requirements with regard to biomass origins on 
        biofuel producers, and ensure that those record keeping 
        requirements are consistent across all other biomass-based 
        industries such as renewable power generation.

   Address the blend wall--Congress mandated the use of 36 
        billion gallons of renewable fuel by 2022. This mandate will 
        not be realized unless the government removes artificial 
        restrictions on ethanol and approves the use of higher ethanol 
        blends in America's vehicles. We urge Congress to urge the EPA 
        to lift the arbitrary limit on ethanol, especially considering 
        the science supports the use of E15.

   Carbon offsets and credits--We urge Congress to adopt carbon 
        legislation that expressly recognizes and encourages biofuels 
        as a solution to reduce greenhouse gas emissions. Specifically 
        we ask that the biofuel component of fuel blends be excluded 
        from the cap since biofuels are already regulated under the 
        Renewable Fuel Standard. We also urge Congress to continue to 
        recognize the carbon neutrality of biofuels and to specifically 
        recognize the ability of biomass based fuels as carbon offsets.

    We commend you and your colleagues in the House of Representatives 
for recently passing the American Clean Energy and Security bill 
(ACES), which goes a long way towards addressing these Renewable 
Biomass and carbon issues, and we encourage your colleagues in the 
Senate to follow your example.

Establish alternative financing mechanisms for technology roll out
    While there have been some efforts aimed at encouraging commercial 
scale development within the industry, it is our experience that most 
of these programs have fallen far short of expectations. The industry 
could benefit from new policies that encourage investment and ensure a 
stable market for biofuels in the future. The technologies are ready, 
but the U.S. Department of Energy's expectations for credit risk 
profiles are unreasonable. We need to establish new funding mechanisms 
to deploy new energy technologies and provide new energy companies a 
way to utilize tax credits.

   Establish a Green Bank--We commend Congress for including 
        the Clean Energy Deployment Administration (CEDA) in the recent 
        passage of the ACES bill. We believe CEDA will be instrumental 
        for accelerating the deployment of advanced biofuels. In order 
        to maximize the effectiveness of this new entity, we believe 
        this Administration must be independent and modeled on 
        successful public-private financial institutions such as the 
        Export-Import Bank and not be under the authority of the 
        Department of Energy as suggested in the Senate version of the 
        legislation.

   Extend cellulosic producer tax credit--Under current law, 
        the production tax credit for cellulosic biofuels is only 
        available for eligible fuel produced before 1/1/2012. This 
        constitutes a significant impediment to investment considering 
        only few commercial cellulosic facilities will be placed into 
        service by that time. By amending section 40(b)(6)(H) to cover 
        all fuel produced before 1/1/2022, Congress would help 
        stimulate private investment by incentivizing these innovative 
        technologies. In addition, the current structure of this 
        credit--the VEETC excise tax credit available to blenders with 
        the balance as a producer tax credit (PTC)--creates unnecessary 
        confusion over the total value of the PTC since it is dependent 
        on the value of the VEETC, going forward. Congress could help 
        by amending section 40(b)(g)(H) to remove the VEETC component, 
        making the entire value of the PTC available to cellulosic 
        ethanol producers.

   Allow flexibility in the monetization of tax credits--
        Biofuel tax credits are currently very difficult to monetize, 
        causing capital hungry start-ups to sell their tax credits at a 
        substantial discount (>40%) if they can find a counterparty at 
        all. Instead, Congress should re-structure these credits to 
        allow the option of taking them as a one time, up-front, 
        investment tax credit/grant that can be used to finance 
        projects, mirroring the solar and wind industry PTCs.

Ensure the entire supply chain is ready for scale-up
    In order to make a meaningful impact on the country's overall 
energy mix, Congress must invest in both the front and back end supply 
chains.

   Ensure proper feedstock development--Help initiate 
        demonstration projects throughout the country for the 
        establishment, production, harvest, collection, storage and 
        transportation of cellulosic feedstocks. We commend Congress 
        and the USDA for their work in this area and look forward to 
        seeing positive impacts from the Biomass Crop Assistance 
        Program (BCAP) and some of the recent grant programs from the 
        U.S. Department of Agriculture.

   Fund investments in fuel delivery infrastructure--Although a 
        fair level of infrastructure is already in place, it's 
        important for Congress to continue fostering the development of 
        flex fuel vehicles, rail expansion, construction of blending 
        facilities and E85 fuel pumps.

V. Conclusions
    The biofuel industry is now at a tipping point. Many technologies 
are showing tremendous promise and are going to commercial scale now. 
Our technologies can compete with gasoline without long-term government 
subsidies, can scale rapidly and sustainably, and can help deliver real 
environmental benefits. The leading venture capital and private equity 
investors in the world are putting their money behind the industry. 
With the help of government policy, even major oil companies are now 
seeing the benefits of investing in feedstock-flexible ethanol 
technologies. We have the ability to meet the primary energy goals of 
Congress by reducing our dependence on oil, ensuring environmental 
sustainability, and creating jobs in every corner of the country. What 
we need is enduring government policy that will help stimulate the 
significant capital investment that it will take to ensure this change.
    Thank you for the opportunity to present today. We look forward to 
working with Members of Congress and the entire industry in bringing a 
sustainable alternative to oil to the world.

    The Chairman. Thank you.
    Mr. Jamerson.

 STATEMENT OF BRUCE A. JAMERSON, CHAIRMAN, BOARD OF DIRECTORS, 
                MASCOMA CORPORATION, LEBANON, NH

    Mr. Jamerson. Thank you, Mr. Chairman, and Members of the 
Subcommittee. I appreciate the opportunity to testify. Thank 
you for the opportunity to be here today.
    Mascoma is an energy biotech company. We have corporate 
offices and a large R&D lab in Lebanon, New Hampshire. We have 
a fully operative demonstration plant in Rome, New York, and we 
are developing our first commercial scale plant in northern 
Michigan. We were founded 4 years ago. We have raised about 
$100 million of equity investment. We have 100 employees, about 
75 are scientists. Our Consolidated BioProcessing Method 
converts non-food feedstocks such as woody biomass, sugarcane 
bagasse, corn stover and energy grasses into low carbon 
cellulosic ethanol. Our Kinross, Michigan biorefinery is in a 
rural area. Once operational, it will employ 50 to 60 highly 
skilled people and according to the State of Michigan the 
construction, maintenance and operation of the facility will 
create approximately 450 indirect jobs for a total of about 500 
regional jobs over the next 5 years.
    I am going to talk about our experience with the USDA loan 
guarantee program. Given the current loan structure at the USDA 
and the challenging credit markets, banks are reluctant to 
provide project financing and to use the loan guarantee program 
as currently structured. We applied for the guarantee. We 
approached 174 commercial lenders. Only two of them were 
willing to work with us. We selected one but in the end they 
were unable to move forward due to structural challenges with 
the loan guarantee program. I am going to give you some detail 
on those concerns.
    For example, as the project size increases, the loan 
guarantee amount reduces so that discourages larger projects. 
There is a requirement to hold a minimum. The bank has to hold 
a minimum of 50 percent of the non-guaranteed portion of the 
loan that has to have the same terms for the non-guaranteed and 
guaranteed portion of the loan. They limit to one percent the 
difference between the guaranteed portion and the full loan 
amounts. We also, think that we should be able to use the 
Federal Financing Bank instead of having to seek commercial 
banks to allow the guarantee to apply to a revolving credit 
facility for working capital, and to be able to replace the 
non-guaranteed portion of the loan with equity or subordinate 
debt. So those are some comments I would have on changing the 
program.
    While it is not the jurisdiction of the Committee, I would 
echo what Bill said about the investment tax credit that the 
wind and solar industry have obtained that is refundable 
through a monetized Treasury Department grant. This mechanism 
has proven to be very effective for jump-starting renewable 
electricity projects in wind and solar, and we believe that a 
similar 30 to 40 percent refundable investment tax credit for 
advanced biofuels would be very significant in attracting 
private equity to the sector. We are very grateful for the 
Federal support of commercial cellulosic biofuels and we are 
confident in our technology. We have invested a lot in it, 
however given economic conditions we will need continued 
Federal commitment to support the industry. Thank you.
    [The prepared statement of Mr. Jamerson follows:]

Prepared Statement of Bruce A. Jamerson, Chairman, Board of Directors, 
                    Mascoma Corporation, Lebanon, NH

    Good morning, Mr. Chairman and Members of the Subcommittee. I 
appreciate the opportunity to testify on behalf of Mascoma Corporation 
today. I have been active in the biofuels industry since 2001, having 
previously served as President of corn ethanol producer VeraSun Energy 
and CEO of Mascoma.
    Mascoma Corporation is an innovative biofuels company committed to 
developing environmentally sustainable, low cost, low carbon biofuels 
from cellulosic biomass. The company's corporate office and R&D 
laboratories are based in Lebanon, New Hampshire. Mascoma is producing 
cellulosic ethanol on a demonstration scale at its facility in Rome, 
New York. Its affiliate, Frontier Renewable Resources, is developing a 
commercial scale production facility in Kinross, Michigan.

Background on Mascoma's Technology and Facilities
    As being described today, there are a number of different 
technologies that may be used to transform excess and waste biomass to 
ethanol, and long term, to other biofuels and biochemicals. Depending 
upon available feedstocks and other region and site-specific factors, 
different cellulosic conversion processes will better suit specific 
regions of the country. For example, wood chips may be used in northern 
climates, sugar cane in the Gulf Coast, and corn stover in the Midwest. 
A diverse portfolio of technologies and fuels will be required to meet 
the United States liquid fuels demand in the coming years, and Mascoma 
is confident that we can meet that challenge. We know that the 
technologies exist to convert cellulosic material into fuels. Our focus 
now is to scale up our process to operate on a cost competitive 
commercial basis.
    Mascoma's Consolidated BioProcessing method converts non-food 
biomass feedstocks into cellulosic ethanol through the use of a 
patented process that eliminates the need for costly enzymes and 
additives. This transformative technology enables ethanol competitively 
priced with gasoline to be derived from cellulose in a manner not 
previously possible. The processing steps involve:

    1. Sustainable harvesting of pulpwood (the feedstock we are using 
        in our first plant).

    2. Pulpwood chipping.

    3. Pretreating the feedstock by cooking and processing the wood 
        chips into a softened material (similar to peat moss).

    4. Combining the pretreated material with proprietary 
        microorganisms in a fermenter, and fermenting the cellulose 
        into ethanol.

    5. Recovering ethanol and lignin from the process. Cellulosic 
        ethanol is blended with gasoline as a low carbon motor fuel. 
        The unconverted fiber, called lignin, is used as a low carbon 
        boiler fuel or converted into other non-ethanol fuels.

    Since several different biological actions that carry out this 
transformation are consolidated into a single type of microorganism, 
our method is referred to as Consolidated BioProcessing or CBP. The 
technology is derived from an array of molecular tools used to 
manipulate the makeup of the organisms. Unlike other biological methods 
of producing ethanol, Mascoma's CBP process eliminates the need to add 
expensive enzymes used to convert cellulose into the sugars needed to 
produce ethanol. Since enzymes are one of the highest cost components 
of cellulosic ethanol production, eliminating them greatly decreases 
the cost of production.
    Mascoma's aim is to develop the lowest cost technology for low 
carbon cellulose ethanol production that will, in turn, be used in 
commercial scale ethanol facilities in rural America that will create 
new economic opportunities for local feedstock providers, create jobs, 
and lessen our dependence on foreign oil.

Efforts Underway to Develop First Commercial Facility
    Mascoma, in conjunction with J.M. Longyear, is actively developing 
the first commercial scale production facility through its affiliate 
Frontier Renewable Resources in Kinross, Michigan. The facility will 
utilize sustainable, lower-value wood products such as pulpwood chips 
to produce up to 80 million gallons of cellulosic ethanol per year. We 
have spent considerable time analyzing feedstock availability to ensure 
sufficient supplies of pulpwood. The feedstock supply will exclude wood 
chips from sawlogs or veneer logs, which are too valuable for use in 
biofuel production.
    I want to thank the Committee for its leadership and work to 
reconcile the definitions of renewable biomass included in the 2008 
Farm Bill and the Renewable Fuels Standard in the 2007 Energy Bill. The 
clarification included in the American Clean Energy and Security Act of 
2009 is of significant help to us in obtaining our feedstock supply.
    We have made substantial strides forward in developing the Kinross 
site by combining significant private capital with grant assistance 
from both the State of Michigan and the United States Department of 
Energy Office of Energy Efficiency and Renewable Energy's Biomass 
Program. Site acquisition and preliminary design engineering are 
complete. Key technology milestones are on track. Significant progress 
has been made on environmental and permitting processes. Letters of 
intent for construction and off-take agreements are in place.
     The Kinross biorefinery will be located in a rural area in the 
Upper Peninsula of Michigan. The plant will be constructed on a site 
near a decommissioned U.S. Air Force base. Kinross Township is located 
in Chippewa County, Michigan, a sizable rural county of 2,700 square 
miles. At the time of the 2000 U.S. Census, Chippewa County had a 
population of only 38,543, while Kinross Township had a population of 
5,922. The construction and operation of a cellulosic ethanol plant in 
this area will create jobs and develop demand for underutilized 
regional hardwood timber resources, providing support for the local 
economy within a 150 mile or greater radius. Once operational, the 
plant will employ an estimated 50-60 highly skilled people. According 
to the State of Michigan, the construction, maintenance, and operation 
of this facility will create approximately 450 indirect jobs, for an 
estimated total of 500 regional jobs created by this project over the 
next 5 years. After the financial success of the facility is proven at 
20 million gallons of cellulosic ethanol production per year, further 
expansion of the facility up to 80 million gallons per year is 
anticipated. This future expansion will amplify the longevity of new 
jobs created by this activity.
    Like the other cellulosic companies, we continue efforts to secure 
sufficient financing to complete the project. The first commercial 
biorefineries capable of producing 20 to 40 million gallons of 
cellulosic biofuel per year will cost more than $200 million to 
construct. These commercial scale facilities, once under operation, 
will lead to rapid de-risking of the technology, and open the path to 
significant cost reductions as operating data becomes available and 
larger scale plants are constructed. Securing financing for a first-of-
a-kind facility is often challenging. The difficult capital market 
conditions over the past year and a half have made financing even 
tougher, particularly for commercial debt financing. Thus, continued 
Federal Government support is critical to keep the cellulosic fuels 
industry on track to meet the production mandates of the RFS and meet 
the promise of new jobs, less dependence on imported fuels, and 
enhanced national security.
Experiences With USDA and DOE Loan Guarantee Programs
    The USDA and DOE loan guarantee programs could be valuable tools to 
help commercialize new technologies. Unfortunately, they have not, to 
date, proven to be the catalyst for quickly developing commercial scale 
cellulosic facilities.
    Given the current USDA loan guarantee structure, challenging credit 
market climate, and new technology of cellulosic projects, banks are 
reluctant to provide project financing and to use the USDA loan 
guarantee program to fund commercial scale cellulosic ethanol projects. 
Earlier this year, Mascoma and its financial advisors contacted 174 
commercial lenders seeking a bank partner to apply for a USDA loan 
guarantee for the Kinross project. We spent significant time and money 
on the loan guarantee application process. Only two lenders were 
willing to work with us. We selected one, but in the end were unable to 
move forward due to structural problems with the USDA loan guarantee 
program requirements. Other first-mover cellulosic companies had 
similar experiences with their projects.
    Lenders told us that they need several adjustments to the USDA loan 
guarantee program in order to meet their credit and pricing guidelines. 
For example, as the project size increases, the loan guarantee amount 
reduces. This discourages larger projects with more impact on jobs, 
climate and energy independence. Other areas that need addressing 
include:

   holding a minimum of 50% of the non-guaranteed portion of 
        the loan;

   requiring identical terms for the non-guaranteed and 
        guaranteed loan portions despite much different risk profiles; 
        and

   limiting to 1% the difference between the interest rate on 
        the guaranteed portion of the loan and the weighted average 
        interest rate of the full loan amount.

    In addition, we recommend several other program improvements that 
would improve funding prospects:

   allowing biorefinery applicants to use the Federal Financing 
        Bank as the sponsor lender, similar to the DOE loan guarantee 
        program;

   authorizing guarantees of a revolving credit facility for 
        project working capital needs;

   allowing the replacement of the non-guaranteed portion of 
        the loan with equity or subordinated debt at market rates to 
        provide more flexibility and options in the financing 
        structure; and

   increasing the percentage of guaranteed debt for projects 
        over $125 million to enhance recruitment of sponsor bank 
        support.

We are working with other industry leaders to encourage USDA to address 
these issues moving forward.
    We appreciate this Committee's efforts to create a workable loan 
guarantee program at USDA and hope the Department of Energy's loan 
guarantee program will also evolve to eliminate present, although 
perhaps unintended, significant hurdles for developing commercial 
cellulosic ethanol facilities. In the most recent round of 
applications, it seems to us that DOE may have applied the same 
evaluation criteria for both mature and developing technologies. This 
has the consequence of bias in favor of mature technologies and 
companies versus new ones like advanced cellulosic fuels.
    The cellulosic industry will develop as quickly as the first plants 
are constructed and proven. To speed the current trajectory of 
construction, more direct, risk-tolerant assistance will be required.

Refundable Investment Tax Credit Would Encourage Equity Investment
    While not within the jurisdiction of this Committee, I want to 
briefly raise a concept that a coalition of several leading ethanol 
companies, including Mascoma, are advocating. The American Recovery and 
Reinvestment Act of 2009 included a provision making the Investment Tax 
Credit for renewable electricity generation, including wind and solar, 
refundable through a monetized Treasury Department grant. To date, over 
$1 billion has been awarded through this program to help develop 
renewable energy projects across the country. This mechanism is proving 
to be an effective and efficient means of jump-starting development of 
renewable electricity projects. We believe that providing a similar 30 
to 40 percent refundable investment tax credit for advanced biofuels 
projects would be significant in helping attract private capital needed 
to build the next generation commercial production facilities.
    As we look at the RFS2 mandated levels of advanced and cellulosic 
fuels in the near term, it is critical that the first wave of 
cellulosic ethanol facilities close their financing and begin 
construction as quickly as possible. Given the current constraints of 
the USDA and DOE loan guarantee programs, a monetized investment tax 
credit is one of the few policy mechanisms that can be employed in a 
timely manner to help ensure cellulosic ethanol production capacity 
comes on line in time to comply with the mandates of the RFS.

Conclusion
    We, at Mascoma, very much appreciate the significant Federal 
support to help develop a commercial cellulosic biofuels industry. We 
are confident in our technology and our ability to produce cellulosic 
biofuels in a cost-competitive manner and appreciate the ability to 
leverage Federal support moving forward. From significant investment of 
funds in the 2008 Farm Bill's energy title for advanced biofuels, to 
the expanded Renewable Fuels Standard in the 2007 Energy Bill, to the 
cellulosic ethanol production tax incentive, to Department of Energy's 
grant funding, Congress has provided important support to help this 
industry succeed.
    However, given the current economic conditions, we will need 
continued Federal involvement and commitment to seeing the promise of 
the cellulosic industry come to fruition. I look forward to continuing 
to work with the Committee in that regard.
    Thank you.

    The Chairman. Thank you.
    Mr. Shealy.

 STATEMENT OF L. CRAIG SHEALY, PRESIDENT, CEO, AND CO-FOUNDER, 
             OSAGE BIO ENERGY, LLC, GLEN ALLEN, VA

    Mr. Shealy. Good afternoon. Thank you, Chairman Holden, and 
distinguished Members of the Subcommittee.
    My name is Craig Shealy and I am the Co-Founder and 
President and CEO of Osage Bio Energy based in Glen Allen, 
Virginia. Thank you for extending us the privilege of 
addressing you today on the future of second and third 
generation biofuels. I would like to provide a brief background 
on Osage and discuss our positive impact on agriculture, review 
several key challenges that are facing Osage and the biofuels 
industry, and conclude with a few specific policy 
recommendations on these challenges.
    Osage was formed in January of 2007 to build market-based 
ethanol plants on the East Coast. Each plant will employ proven 
bioprocessing technologies and carries a capital investment of 
approximately $200 million who will employ approximately 55 
people. Our plants will be optimized around local winter barley 
but can also process a variety of small grain feedstock. Last 
fall Osage broke ground on its first plant in Hopewell, 
Virginia. The Hopewell plant will be operational in May 2010, 
and will be the only commercial scale barley-fed ethanol plant 
in the United States. Our process uses state of the art 
technologies from a number of industries to create four 
marketable products, 65 million gallons of motor fuel grade 
ethanol, approximately 50,000 tons of renewable biomass fuel 
pellets made from the barley hulls, 170,000 tons per year of 
barley protein meal, actually an offset for soybean meal, and 
150,000 tons per year of food grade liquid CO2.
    Osage is a deployment and operations company. While other 
companies work on developing tomorrow's second and third 
generation technologies, our goal is to deploy the best 
technology available and incorporate it into a commercial scale 
operating plant. We look forward to the successes of our 
technology counterparts, hoping that someday very soon we will 
have the opportunity to bring their technologies to commercial 
scale reality as well.
    Each Osage barley project will create an immediate annual 
market for 300,000 acres of winter barley. These acres will 
come from relatively under-utilized winter acres, many of which 
are left fallow before a full-season soybean crop. This 
translates into a truly new incremental $100 million annual 
revenue opportunity for the local farming community around each 
of our plants. Many of these farmers also responding to this 
opportunity, particularly around Hopewell are located in the 
Chesapeake Bay Watershed. Winter crops, especially barley are 
promoted in the watershed as common and accepted soil and water 
conversation practice, and the Chesapeake Bay Commission has 
spoken out publicly in support of our project. The use of 
barley as a feedstock contributes to positive and accepted land 
use practices and actually avoids indirect land use change. The 
bottom line is our projects have positive land use effects and 
avoid negative implications associated currently with ILUC, and 
keep farmers on the farm.
    The challenges we face in the industry as a whole we can 
enumerate in several key areas. The first as has been mentioned 
before, there is a complete absence of financial market 
liquidity for future projects. We are actually having to 
finance our first project out of 100 percent equity. There is 
currently an inability in the industry because of this to meet 
the RFS2 advanced biofuel carve out. Furthermore, there is a 
great market uncertainty as has been referenced by my 
colleagues here on the panel due to the E10 blend wall. The 
reality is that maintaining this cap will have the impact of 
rendering second and third generation advancements meaningless 
as there will be no market driven reason to deploy them. 
Additionally, the declining value and pending elimination or 
expiration of the blenders tax credit is also forcing great 
uncertainty into the industry.
    Existing Federal programs that could bridge the financial 
downturn are either too restrictive or too structured around 
specific technologies and exclude commercial scale biofuel 
projects from eligibility. One example is of the recent DOE 
loan guarantee program which is very specific around renewable 
electricity, and the other that has also been referenced here 
is the USDA Biorefinery Assistance Program. Our view of that 
program can be summed up as such, in good times you don't need 
it because the banks will provide the capital. In bad times you 
can't use it because the banks want to take zero risk on the 
industry, and, in particular, that is what we see at the 
moment. In addition, RFS2 represents another policy area with 
significant implications in the industry and in an attempt to 
overcompensate for the lack of sound science on lifecycle 
emissions impact to biofuels, RFS2 over complicates the rules 
that govern biofuel markets. Specific examples of this include 
the RFS2's feedstock certification requirement as well as much 
of everything involved around the indirect land use change. In 
addition, we feel strongly that advanced biofuel designation 
should be performance-based, not policy-based. Therefore, 
developers of second and third generation technologies need a 
level playing field with the entire spectrum of feedstock and 
conversion processes at their disposal. Now, RFS2 seeks to 
unnecessarily stovepipe these into a complex matrix of fuel 
pathways, each with their own unique challenges and validation 
requirements.
    In conclusion we recommend the following policy actions. 
First, we have to raise the E10 volume cap through an EPA grant 
of an E15 waiver or at a minimum an intermediate E12 waiver. We 
have to extend the blenders tax credit, and we have to revise 
Federal loan and grant programs to make them more widely 
accessible and applicable, and finally we have to simplify the 
RFS2 by removing ILUC requirements and making it a performance-
based advanced biofuel status. Osage Bio Energy can build high 
performance commercial scale advanced biofuel plants today and 
we are, and we stand ready to deploy second and third 
generation technologies as they emerge from development and 
demonstration phases.
    Thank you very much for the opportunity to talk to you 
today.
    [The prepared statement of Mr. Shealy follows:]

Prepared Statement of L. Craig Shealy, President, CEO, and Co-Founder, 
                 Osage Bio Energy, LLC, Glen Allen, VA

October 29, 2009

U.S. House of Representatives,
Committee on Agriculture,
Subcommittee on Conservation, Credit, Energy, and Research,
Washington, D.C.

RE: Testimony of Craig Shealy, Osage Bio Energy, LLC

    Ladies and Gentlemen,

    Good morning. My name is Craig Shealy, and I am the founder, 
President, and CEO of Osage Bio Energy. Thank you for extending me the 
privilege of addressing you today on the future of second and third 
generation biofuels. I would like to provide a brief background on 
Osage Bio Energy, discuss our positive impact on agriculture, review 
several key challenges facing Osage and the biofuels industry, and 
conclude with policy recommendations on facing these challenges.

1. Company
    Osage was formed in January 2007 to build market-based ethanol 
plants on the East Coast. Each plant will employ proven bio-processing 
technologies and carries a capital investment of approximately $200 
million.
    Our plants will be optimized around local, winter barley, but can 
also process a variety of small grain feedstock. Last fall, Osage broke 
ground on its first plant in Hopewell, Virginia. The Hopewell plant 
will be operational in May 2010 and will be the only commercial scale, 
barley-fed ethanol plant in the United States. Our business model is to 
develop at least two more similar facilities.
    Our process uses state-of-the-art technologies from a number of 
industries, the most important example being in grain processing. 
Incorporating advanced food processing technology, our milling and 
fractionation of barley grain allows us to efficiently process the 
independent grain fractions into high quality product and co-product 
streams. It also allows us to capture the exceptional protein profile 
found in barley, and our specialized processing and drying methods 
preserve this in a high quality livestock meal product.
    We have engineered and packaged these technologies into a unique 
bio-products plant that will create four highly marketable products:

   65 million gallons per year of fuel grade ethanol;

   50,000 tons per year of renewable biomass fuel pellets from 
        barley hulls;

   170,000 tons per year of Barley Protein Meal; and

   150,000 tons per year of food-grade liquid CO2.

    Osage is a deployment company, which distinguishes us from other 
biofuel companies you are hearing from today. While other companies 
work on developing tomorrow's 2nd and 3rd generation technologies, our 
niche is finding the best that is out there and incorporating it into 
the engineering, design, and construction of an operating plant. We 
look forward to the successes of our technology counterparts, hoping 
that someday soon we will have the opportunity to bring their platform 
into commercial scale reality.

2. Agricultural benefits
    Each Osage project will create an immediate annual market of 
300,000 acres of winter barley. These acres will come from 
underutilized winter acres, many of them followed by a full-season 
soybean crop. Winter barley is harvested early enough to allow full-
season beans to follow, providing an ideal double-crop opportunity. 
This translates into an additional cash crop, with a $100 million 
annual revenue opportunity for the local farming community.
    Many of the farmers responding to this opportunity for our 
Hopewell, Virginia plant are located in the Chesapeake Bay Watershed. 
Winter crops are promoted in the watershed as a common and accepted 
soil and water conservation practice. As a winter crop, barley will 
capture remnant nutrients left in soils after the fall crop harvest, 
reducing non-point-source nutrient runoff. The Chesapeake Bay 
Commission has gone on record endorsing our project as a ``generation 
1.5 biofuel'' serving as an ``important stepping stone'' toward 
cellulosic ethanol. The use of barley as a feedstock contributes to 
very positive and accepted land use practices and avoids indirect land 
use change. Furthermore, barley hulls and barley straw have been 
identified as attractive cellulosic feedstock options. Our access to 
this resource provides us valuable and abundant raw materials for our 
entry into 2nd and 3rd generation plant deployment.
    According to the most recent Ag Census statistics, Virginia, alone, 
lost more than 100,000 acres of farmland per year over the 5 year 
Census period. Because winter barley utilizes otherwise idle cropland, 
equipment, and manpower, it can be grown with minimal investment by the 
farmer. Coupled with a clear revenue stream, this may be just what is 
needed to reverse the trend of declining farmland acres. Let's not let 
concrete become the last crop. Bottom line: our projects have positive 
land use effects, avoid negative implications associated with ILUC, and 
keep farmers on the farm.

3. Challenges
    The biofuels industry, as a whole, is challenged on a number of 
fronts:

   Absence of financial market liquidity--Growth opportunities 
        are limited to small, privately funded research and 
        demonstration activities.

   Inability to meet the RFS2 advanced biofuel carve-out--Osage 
        is poised to develop additional commercial scale projects that 
        will meet the greenhouse gas performance standards of advanced 
        biofuels and can be part of the solution to this problem.

   Industry myths and bad press--As the result of efforts of 
        certain advocacy groups and much of the media, biofuels have 
        been given a bad name. Some of the misinformation leads the 
        public to believe that biofuels have negative greenhouse gas 
        impacts and are the culprit for high food prices. To those of 
        us in the industry, the spread of these clear falsities is 
        damaging.

   Market uncertainty--The E10 blend wall represents an 
        industry volume cap and limits growth opportunity and how far 
        ethanol can go in helping to displace imported oil. Maintaining 
        this cap will have the impact of rendering 2nd and 3rd 
        generation advancements meaningless as there will be no market 
        driven reason to deploy them. Additionally, the declining value 
        and pending elimination or expiration of the blenders tax 
        credit (VEETC) is forcing the industry in the direction of 
        increased uncertainty.

4. Policy Issues and Recommendations to Face Challenges
    Existing Federal programs that could bridge the financial downturn 
are either too restrictive or too structured around specific 
technologies, excluding commercial scale biofuels projects from 
eligibility. An example of technology eligibility limitations is the 
recently announced DOE Loan Guarantee program for commercial 
technologies. This program is structured around renewable electricity 
technologies, such as solar and wind, and excludes biofuels from 
eligibility. In fact, it appears to us that DOE is abandoning 
alternative fuels altogether in pursuit of hybrid and battery/electric 
technologies.
    As an example of being overly restrictive, I offer the USDA 
Biorefinery Assistance Program. Osage has spent considerable time in 
researching and trying to apply this program to our projects. Our 
conclusion is this: In good times, you don't need it; in bad times, you 
can't use it. Even in these bad times, Osage stands ready to commit 
$100 million of equity toward a second project. In order to proceed, we 
need $100 million of debt. A 70% BAP loan guarantee of $70 million 
doesn't help, because no bank will take the risk on the remaining $30 
million. In working closely with exciting partnering opportunities in 
South Carolina, Kentucky and Pennsylvania, one approach considered was 
for the state to backstop and guarantee a loan on the remaining $30 
million. Unfortunately, the BAP program restricts this, eliminating it 
as an option. In short, the program doesn't work because of a single 
and rather simple program restriction. (Congressman Holden and Mr. 
Chair . . .), we have been working closely with Lancaster Biofuels on 
their pursuit of a barley-based plant in Lancaster, Pennsylvania. Osage 
is their partner of choice in deploying this project. If we could 
eliminate or waive this one restriction, it could be the single most 
important thing to get us started on our next project.
    The RFS2 represents another policy area with significant 
implications on the industry. In an attempt to overcompensate for the 
lack of sound science on the lifecycle emissions impact of biofuels, 
the RFS2 seeks to overcomplicate the rules that will govern biofuel 
markets. An example is the RFS2 feedstock certification requirement. 
The rule seeks to have all shipments of biofuel feedstock certified to 
ensure it was produced from croplands in existence prior to December 
19, 2007. The purpose of this is to help prevent the creation of new 
bioenergy crop acres through deforestation practices. With no sound 
science to quantify or confirm this, we view this as an unnecessary 
administrative burden that will add cost layers and complexity, with no 
true benefit. Osage feedstock in particular will be sourced from legacy 
farms, many in existence prior to 1807, much less 2007. In fact, one 
participating farm, only 8 miles from our Hopewell, VA plant, was 
founded in 1638. With Renewable Electricity Portfolio standards 
requiring no such certification, biofuels will be placed at a 
disadvantage. Oil companies that bristle at the recent suggestion of 
requiring certification of crude oil country of origin provide a stark 
reminder of the lack of subsidy and regulatory parity within the fuel 
industry.
    The Osage business model is based on the opportunities associated 
with advanced biofuel designation, and we feel strongly that this 
designation should be performance based, not policy based. Osage is a 
member of the Advanced Biofuels Association, and we agree with the 
platform that biofuel-related policies and regulations need to be 
technology neutral, feedstock neutral, and subsidy neutral. Developers 
of 2nd and 3rd generation products need a level playing field with the 
entire spectrum of feedstock and conversion processes at their 
disposal. The RFS2 seeks to unnecessarily stove-pipe these into a 
complex matrix of fuel pathways, each with their own unique challenges 
and validation requirements. The intent of facilitating renewable fuels 
has been completely lost in a policy driven, regulatory complex 
conundrum.
    In conclusion, we recommend the following policy actions:

   In order to develop market certainty, raise the E10 volume 
        cap through the EPA grant of an E15 waiver, or at a minimum an 
        intermediate E12 waiver. This will provide a market reason for 
        companies such as Osage to invest and expand into the 2nd and 
        3rd generation space.

   In order to develop market certainty, extend the blenders 
        tax credit.

   In order to bridge financial market downturns, revise 
        selected Federal programs to make them accessible and 
        applicable to existing commercial scale biofuels technologies.

   In order to facilitate biofuels in the marketplace, simplify 
        the RFS2. As written, proposed rules do more to impede 
        advancement. The complexity of the rules will delay growth and 
        add cost layers to an industry already burdened with thin 
        margins and uncertain economics.

    To be clear, Osage Bio Energy can build high performance, 
commercial scale advanced biofuels plants today, standing ready to 
deploy 2nd and 3rd generation technologies as they emerge from 
development and demonstration phases.
    Ladies and gentlemen, that concludes the testimony of Osage Bio 
Energy. We sincerely thank you for the opportunity to stand before you 
today.
            Very truly yours,

            
            
                               Attachment



     Thank you.Mr. Jamerson, thank you for your comments about the 
problems you see with the loan guarantee program. I hope you had a 
chance to talk to Mr. Tonsager about that.
    Mr. Jamerson. We did.
    The Chairman. Okay, well we will follow up with that as well and, 
Mr. Roe, you are absolutely right about different and conflicting 
definitions. Now, this Committee has worked very hard since H.R. 6 was 
passed, without any input from this Committee, to change that 
definition. We are still trying, with an energy bill moving now, but if 
we are unsuccessful in getting the law changed, how will this impact 
the future of investment in biofuels, for anyone on the panel.
    Mr. Jamerson. Well, first of all there is a lot of chatter around, 
and rightfully so, around the emerging technology platforms but 
ultimately, these technologies will get legs or they won't and at a 
point this all becomes a feedstock game. It is very much a feedstock 
game, so I listened with great interest to our friends from the USDA 
this morning talk a little bit about feedstocks, where they are going 
to come from and their ultimate development. Ultimately, all of the 
rhetoric around the commercialization of processes and technologies is 
hollow unless the definition of the feedstocks is clean and clear, and 
the way is paved for the utilization of those in some sort of a planned 
fashion.
    The Chairman. Anyone else care to comment?
    Mr. Shealy. If I may, our view very strongly is that there needs to 
be, again, a very performance-based approach where we model the true 
GHG impact of any given feedstock and actually create an environment. 
One which does not overly specify a specific pathway, which is what the 
current situation is with respect to several of the legislative 
remedies mentioned here, as well as the RFS2 implementation process.
    The Chairman. Anyone else? No.
    Mr. Roe, your plant in Pennsylvania, it is in southwestern 
Pennsylvania, correct?
    Mr. Roe. It is just about an hour or so outside of Pittsburgh, 
south and a little bit east actually.
    The Chairman. Okay, and what made you choose that location?
    Mr. Roe. A variety of things we have had, we find the Commonwealth 
to be a place that is friendly as far as its outlook on energy in 
general. We have a technology partner that is located in the near 
vicinity that made it convenient for us to come there as well, but a 
whole variety of things caused us to go there.
    The Chairman. And are you saying you are just in design or are you 
in construction there?
    Mr. Roe. No, that demonstration facility is complete and now in 
operation. We have been running now, we commissioned it back in July 
and it is in operation, and we needed that facility essentially to 
confirm the final design parameters on the full scale plant that we 
have designed.
    The Chairman. Okay and what affect has that had on the local 
economy, if you know?
    Mr. Roe. Probably very little in that we kind of broke ranks here 
in that we decided to build this facility, we decided to build the 
smallest facility that we could possibly build that would still scale 
to 50 million and 100 million gallon a year type facilities. So 
essentially we have added maybe 14 or 15 jobs in terms of full-time 
jobs to operate that small facility in Pennsylvania.
    The Chairman. Okay, thank you.
    And finally, for all the panelists, what are each of you doing to 
engage the agriculture community, and what efforts are you making to 
talk to farmers as you proceed with the next generation biofuels?
    Mr. Shealy. Well, if I may just start. That is really the core 
bread and butter of our business. We were with farmers yesterday, 
today, the day before and tomorrow we have an active contracting 
program on our energy crop program around the winter barley in the mid-
Atlantic. So, we have, I would say, daily conversations with the whole 
farming community in our region.
    Ms. Ellerbusch. On BP's side with our partner, Verenium and our 
facility in Highlands County, Florida we have a partnership with Lykes 
Brothers, who are one of the largest landowners in Florida and they are 
our farming partner there. We have a 20 year land lease and are in 
conversations around growing contracts with them, so we work on a 
regular basis with them. We are, as we are looking for our second 
facility, we are in conversations with multiple landowners elsewhere in 
the U.S. Gulf Coast. We, as BP, are beginning to work with farmers and 
landowners to understand where we can explore opportunities to develop 
different varieties and propagate those varieties to be able to 
establish product facilities, going forward. And we have begun working 
with the USDA on programs as well that could help in terms of 
understanding the genetics and development of further feedstocks.
    The Chairman. Anyone else?
    Mr. Jamerson. I would say for our first commercial plant we are 
using pulpwood, excess wood material and we are not talking to farmers. 
We are talking to landowners, timber owners, also to an environmental 
group to help us develop sustainable standards. We use, essentially, 
the branches after others use the main stem of the tree, and so we are 
very active on a weekly basis meeting and talking to people about that.
    The Chairman. Thank you.
    The chair recognizes the gentleman from Virginia.
    Mr. Goodlatte. Thank you, Mr. Chairman.
    Ms. Rosenthal, I understand the U.S. Navy for the first time ever 
is purchasing renewable fuels derived from algae for testing and 
certification, and that the volumes provided under these contracts are 
over 20,000 gallons of the type of diesel fuel for Navy ships and 1,500 
gallons for jet fuel. It sounds to me like this is the real first step 
toward commercialization. What can you tell us about this technology 
that is being used to produce these volumes?
    Ms. Rosenthal. That is one of our member companies and is actually 
producing those using algae for these jet fuels and for Navy 
requirements. Unfortunately, I cannot tell you as much as I would like 
to about the specific technology because it is proprietary, however, it 
was a great step in the right direction as far as real 
commercialization from one of our member companies.
    Mr. Goodlatte. And do you think this is likely to lead to a steady 
contract, be able to actually, I mean, Navy ships require huge 
quantities of fuel. Do you think this can be scaled up to the level 
that would accomplish this?
    Ms. Rosenthal. The availability is an opportunity. It is probably 1 
to 2 years out before we are fully scaled and to a commercialized 
industry, however there is opportunity for us to do so with our 
selected member companies. Being an industry trade association, I can't 
speak to specific organizations. I have to speak to my membership.
    Mr. Goodlatte. Sure, but whether you think it is available?
    Ms. Rosenthal. Yes, the ability is there.
    Mr. Goodlatte. We have heard about many obstacles that must be 
overcome before we see large-scale commercial production of advanced 
biofuels, whether it be policy, research, or financing. In your 
opinion, what is the biggest hurdle facing commercialization of second 
and third generation biofuels, and I will just go right down the line. 
I will start at the other end, Mr. Shealy.
    Mr. Shealy. I would say the biggest hurdle today is market driven 
with respect to the uncertainty around the blend wall as it relates to 
the only really large scale commercial biofuel, renewable fuel we have 
in this country which is ethanol. We need to have some clarity in that 
and that is for both second and third generation, as well as the first 
generation technologies. We have to have some market certainty. I think 
that is probably the single most critical thing if I had to pick one 
that we have to get resolved is the blend wall issue.
    Mr. Goodlatte. And explain that a little, if you could.
    Mr. Shealy. Well, the current situation is we have an arbitrary cap 
of a ten percent blend with respect to EPA's lines of E10. The only way 
that RFS is going to be met, even in as soon as 2010, is we have to 
have a waiver to get to E12. So that is creating--there is no reason to 
build any second and third generation plants at this stage of the game 
until there is greater market certainty around that demand and the 
ability to blend at those higher levels.
    Mr. Goodlatte. So you don't think these products can stand on their 
own and sell in the marketplace because there obviously are a lot of 
controversies surrounding raising those limits. We have heard from a 
number, I have and I am sure others here have as well about various 
types of machinery not functioning properly the higher the ethanol 
percentage is. Do second and third generation fuels take care of that 
problem? Would that be a replacement for it that would eliminate that 
kind of uncertainty in the marketplace?
    Mr. Shealy. Well, I mean if you had fuels ready to deploy which 
truly were a direct offset to gasoline and diesel fuel, the reality is 
while there may be some very promising, those were discussed in the 
last panel as being classified as sort of third generation according to 
Dr. Shah. If you had those that could replace directly gasoline and 
diesel then perhaps that would be the case. However, today the issue 
holding back the use of greater ethanol is an allowance to blend at a 
higher level, and so it is not even a market driven decision. The EPA 
simply doesn't allow a blend.
    Mr. Goodlatte. Are we talking about corn-based ethanol or are we 
talking about something else?
    Mr. Shealy. It doesn't matter what type of ethanol, how the ethanol 
is produced. There is no reason to blend at a higher level whether it 
is corn-based ethanol or whether it is what you might call a second 
generation fuel, i.e., what both Mascoma and Coskata are doing where 
you are producing ethanol from biomass, there is no reason to build one 
of their plants today if you don't have any, you can't blend past the 
current limit. We can meet ten percent roughly, or very close to it, 
based on the corn-based ethanol capacity that is out there today.
    Mr. Goodlatte. Mr. Jamerson.
    Mr. Jamerson. Yes, so I would say the biggest challenge is 
financing. Debt capital is just plain not available without a loan 
guarantee. It is just not there and equity investors really don't want 
to put in 100 percent equity at these plants. They need to have a 
leverage return to make their IRRs look good and so I think that is a 
big hurdle. I truly believe that if we can get loan guarantees opened 
up, and also this investment tax credit, that there will be plenty of 
equity for these plants. So I do share some of my colleagues concerns 
about the blend wall, but I think that with the RFS2 which mandates 
cellulosic fuels, I think you will see further acceptance of the 
cellulosic component if you will, in the marketplace. So, I am maybe a 
little less concerned about that but the financing is a big thing.
    Mr. Goodlatte. Mr. Roe.
    Mr. Roe. I will save your time. Ditto. It for us is exactly the 
same issue. It is the hurdle that we have in front of us that we can't 
seem to figure out how to jump is how do we get this first plant up and 
built. Now, I am an optimist and I believe once the first one, the 
first 50 or 100 million gallon plant that we build, the doors are going 
to swing open for financing of future ones and we won't need anymore 
help, but getting that first one up is nigh on impossible in this 
environment right now.
    Mr. Goodlatte. Yes, now are you going to produce a fuel that stands 
independent or has to be blended with gasoline?
    Mr. Roe. Well, we are producing ethanol and so we have the same 
types of market restrictions as some of the other folks have discussed 
here in terms of the blend wall and that type of thing, but I am 
confident that we can overcome that.
    Mr. Goodlatte. And what do you have to say about those who say that 
machinery has to be retooled? Are you going to see more flex-fuel 
vehicles or I mean I would love to have E85 pumps. I looked at buying a 
flex-fuel vehicle a few years ago and I went on a website that tells me 
where I can find E85.
    Mr. Roe. Well, number one.
    Mr. Goodlatte. Well, let me finish and on that website I found that 
the closest one to Roanoke, there were none within a 100 mile radius 
and there were 20 within a 200 mile radius, but, obviously, that wasn't 
going to meet my needs.
    Mr. Roe. Well, what you describe is real but we shouldn't consider 
that to be a technical challenge to figure out a way to use blend pumps 
and that type of thing. It is very true that there are internal 
combustion engines out there that aren't going to operate well with 
high concentrations or even lower concentrations of ethanol. I would 
not deny that but for the current automobile fleet, we can all burn at 
least ten percent and science is there for 15 percent.
    Mr. Goodlatte. Right, I understand the interest in mandates. I am 
much more of a free market guy. In Brazil, they have flex-fuel vehicles 
almost universally available and the consumer knows how to do the 
computation based on you get less miles per gallon perhaps.
    Mr. Roe. Right.
    Mr. Goodlatte. But how to do the computation whether they are 
better off with the E85 or whether they are better off with gasoline 
and they switch back and forth.
    Mr. Roe. Exactly.
    Mr. Goodlatte. I would love to see that develop in our marketplace 
and I would bet you would, too.
    Mr. Roe. So would we.
    Mr. Goodlatte. How do we do it?
    Mr. Roe. Well, you tear a page out of Brazil's book. I mean it was 
clear what they did. They did it, essentially, through a government 
mandate.
    Mr. Goodlatte. In what respect?
    Mr. Roe. Well, first of all they basically worked at this for a 
number of years and didn't give up. It wasn't an overnight success in 
Brazil. It was 20+ years in the making, but over that period of time 
with the production of the fuel and the introduction of automobiles 
that could burn that fuel they were able to do this. But, it took a 
government definition and a government mandate to get there.
    Mr. Goodlatte. But what was the mandate?
    Mr. Shealy. They mandated flexible fuel vehicles. Every vehicle in 
Brazil is a flexible fuel vehicle.
    Mr. Goodlatte. Okay, the car companies have been pretty forthcoming 
in saying they would love to build them. I know of companies that 
manufacture cars that work with entities like Wal-Mart and Sam's Club 
and say look if you put an E85 pump at a particular location, we will 
notify everybody in that area who has a flex-fuel vehicle that they can 
find that fuel at these locations in that area. So, the car companies 
are on board with wanting to make flex fuel vehicles, I don't think 
that is the problem.
    Mr. Roe. Even before the issues of last year, General Motors 
committed to having 50 percent of their models flex-fuel capable within 
the very, very foreseeable future, single digit years and they are on 
that track, as you know.
    Mr. Goodlatte. Right, good.
    Ms. Ellerbusch.
    Ms. Ellerbusch. So in terms of the challenges, I would echo what 
Mascoma and Coskata are indicating are financial challenges. I think 
the financing industry has essentially been closed down, and without 
this financing you cannot bring commercial facilities to bear and also 
continue to support the continued development we need on technology. We 
need stability in the policy and regulatory support frameworks that we 
have today to make those investors believe that they can invest in this 
industry and feel like they will be able to get some return for their 
investment. So banks won't come into this base because they are 
concerned about what they saw happen on corn ethanol, and they are 
concerned that the technology risk that sits in cellulosics and other 
advanced biofuels is too great for them to risk their money. And 
second, for us, we see that feedstock support is critical. Right now, 
if you look at our facility we are building in Highlands County, 
Florida, we are using energy cane. There are only a few varieties of 
energy cane available anywhere in the U.S. Nobody in Brazil builds 
facilities without less than a dozen types of varieties of sugarcane 
because of the issues you may have with crop failure. So, we have an 
industry that is trying to form around perennial energy crops with 
almost no variety development that has been done. So to get to this 
scale around development we are going to have to work with USDA, 
farmers, seed companies, other developers in this region to be able to 
develop feedstocks to go forward to make success happen in this 
industry.
    Mr. Goodlatte. Well, thank you, Mr. Chairman. I know I have vastly 
exceeded my time. Since I am the only one on this side maybe that is no 
real problem.
    The Chairman. The gentlewoman from Pennsylvania.
    Mrs. Dahlkemper. Thank you, Mr. Chairman. Thank you for this 
important hearing. Thank you for the, thank you to the witnesses for 
coming forward.
    I have a number of different questions. First of all, do any of you 
have a biodiesel plant? You are all ethanol-based, right, okay, just 
wondering about that.
    Ms. Rosenthal, I actually watched a very interesting documentary 
the other day called FUEL, have you seen it?
    Ms. Rosenthal. I have not seen it yet.
    Mrs. Dahlkemper. Very interesting and in anyway I would recommend 
people watch it. It talks a lot about the diesel engine actually, and 
from that film and just thinking about the rest of the world, where do 
you see we are here in the United States in terms of respect to our 
development, whether we are talking about biodiesel or ethanol in terms 
of any kind of biofuel? Where are we? Are we falling behind? Are we 
equal with other parts of the world? Where do you see the United States 
is in terms of development of these alternative fuels?
    Ms. Rosenthal. I can only specifically talk about algae, but I see 
a lot of development in China, India, in Europe with the algae 
community and what they are doing with both biodiesel and other jet 
fuels. Do I feel like we are falling behind? Absolutely not. We have 
had more investment here in the last year, close to $1 billion of 
private investment into the algae community with a variety of different 
stakeholders that I represent with my trade organization. Our key is 
just making sure algae is treated equally to other fuels, that we get 
financial parity as far as the same tax incentives, subsidies with 
other renewable fuels as well as.
    Mrs. Dahlkemper. Well, on that specific question. Can you give me 
an idea of, or can you give me the specific definition of algae, where 
that falls because that was one thing that you brought up. I wanted to 
ask you about that. Can you explain where algae falls in that 
definition and why there is an issue with that?
    Ms. Rosenthal. I cannot.
    Mrs. Dahlkemper. Okay. I didn't mean to cut you off.
    Ms. Rosenthal. No, that is okay. I will just be very, very candid. 
I am relatively new into this role and I don't have the science behind 
me to do that.
    Mrs. Dahlkemper. Okay, if somebody could get that information to 
me.
    Ms. Rosenthal. I can get that information to you.
    Mrs. Dahlkemper. Does anyone else want to address where we are 
compared to the rest of the world at this point?
    Ms. Ellerbusch. I will comment. I think the Energy Independence and 
Security Act of 2007, really was a catalyst to take the U.S., 
potentially, to the forefront of advanced biofuels. In BP, we were 
looking at advanced biofuels through kind of a long term technology 
partnership with universities here that we have called Energy Bio 
Sciences Institute. When we saw the EISA form in 2007, it catalyzed us 
to become a major investor now, and I think we have realized through 
our efforts around the globe that the U.S., on the technology side, on 
things like cellulosics is well-advanced to others. We have the 
opportunity in the U.S. to actually be at the forefront and be the 
first to make a material, scalable business in cellulosics here. So I 
do think we are different here in the U.S.
    Mrs. Dahlkemper. I have a question for those with first generation 
ethanol plants. Tell me what the difficulty is in converting that to 
second and third generation feedstocks, because I know I have a 
biodiesel plant in my district. They designed the plant to be able to 
take many feedstocks and actually they are one of the few biodiesel 
plants that is actually up and running today. If this is one of the 
issues with your plants, if somebody could address that, I would 
appreciate it.
    Mr. Shealy. I think I am probably the closest one. We are, we kind 
of consider ourselves as generation 1.5. We actually ferment grain-
based starch, which means that we don't have any corn-based plants, but 
we are building a barley-based plant which is fundamentally very 
similar technology-wise. What I would tell you is, I think it actually 
has a great opportunity to have a bridge into these new feedstocks, and 
let me give you a couple examples that we are working on. With barley 
in particular, you create a decent amount of straw which is incremental 
straw that wouldn't have otherwise have been available on the ground 
which could be collected and used as a cellulosic feedstock. Also, we 
create a byproduct essentially from the hulls of the barley which we 
currently turn into a renewable biomass fuel pellet, which is co-fired 
with coal or potentially shipped to Europe because there is a big 
demand over there for that. We see those as two great cellulosic 
feedstocks as potential to and with cellulosic technology from one of 
the, potentially one of the folks sitting beside me here or others in 
this space as well. I think very similar situations are out there and 
opportunities in the corn space where you have the cob, you have the 
stover and there are certain pieces of the back end of the plant, if 
you will, that can be leveraged to multiple technologies, specifically 
distillation and dehydration of the ethanol.
    Mrs. Dahlkemper. Okay.
    Ms. Rosenthal. I wanted to add one element so we are working on 
technology, butanol with DuPont, and actually that is a technology that 
will give us an advanced molecule that can be retrofitted, actually we 
call it the software change, into existing corn ethanol facilities and 
any other grain-based facilities today. So for a small capital 
investment we can take today's ethanol facilities and potentially make 
them into biobutanol facilities, and this is a molecule that can be 
blended in at higher rates than today's infrastructure. So, it does 
allow us to have an opportunity to even move through the blend wall as 
a transition.
    Mrs. Dahlkemper. Okay, I have one more question, Mr. Shealy. One 
thing you mentioned, you said that you feel strongly that this 
designation should be performance-based and not policy-based.
    Mr. Shealy. Correct.
    Mrs. Dahlkemper. And I just wanted to question you on that because 
I am wondering should we not look at issues in terms of clean water or 
clean air? Should it all be just, when you say that it should just be 
performance-based, that is a question I had with that statement.
    Mr. Shealy. Oh I absolutely think it should be that those things 
should be considered to the extent they can be quantified, and so for 
example with the winter barley crop that we are utilizing, it actually 
prevents the nutrient runoff that would otherwise occur during the 
winter months on land that is typically left fallow between a corn and 
soybean cropping system. So we target those acres and the Chesapeake 
Bay Foundation has actually come out in support of our project for that 
very issue because of the positive impact to the watershed.
    Mrs. Dahlkemper. Well, maybe I don't understand then what you mean 
by performance-based, because if we are looking at policy, obviously, 
here. When we look at these different feedstocks we have to look at 
things such as water and air and things that obviously would 
potentially harm our society.
    Mr. Shealy. Sure.
    Mrs. Dahlkemper. So not just performance when I think of 
performance, and maybe I am not understanding exactly.
    Mr. Shealy. I think performance again has to be things that you can 
quantify. For example, currently the indirect land use change 
calculation is a very arbitrary, it is a very arbitrary approach which 
is trying to sort of assimilate one number across the board to any type 
of pathway.
    Mrs. Dahlkemper. Well, I have some issues with that, too, so I 
guess I don't have issues with water and air and some of those things I 
know we can measure.
    Mr. Shealy. Yes, if we can measure it I am fully supportive of 
actually trying to make if we can actually quantify and measure what a 
given impact is, then that is how a given pathway should be measured.
    Mrs. Dahlkemper. But basically you are saying policy does have, 
should be part of this as bringing the performance.
    Mr. Shealy. What I mean is I don't think we should get overly 
specific with respect to the pathway, say going from one feedstock to 
one fuel. We need to look at, we need to have set metrics which, again, 
can be measured and actually tested. Then you can say okay this 
particular pathway, while it may be from some type of grain starch 
actually has an overall greenhouse gas emissions profile which is 60 
percent better than the baseline gasoline and there are not additional 
other land use concerns such as water, et cetera, that can come up. I 
think if you can measure and you can set real guidelines around that 
and really test for that, then that is exactly what we should be doing.
    Ms. Rosenthal. If I could just interject on that, from our 
perspective, everything should be based on a technically neutral 
standard. It needs to be based on validated lifecycle assessments that 
are measuring the variety of different inputs and outputs of the fuel 
as compared with fossil fuels. It needs to be very specific to 
lifecycle assessments that are validated, peer reviewed and equitably 
measured. I have just spent 5 years in the bio-plastics industry and 
have been deep into LCA for several years.
    Mrs. Dahlkemper. Well, thank you. Thank you all. My time has 
expired.
    The Chairman. Thank you, gentlewoman, the chair recognizes the 
gentleman from Michigan.
    Mr. Schauer. Thank you, Mr. Chairman.
    As I am from Michigan I want to direct some of my comments to Mr. 
Jameson. Thank you for being here. I was in the Michigan Legislature 
when we enacted some of the tools that drew you to northern Michigan. I 
am from down south, but I am pleased that you are all here. I have two 
ethanol plants in my Congressional district, one biodiesel plant. The 
biodiesel plant is having a very, very difficult time especially right 
now.
    Mr. Jamerson, I am assuming you located to Kinross because that is 
where the feedstock was?
    Mr. Jamerson. Yes, if you look at the timber feedstock in the upper 
peninsula there is competition over on the western side from some of 
the pulp and paper mills, but there isn't competition over in the 
eastern side of the state, or in the northern lower peninsula.
    Mr. Schauer. Would there be adequate resources in the lower 
peninsula or even the southern part of the state for a plant like 
yours?
    Mr. Jamerson. There certainly would be. We draw a radius of 150 
miles from Kinross area, and there is about 8 or 9 million tons a year 
of available feedstock in that area. The first phase of our plant will 
only use less than a half of a million tons of that excess pulpwood so 
there is a terrific amount of feedstock. To go lower down into the 
lower peninsula, we would have to work the transportation costs, but we 
do intend to source from the lower peninsula.
    Mr. Schauer. I heard two themes, one blend wall, the other debt 
financing so again I will direct this to you, Mr. Jamerson. If the 
demand was there--and I will connect that to the blend wall issue--you 
can blend higher percentages and if the financing was there, you all, I 
suppose, could be very busy constructing these biofuel facilities all 
over the country.
    Mr. Jamerson. Absolutely, there is huge demand.
    Mr. Schauer. Including a lot of jobs in the process.
    Mr. Jamerson. Correct, there is a huge demand for what we are 
doing. Right now, the financing market and then legislative uncertainty 
is what I would call it.
    Mr. Schauer. Yes.
    Mr. Jamerson. It is a combination of blend wall, indirect land use, 
some questions on the RFS2 so investors just need to get clarification.
    Mr. Schauer. Sure, you need that certainty.
    Mr. Jamerson. They need certainty in order to make decisions.
    Mr. Schauer. I want to ask a quick question and I will throw this 
open to any of you. I am in Michigan where we make a lot of cars and do 
tremendous automotive R&D, best in the world. What is in your opinions, 
the science on the blend ratios? How is ten percent really in your 
opinion a low-ball arbitrary limit? What, how high could you go without 
GM, Ford or Chrysler or any of the transplants having to change their 
technology?
    Mr. Jamerson. I have been looking at this for a number of years. 
Before being with Mascoma I was President of Earth Energy, a corn 
ethanol producer and so I have been in this sector since 2001. The 
studies I have seen over the years show that most vehicles can run up 
to 15 to 20 percent without any problems on the engine. That has been a 
lot of independent research, universities and the like. I think the big 
question is liability. What if there is a problem? Who is liable, but 
the biggest problem is just getting the infrastructure in place getting 
the oil companies behind it. The car companies can make the cars. GM 
will have in a couple of years 50 percent of their fleet that will be 
flex-fuel, but they need the distribution system. I am a big fan of E85 
and I think that is also a very big driver but we don't have it.
    Mr. Schauer. But a flex-fuel vehicle could burn E20.
    Mr. Jamerson. Absolutely.
    Mr. Schauer. Without any problems at all, correct?
    Mr. Jamerson. Correct, correct.
    Mr. Schauer. Do you collaborate with the car companies?
    Mr. Jamerson. Well, for our company, GM is an investor. It is also 
an investor in Coskata as well so we collaborate with them and talk to 
them. We also have an oil company, Marathon Oil that is an investor in 
our company and so we collaborate with them. It is going to take the 
technology, the production, the oil companies and the car companies all 
to get this together.
    Mr. Schauer. The final question is on the financing side. What did 
those 172 lenders that ignored you, or said, ``no,'' say, or did they 
respond?
    Mr. Jamerson. Most of them responded. Some of them didn't respond. 
I think the challenge was that when we went out to that market earlier 
this year, I mean the credit markets were just flat on their back and 
they just weren't doing any business of any kind, and even today it is 
very, very challenging. I am sure you hear this in the marketplace. The 
credit markets are extremely challenging.
    Mr. Schauer. Well, Mr. Chairman, I would like to work with you and 
work with USDA and some of our panelists on seeing if we can provide 
some relief in that area. There is no question in my mind in my state, 
and I am sure in Pennsylvania as well, that we would be much further 
along in our recovery if there was greater access to credit. I have 
been focusing on manufacturing but you are an industry that echoes that 
story. We are losing out on the creation of jobs because even with 
highly guaranteed credit that credit isn't flowing, so it is a burning 
passion of mine and I look forward to making progress on that issue.
    Thank you. I yield back.
    The Chairman. The Chairman looks forward to working with them. The 
chair also thanks our panelists for their testimony today. Under the 
rules of the Committee, the record of today's hearing will remain open 
for 10 calendar days to receive additional material and supplementary 
written responses from the witnesses to any question posed by a Member. 
This hearing of the Subcommittee on Conservation, Credit, Energy, and 
Research is adjourned. Thank you.
    [Whereupon, at 1:00 p.m., the Subcommittee was adjourned.]
    [Material submitted for inclusion in the record follows:]

  Submitted Statement by Kevin Gray, Ph.D., Chief Technology Officer, 
                              Qteros, Inc.

    Chairman Holden, Ranking Member Goodlatte, and distinguished 
Members of the Subcommittee, I am Dr. Kevin Gray and I serve as the 
Chief Technology Officer for Qteros, Inc., a leading biofuels company 
focused on converting cellulose to ethanol. I want to thank you for the 
opportunity to share my thoughts and insights with you on the future of 
next-generation biofuels.
    Qteros is a venture-backed company committed to delivering 
innovative process technologies for clean transportation fuels that 
reduce greenhouse gas emissions at a price competitive with gasoline. 
Our team is dedicated to producing liquid fuels to achieve a 
sustainable solution to the world's growing energy needs.
    The Energy Independence and Security Act of 2007 (EISA) enacted on 
December 19, 2007, mandates the annual use of 9 billion gallons of 
renewable fuel in 2008, growing to 36 billion gallons by 2022, 
including 16 billion gallons of cellulosic biofuels. With recent 
ethanol prices approximately $2.50 per gallon, the cellulosic ethanol 
mandate translates into an addressable market of over $40 billion 
annually within the U.S. alone.
    In addition, the Food, Conservation, and Energy Act of 2008 (FCEA), 
enacted on June 18, 2008, puts in place a $1.01-per-gallon production 
tax credit for cellulosic ethanol, as well as new forms of assistance 
for biorefinery development, energy crop production, and research into 
techniques for processing cellulosic biomass feedstocks for biofuels 
production.
    Currently in the United States there are 201 ethanol plants using 
almost exclusively corn grain as the raw material (a small percentage 
use other grains like milo or barley). These plants have a total annual 
nameplate capacity of 13 billion gallons. However, there are currently 
no commercial scale cellulosic ethanol plants in the U.S. though the 
EISA mandates 100MM gal in 2010 and 250MM gal in 2011 (increasing to 16 
B gallons by 2022).
    One of the major reasons for delays in deployment of cellulosic 
biofuel plants is the poor economics of the currently proposed 
processes. Ethanol production involves the conversion of the feedstock 
(be it corn grain or biomass) into sugar and subsequent fermentation of 
that sugar into ethanol. The conversion into sugar is carried out by 
enzymes, whereas the fermentation is carried out by a microbe, for 
example a yeast or bacterium. The ``conventional'' biomass-to-ethanol 
processes utilize separately produced enzymes and microbes, and cost 
analyses have shown that one of the most expensive steps of the process 
is the enzymatic conversion into sugar. For example the enzyme producer 
Novozymes estimates today that enzymes alone contribute up to $2.25/
gal, almost as much as what ethanol sells for. Once the other parts of 
the process are added together it is easy to see that ethanol today 
produced from biomass is not economical.
    Certainly other biofuels can be made from sugar, including butanol 
and longer-chain alcohols and hydrocarbons. The longer-chain 
hydrocarbons may be considered more ``infrastructure compatible'' or 
``gasoline-like'' than ethanol or even butanol, however the economics 
of production of the longer-chain molecules will be even more 
challenged, since it will take more sugar to produce those molecules.
    The economics of a sugar-based process is determined by the cost of 
the sugar (i.e., the original cost of the feedstock, whether biomass or 
corn), the cost of producing the sugar from the material, and the yield 
of product from the sugar. Glucose (sugar) is a 6-carbon molecule and 
ethanol is a 2-carbon molecule, and the chemistry is such that two 
molecules of ethanol are produced for every molecule of glucose 
consumed during fermentation (in addition to two molecules of carbon 
dioxide). Butanol is a 4-carbon molecule, therefore only one molecule 
of butanol is formed per molecule of glucose, making butanol more 
expensive than ethanol to produce on a pound-for-pound basis. The more 
gasoline- or diesel-like hydrocarbons contain upwards of 6-8-carbon 
atoms. Hence it will take multiple molecules of sugar to produce the 
longer-chain hydrocarbons and they will be even more expensive.
    Until the cost of sugar comes down via more efficient processing, 
the economic production of sugar based hydrocarbons will always be 
challenged. In a sense, therefore, ethanol is in a ``sweet spot'' for 
the economic production of biofuels.
    My company, Qteros is developing a process of producing ethanol 
from biomass that will ultimately eliminate the need for exogenously 
added enzyme, therefore removing the estimated $2.25 from the 
production costs. The company is doing this by using a microbe (known 
as the Q microbeTM or Clostridium phytofermentans) that has 
the ability to both break down the biomass into its component sugars 
and ferment those sugars into ethanol, thereby producing ethanol from 
biomass in a single step (known as ``Consolidated BioProcessing'' or 
CBP).
    The current yields are very high (close to theoretical), though the 
current rates of production need to be improved to achieve industrial 
scale production, the current focus of our development efforts. The 
current status of the Qteros process is that this organism requires 
approximately 75% less enzyme than standard yeast in a biomass process, 
resulting in huge cost savings. In addition the yields of ethanol from 
biomass are significantly higher using the Q microbeTM as 
compared to yeast (81% conversion versus 50% conversion).
    The ultimate goal of the company's efforts is to completely 
eliminate the need for any exogenously added enzyme.
    Thank you again, for the opportunity to share my thoughts with this 
distinguished Subcommittee on the future of next-generation biofuels.
                                 ______
                                 
 Submitted Statement by Neal Gutterson, CEO; and Greg Ikonen, General 
                  Counsel, Mendel Biotechnology, Inc.

    Mendel Biotechnology, Inc. appreciates the opportunity to submit 
written testimony regarding the opportunities and challenges in the 
advanced biofuels industry. We believe that biofuels produced from 
purpose-grown energy crops, like perennial grasses, provide a 
compelling means of helping to reduce our country's energy dependence 
on foreign sources, while maintaining and improving overall 
environmental health of our landscape.

Mendel Overview
    Mendel was founded in 1997 as a plant science-based technology 
company, focused on genomics and biotechnology for plant improvement. 
Mendel has collaborated with Monsanto for 12 years developing a deep 
understanding of plant gene expression and regulatory pathways to 
create traits for improvement of Monsanto's leading seed products, 
particularly for corn and soybean. Mendel has more recently emerged as 
a leading developer of purpose-grown energy crops for the production of 
renewable power and transportation fuel, leveraging its understanding 
and expertise in plant expression, and use of state-of-the-art 
molecular biology and genomic tools to create improved plant varieties, 
both conventional and biotech. In 2007 Mendel partnered with BP, a 
leader in renewable fuel research and production, to develop new 
purpose grown energy crop varieties.
    Mendel's crops--high-yielding perennial grasses like Miscanthus and 
high biomass sorghum--can be grown on marginal or underutilized lands, 
require minimal water and other inputs, and yield significant 
greenhouse gas emission reductions compared to other renewable biomass 
sources. Biofuels produced from Mendel's renewable feedstocks can be a 
major contributor to a more secure and sustainable energy future. By 
appropriately mobilizing the agricultural sector, we can help meet 
America's need for a sustainable bioenergy supply that substantially 
improves energy security while providing a broad-based economic 
opportunity.

Government incentives established the first generation biofuels 
        industry
    Congress' passage of the Energy Independence and Security Act of 
2007 (EISA) provided necessary incentives to 2nd generation biofuels 
producers to develop the first commercial scale quantities of biofuels 
derived from cellulosic sources. EISA required that an increasing 
percentage of the renewable fuel mandates come from advanced biofuels, 
and specifically cellulosic fuels, to encourage development of biofuels 
from these nonfood feedstocks.
    The current Renewable Fuel Standard (RFS) mandates in EISA require 
production of 36 billion gallons of biofuels by 2022, of which 15 
billion gallons must be from cellulosic sources. This production will 
require more than 150 million tons of biomass. Further biomass demand 
exists in the power sector, as power utilities are sourcing biomass for 
co-firing in existing coal-fired generators, as well as building new 
dedicated renewable power plants. The combined growth of the biofuels 
and biopower industries will drive demand substantially over the next 2 
decades, which could require as much as 800 million tons by 2030. This 
level of biomass production would support substantial quantities of 
renewable electrical power generation and up to 30% of America's liquid 
transportation fuel requirements.

Dedicated energy crops can meet biomass need
    As the interest and potential of biofuels has increased, questions 
have arisen over greenhouse gas emissions, land use conversion, and 
diversion of food to fuel. These issues are part of a broader theme of 
sustainability: if 30% of our country's liquid transportation fuel in 
future years is to come from biofuels, these feedstocks will have to be 
produced in a sustainable fashion. And while corn stover and timber 
residues will be part of the solution, meeting these targets will 
require purpose-grown, perennial energy crops--crops like the C4 
grasses switchgrass and Miscanthus, and woody crops, such as poplar, 
eucalyptus, and willow. These energy crops can be produced on less 
productive land, like hay or pasture land, and can yield carbon 
negative energy given their low fertilizer and other input needs. This 
represents a unique opportunity for energy production while reducing 
atmospheric carbon, in contrast with other carbon neutral energy 
sources.
    Much modeling of future landscape conversion is being done at 
projected yields of 5 dry tons/acre, based on historic data that is 
being replaced now with more recent figures from academic institutions 
and field trials by companies like Mendel. Fast-growing, perennial 
grasses like Miscanthus have yields more than double these projected 
levels, and we are confident that with targeted development of 
feedstocks and focused breeding efforts, these yields will exceed 15 
dry tons/acre over the next decade.
    In this decade, the Federal Government has committed more than $2 
billion to support the development and deployment of biorefineries to 
produce ethanol from biomass as a cornerstone of the renewable fuel 
effort. The goal of this funding has been to accelerate development of 
a renewable fuels market that is competitive with fossil fuels by the 
end of the next decade. These funds, however, have focused on 
downstream activities, like development and improvement of conversion 
technologies, and loan guarantees for new biofuels refineries. Less 
than 6% of DOE funding dollars have targeted upstream activities, like 
development of feedstocks and their supply chains.
    To meet EISA's advanced biofuels and cellulosic biofuels targets 
and to ensure that we are positioned to reap the benefits of the 
government's significant investment in downstream technologies and 
refineries, we must devote attention and resources to development of 
consistent, sustainable production of renewable feedstocks. This effort 
will require targeted breeding of new feedstock varieties, and 
significant trialing to test different energy crops and varieties of 
these crops, produced in different regions, and converted with 
different processes, to ensure efficiency of biofuel production despite 
disparate crops, varieties and production practices.
    These purpose-grown energy crop varieties do not exist today in 
commercial form, but are in development by leading feedstock providers. 
Mendel and other companies are working to develop varieties that are 
higher yielding, climatically adapted to different growing regions 
across the U.S., and that can be optimized for its ultimate purpose--
whether conversion to transportation fuel or co-fired for production of 
electricity--to have compositional characteristics best suited for 
greatest extracted energy value per pound of feedstock.

Supply chain development and feedstock development are two key needs
    Biorefineries and renewable power generators need consistent and 
reliable supplies of biomass produced in a way that refining processes 
or systems for burning for power are most able to utilize. Purpose-
grown, perennial energy crops are ideally suited to meet these biomass 
demand needs in a well-structured supply chain. However, in contrast to 
the well-developed supply chains for commodity crops such as corn and 
soybean, the supply chain for cellulosic biomass has not been 
established. Neither has the promise of high-yields from these crops 
nor their regional adaptation with appropriate yields and utility for 
particular energy conversion processes been established. Research and 
field studies in target regions across the United States are needed to 
validate industry's projections of high yields in these regions that 
would maximize GHG emission reduction benefit while minimizing land 
requirements.

Current legislation and policies should be continued
BCAP
    The public-private partnership efforts should coordinate with 
existing regulatory and legislative efforts, including the Biomass Crop 
Assistance Program (BCAP) established in the 2008 Farm Bill. USDA is 
finalizing its proposed rulemaking for BCAP, and we believe that this 
program is a key means of encouraging biofuels and bioenergy projects 
using next generation feedstocks, and is a key means of de-risking the 
developing feedstock supply chain. We urge Congress to extend this 
program for at least 5 years in the next farm bill to ensure continued 
private investment and development of bioenergy projects through a 
critical transition period for the industrialization of 2nd generation 
biofuels and biopower generation.
    Funding for future BCAP projects should be prioritized to optimize 
productivity and sustainability. Additional research and development 
efforts to determine best production and sustainability practices 
should be developed in conjunction with these BCAP projects, as well as 
in smaller-scale, focused projects.

Energy crop insurance
    In addition to concerns about a market for their energy crops, 
farmers are concerned about agricultural risk. Establishment of a crop 
insurance program for purpose grown energy crops would help drive 
farmer adoption, and further encourage planting of these feedstocks to 
provide variety performance data and develop agronomic and other 
protocols to ensure the sustainability of their production.

A public-private partnership would drive development of the supply 
        chain and new varieties optimized for different regions
    The development of new feedstock crop varieties, and the evaluation 
of biomass production systems from these varieties in the context of a 
full supply chain, are generally considered to be the responsibility of 
private companies. However, the cost of capital for the emerging 
companies committed to this market is very high today, much as it is 
for those companies developing biorefinery conversion processes. The 
cost of capital will only come down when reliable production processes 
from new varieties has been established sufficiently that biofuel and 
power companies are willing to enter into contracts with growers to 
produce required amounts of biomass for bioenergy production. The 
required steps to enable the industry would benefit from efforts both 
from emerging feedstock genetics companies and academic/agency 
scientists.
    A public-private partnership would provide industry the means to 
collaborate with agency scientists and land-grant universities, 
leveraging government resources, much like current partnerships being 
deployed by the DOE to support biorefinery development. These new 
partnerships can ensure that the best feedstocks are available when 
conversion facilities are developed, and that a viable supply chain for 
delivery of those feedstocks is established. A number of land-grant 
universities are already shifting academic priorities to support 
perennial crops for bioenergy, including Purdue University, University 
of Illinois, University of Kentucky, University of Tennessee, and Iowa 
State University--and we expect others to follow as interest in 
bioenergy continues to grow.

Agronomic and climatic trials
    The first effort would be to establish watershed-scale trialing and 
agronomic practices to accelerate understanding of how different 
feedstocks are established, grown and harvested in different climatic 
regions, as well as help develop agronomic best production practices 
for farmers to ensure sustainability and further development of the 
upstream supply value chain. These trials and efforts would be 
undertaken with leadership from key agencies, like USDA and DOE, to 
work with land-grant universities and other local research centers to 
determine the productivity and adaptation of leading feedstock 
candidates in these geographies, as well as the convertibility and 
compositional characteristics of leading feedstock candidates. These 
results will be required for biofuels and power utilities to secure 
financial funding and resources needed to build new facilities in these 
regions.
    Additionally, research in various local and watershed-scale trials 
would drive understanding of overall carbon and energy balances, 
including carbon sequestration and improvement in soil quality through 
development of below ground root systems, as well as establish 
practices to reduce the potential for the spread of seed or genes to 
relatives outside of production zones. These efforts would further 
drive private industry's development of the entire upstream supply 
value chain through delivery to refiner or power utility.

Feedstock development
    The second goal would be funding of development of best feedstocks 
to supply to the biofuels and biopower markets. Leading feedstock 
suppliers have developed extensive germplasm collections with thousands 
of accessions and are beginning to undertake focused breeding and 
adopting cutting edge molecular markets and other genomic tools to help 
rapidly improve yield and other key traits. Government funding to 
accelerate this development will help ensure reduced land use and 
sustainable production with varieties using less nitrogen, having 
greater conversion efficiency, and less environmental effects than even 
today's figures, which are good.
    If properly resourced, by 2015 this public-private partnership will 
deliver sufficient yield and performance data for leading feedstock 
varieties in various regions to enable biofuels refineries and 
electrical utilities to make investment decisions. Additionally, key 
agronomic practices for these varieties in those regions will have been 
identified, and work on energy and carbon balances, greenhouse gas 
emission analyses and carbon sequestration will be well underway.
    By 2020, feedstocks tailored to particular end uses and conversion 
technologies will be developed and yield and performance data in 
diverse climatic regions will be developed, and a set of best 
production practices for each region will have been optimized to ensure 
sustainable, long-term production of biofuels and biopower to meet our 
nation's renewable energy goals.

Conclusion
    Mendel strongly believes that cellulosic biofuels will be a 
significant part of America's transition to renewable transportation 
fuels and more sustainable energy production. We see dedicated energy 
crops like Miscanthus and other energy grasses as the principal means 
for producing the cellulosic feedstock required for production of these 
fuels.
    Mendel is committed to working with Congress, government agencies, 
and state officials and universities to accelerate and develop high-
performing varieties and a robust supply chain that can compete with 
hydrocarbon fuels by 2020.

                                  
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