In the first part of this three part series, I explained why I was attending a biofuels conference and summarized discussions about interactions between the government and the biofuels industry.
Day 2: We need the money
The ALBC was more of a business conference than it was a technology conference. Many technologies have been able to prove viability in the laboratory. Step two, proving it can work at slightly sub-market scale, is being pursued through many pilot tests. The development of these technologies though takes massive amounts of money. Some might ask why taxpayers, bank customers, or anyone not directly invested in biofuels should have to share any of this cost burden. The easy answer is because we have done so in the past. The easy answer is because this technology is something we will all be using in the future. Any and all major technologies that we depend on took large amounts of money to develop. Without proof it was going to work, this was often a risk that couldn’t be justified by “free market” principles. Innovation is often too risky for any one entity to tackle, and since biofuels will have a vast effect once they are at scale, getting to the final payoff requires even more money.
The government can serve a few different roles. They can be the supporter through science grants (NSF does this a lot), they can nudge market support through tax incentives, or they can show figurative support through loan assurance, or something called Loan Guarantees (pledging backing to banks if the loans fall through). Also, if it has any usability on the battlefield, often a technology will be supported by the Department of Defense, which happens to have quite the research budget (a couple of the companies that were making jet fuel and diesel were getting support from the Navy, who is quite the financial partner to have).
With something like a loan guarantee though, you then need a lender. This is where private banks will come into play to actually finance the technology development. During Day Two of the conference, the phrase “creative financing” continued to arise. This is because it is rare to just have a bank loan or a government grant that covers everything. Often the final monetary package is a mixture of tax incentives, grants, loan guarantee, and private equity investment. I thought it was the technology side of things that was hard to figure out, but after spending a day talking about money, I now realize that getting the 10’s of millions of dollars to develop advanced biofuels is every bit of a hurdle that only accountant scientists can figure out.