With all the talk about how the American Recovery and Reinvestment Act has failed to revive the economy and create jobs, little attention is paid to the long-term investments that could pay dividends down the road.
The $789 billion ARRA allocated roughly $20 billion in funding for renewable energy, and Wisconsin has received a $55 million down payment. State government will use the money to provide low-interest loans for clean energy development and for businesses that “retool” in its manufacturing sector.
David Jenkins, director of commercialization and market development for the Wisconsin Office of Energy Independence, said the state views the manufacturing sector as the best place to apply initial stimulus funds because Wisconsin is the largest manufacturing state in the U.S. as a percentage of non-farm employment. The state has 10,300 individual business locations that are considered manufacturing sites by the state Department of Revenue.
As part of the state’s Clean Energy Manufacturing Program, the Wisconsin Department of Commerce is taking applications for that $55 million, and it will be distributed in low-interest (2%) subordinated loans — subordinated to other debt that a company might have. The money has been evenly divided into three pots, and it can be spent for:
- Renewable projects that promote energy-efficiency in a manufacturing business, such as a paper mill that wants to install equipment that will reduce its use of natural gas or electricity.
 - “Retooling” projects in manufacturing businesses that want to retool and purchase equipment and machinery and set up lines to produce components for renewable energy systems. The opportunities for the former are considerable, given the fact there are about 8,000 distinct parts of a wind turbine, but money also could be allocated for the components of solar panels or digester equipment.
 - Manufacturers that create or retain “significant numbers” of full-time jobs by making energy-efficient products such as wind or solar energy, biofuels, and advanced electrical storage systems.
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The Clean Energy Manufacturing Program won’t finance 100% of a project because Commerce will administer it in much the same way it would other business assistance programs — with the recipient contributing to the financing through investors, bank financing, its own resources, or a combination.
There are prohibitions on the use of this money established by federal law — it can’t pay for land or buildings or research and development — but it came pay for machinery tools, equipment, and other working capital.
Since the ARRA was signed in February, Jenkins, the Wisconsin OEI, has talked to about 800 businesses statewide expressing an interest in ARRA money. He said there is no deadline to apply for the clean energy funds, and that Commerce would continue to take applications until the money runs out.
“We’ve got applications so far in excess of the amount of money we have, but that’s always true of programs like this,” Jenkins said. “Commerce is going to continue to take applications until it feels that there are enough projects to fund and it can’t do any more.”
Down the road, more stimulus money will be available for renewable energy, and certain tax provisions that are designed to promote alternative energy will survive the life of the ARRA. Technically, ARRA programs expire Sept. 30, 2010, but the ability to get a 30% investment tax credit for solar energy development, for example, is available until 2013.
“This $55 million pot of money is a lot,” Jenkins noted, “but it’s only one piece of the resources that are available to businesses.”
With that in mind, we spoke to three green energy companies that are leveraging stimulus dollars and other government programs for alternative energy development: Virent Energy Systems (biofuels), Wavewind (wind energy services), and C5-6 Technologies (biofuel development services).
Virent Energy Systems
Federal loan guarantees are the government vehicle that Virent Energy Systems, which is developing low-carbon “green gasoline,” hopes to use as part of its future financing mix. Thus far, Virent has raised $70 million in government grants, equity investing, and private R&D collaboration projects with the likes of Shell Oil. Of that $70 million, just over $30 million has come from equity investors who own shares of stock in Virent.
Lee Edwards, CEO of Virent, said while the company is now pursuing an additional $25 million to $40 million equity investor financing in a Series C round from new and existing investors to continue existing research and development projects, the company will need government support to help finance the manufacturing plants it will need to mass produce its low-carbon “green gasoline” for cars, trucks, and aircraft. Each commercial-scale plant would cost in the hundreds of millions of dollars, so Virent would rely on a financing mix that includes federal loan guarantees, industry partnerships, and traditional bank financing.
(The current equity-financing round would take Virent through the end of 2012, which is the point where it will be ready to build a larger, commercial demonstration-sized plant. The company soon will open a 10,000-gallon pilot plant in Madison to demonstrate its ability to produce gasoline in larger volumes.)
Since a lot depends on the ability of Virent’s formula for turning plant sugars into green gasoline to sufficiently scale up on a cost competitive basis, Edwards believes the government should make it easier to access capital for the development of pilot and commercial demonstration plants. That’s where the loan guarantees, which are focused on technologies that have already been proven at the pilot and commercial demonstration phase, come in.
Virent believes the capital intensity of alternative fuel development requires it to leverage a number of different sources for financing.
“We think there’s an important role that government can play to help accelerate and de-risk deployments required by breakthrough technologies,” he said. “These technologies will be doing things that have never been done before on the scale that is required to meet some of the challenges of energy security, environmental improvement, and job creation within any country’s borders.”
Edwards used the barbell analogy to illustrate recent funding history. “One end of the barbell revolved around primary research and development, and there has been and will continue to be increased activity in R&D,” he said. “At the other end of the barbell is commercialization deployment, and those are primarily through loan guarantees. And the loan guarantees have been available for proven technologies that have been de-risked and loans that allow them to be commercially deployed.
“We have participated in the first load of the barbell, and we are on our way to be able to participate in the other load.”
The company has not yet decided how large the commercial demonstration plant should be, but it will use operating data from the pilot plant to guide its decision. Its current estimate is 100 million gallons a year in capacity, which is roughly 6,500 barrels a day of bio gasoline, bio diesel, and bio jet fuel.
The company, founded in 2002, has developed what it calls a “BioForming” technology platform to convert plant sugars from a variety of biomass sources into hydrocarbon molecules that are identical in structure to the petroleum-based hydrocarbons used in modern fuels. The company plans to use this platform to develop gasoline, then renewable jet and diesel fuels.
As for the Series C fund-raising, Edwards, who came to Virent from BP Solar (BP stands for Beyond Petroleum), is confident that the prospective deal is on track. “We have provisionally targeted either late this year or potentially early next year, depending on the structure and the progress of the deal, to close that round,” he said.
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Wavewind
The management team at Wavewind, a Sun Prairie-based company that serves small to mid-sized wind project developers, expects stimulus funding to benefit the wind energy industry, in part because of an $11 billion commitment to modernize and expand the energy grid.
The company was established to fill the gap between construction and maintenance services — including project planning and wind turbine construction and maintenance — between large wind projects and the small and mid-sized projects that Wavewind believes will proliferate as the wind energy industry grows.
Since Wavewind is more of a services company at this point — primarily constructing wind farms for smaller scale developers (50 megawatt and under) and manufacturers of wind turbines, and serving large-scale wind farms from the maintenance side — it doesn’t qualify for as many grants. The grants for wind tend to be product-intensive and typically are awarded to manufacturers. Nevertheless, Wavewind is in the process of pursuing a U.S. Treasury Department grant that is available thanks to some tweaking that was done in the ARRA.
According to Joe Pagano, managing partner of Autonomous Mind, a Madison-based business consulting firm, the Treasury grant program was created in the ARRA to address flaws in previously enacted production tax credit and investment tax credit programs that dangled credits of up to 30% for the production of a renewable energy system — everything from large-scale wind, to solar, to geothermal system. The problem with the tax credits was that many of the companies that were building new systems were not profitable so they were unable to take advantage of the tax credit, or the tax credit program was a more cumbersome tax benefit than they could get somewhere else.
The stimulus package introduced an alternative in which any company eligible for either the production tax credit or the investment tax credit could instead waive the right to that credit and choose a grant from the Treasury Department for up to 30% of the installed cost of a renewable energy system.
Wind projects can cost up to $150 million or more to develop, so a grant that covers 30% of the cost of renewable system can be a significant part of the financing.
Wavewind would pursue the grant to help develop a wind project in Hobbs, New Mexico. It would be the first project that Wavewind develops from beginning to end, rather than just coming in for the erection of the turbine.
“We’re looking to own and operate it,” said Tim Laughlin, president of Wavewind. “We bring the full scope of knowledge to construct it, and we are learning the development side as we go.”
Several pieces are already in place. Wavewind has towers on site that are monitoring and reading the wind, and unlike some situations in Wisconsin, where there are multiple landowners to deal with, Wavewind has a much simpler job in New Mexico because it is working one landowner with 55,000 acres. Wavewind will own 50% of the development.
“Very few times do you ever see the developer — we’ll call Wavewind the developer — get the landowner involved at this level, not only with a sense of ownership but also actually having ownership,” Laughlin said. “Usually a developer will come in and lease the real estate and do a 20-year lease.”
For the time being, however, Wavewind is trying to weather low gusts. Laughlin said the company had reached the $17 million mark in annual revenue, and was bursting at the seams until eight months ago. It began to feel the affects of the recession only after a huge inventory of wind turbines had been pushed through various plants and out to the projects.
With bank credit tight, the company’s early momentum has been blunted. Wavewind has a number of projects that are sitting on the shelf collecting dust because it can’t get the money, mainly bank financing.
“Unfortunately, things are a little slow right now until money is released, not just for Tim Laughlin but for the industry,” Laughlin said.
As more stimulus money is released, Dionne Lummus, business development coordinator of Wavewind, said the company would benefit indirectly because many of their customers will qualify for funding as they pursue wind projects. “You’ll see more projects get funded,” she said, “and they will come to us for the service part of it, whether it’s construction or maintenance.”
C5-6 Technologies
John Biondi, president of C5-6 Technologies, said his company is in the midst of a transition and is seeking government funds for second-generation biofuel development. C5-6, a spin off of Lucigen Corp., began in the era of ethanol, discovering biomolecules that help convert agricultural and forestry feedstocks into five- and six-carbon sugars (hence the company name) for processing into biofuels.
Biondi is awaiting word on his application for a Department of Energy grant of up to $25 million to build a second-generation biofuels pilot plant. The grant would help C5-6 and two private partners build a pilot plant for the production of cellulosic ethanol, the fuel that is suppose to be the successor to corn-based ethanol.
Its industry partners include a process-engineering firm called Chemtex, with which it has applied for the DOE grant, and an Italian partner, the M&G Group.
C5-6’s technology officer would be the principal investigator on the grant. In addition to supplying the enzymes that aid in the process of creating the fuel, the company would have a process management function on the chemistry side of the operation.
Meanwhile, Chemtex would design and build the facility in Sharon Center, Ohio, and offer its technology for the pre-treatment of cellulosic material, which breaks it down and prepares it for the actions of the enzymes that C5-6 would provide. The M&G Group has completed three years of agronomics work reviewing energy crops that would be processed into fuel. The nonfood crops include: Miscanthus, a grass found in Africa and southern Asia; arundo donax, a perennial cane plant that grows in damp soils; and fiber sorghum, which has the potential to be a low-cost feedstock.
Pilot plants, which produce about one ton of biomass material per day, are the first step in demonstrating that biofuels can scale, followed by demonstration scale plants, which produce from six to eight tons per day, and then commercial scale plants, which measure an output of 50-100 million gallons per year.
“A lot of these bio-based processes take some effort to scale,” Biondi said. “You can’t just build from lab scale to commercial scale overnight. You have to go through certain steps and that’s why the DOE is funding these different scale plants.”
Biondi believes the fact that it’s a collaborative project helps the grant’s prospects because the federal government has been encouraging partnerships that leverage various capabilities. C5-6 also is a partner on the DOE’s Great Lakes Bioenergy Research Center, which has been established at the University of Wisconsin-Madison to promote the development of cellulosic ethanol.
“We have strengths in the enzyme area, and our partner is a big global process engineering firm that develops a lot of process facilities around the world, not just in the fuels area but in the chemicals area,” he noted. “Between the three of us, hopefully we can cover the various bases here.”
For C5-6, second-generation fuels aren’t necessarily a Plan B because the intent always was to help develop them, but the company’s initial thrust — first generation corn-based ethanol — isn’t advancing. The company is involved in a process-improvement project for corn-based ethanol, but the effort is struggling because neither the DOE nor private investors are investing in first generation ethanol.
“I think it’s because of the sense that corn-based ethanol is yesterday’s news and due to the fact that in the last 18 months, first generation ethanol producers have not done well financially,” Biondi said. “That’s too bad because the market still needs them. If we could get them developed, we could certainly sell them, but getting research dollars in this area is just not an easy process.”
It’s the Jobs, Stupid
In an era of state and federal government declarations — Congress, for example, has decreed that biofuel production should reach 36 billion gallons by 2022, and by 2025 the state of Wisconsin wants to obtain 25% of its energy and fuel needs from renewable sources — it is the private sector that will help meet the stated goals.
There are three metrics by which clean energy grant applications will be evaluated: job creation or retention, production of renewable energy or reduction in fossil fuels, and green house gas emissions reduction.
The most important of these is jobs, according to Pagano (Autonomous Mind). He advised companies interested in grant money to expect a paper-intensive process, and to identify the right people to work with at the Wisconsin Department of Commerce, since many stimulus programs are administered through block grants to the states.
“The company has to have a clear understanding of what it’s going to use the money for, and make sure they articulate it properly to the people authorizing the money, and one of the things those people really want to hear are jobs,” Pagano said. “They are going to want to hear that this is going to create jobs.
“This stimulus is not just about a switch to renewable energy. The stimulus should increase the base of jobs permanently, particularly for manufacturing jobs.”
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