Aviation and Military Biofuels: New Thinking on Finance, Fuels

A transcript of the complete interview is here.

In the interview, Mabus revealed the influence that his tenure as U.S. ambassador to Saudi Arabia had on his thinking regarding the U.S. military and its energy platforms.

U.S. Navy Secretary Ray Mabus’ perspective on energy security, warfighting

“Oil, energy, it’s something I brought into this job [as Secretary of the Navy] and how we really shouldn’t be as dependent on foreign sources of our energy as we are today and it was driven home very loud and clear not only in Saudi Arabia, but in that part of the world.

Mabus restated his five-point plan for the Navy’s transition to new energy by 2020.

“We are too dependent on either potentially or actually volatile places on earth to get our energy. Now we’re susceptible to supply shocks and even if we’ve got enough, we’re susceptible to price shocks. I mean when the Libya situation started and the price of oil went up $40 a barrel, that was almost a billion dollars additional fuel bill for the U.S. Navy.”

Mabus pointed out that the oil shocks cost the U.S. Navy in terms of readiness and operation. “The only place we’ve got to go get that money is operations or training, so our ships steam less, our planes fly less, we train our sailors and Marines less.”

His focus, he insists, is not on the adoption of renewable energy for reasons of reducing carbon emissions, but U.S. naval preparedness. “We’re moving away from it for one reason, that is it makes us better war fighters. We would never give these countries the opportunities to build our ships, our aircraft, our ground vehicles, but we give them a vote in whether those ships sail and whether those aircraft fly or those ground vehicles operate when we allow them to set the price and the supply of our energy and we’ve just got to move away from it.”

But he did point to the U.S. Navy’s role in moving the country to new energy platforms throughout its history. “The Navy has led this country in changing energy for a long time now, ” he said.

The naysayers

“In the 1850s, we went from sail to coal. In the early part of the 20th century, we went from coal to oil. In the 50s, we pioneered nuclear. We were the first service, first people to ever use nuclear power for transportation. And now, we’re changing it again. And every single time, from the 1850s to today, you’ve got nay sayers, they say you’re trading one form of energy that you know about, that’s predictable, that’s affordable for another that’s not and you just shouldn’t do it. And every single time, they’ve been wrong and I’m absolutely confident they’re going to be wrong again."

Mabus restated the Navy’s commitment, specifically, to biofuels for marine and aviation fuel. “We just made the largest purchase of biofuel, we think in American history. We’ve certified all our aircraft, every aircraft the Navy and Marine Corp fly for biofuels. We’re doing the same thing with our surface fleet today. We’ve got an F-18, the Hornet, that’s flown 1.7 times the speed of sound using a 50/50 mix of biofuel and aviation gas.

“We’re looking at second and third generation biofuels made from algae, made from things like camelina, which is an inedible part of the mustard family and the main source of this big biofuel purchase came from inedible grease that came from Tyson foods, from cooking chicken basically. So we’re – we don’t have a specific technology in mind, we just need the energy.

The Obama Administration’s $510 million commitment to fostering commercial-scale biofuels for military use

The centerpiece of the Navy’s fuels strategy in the near-term: a Green Strike Group, powered by renewable diesel-electric engines, nuclear power and aviation biofuels, is able to operate independent of fossil fuel supply line threat or disruption.

The group contains a supercarrier; a carrier air wing of 65 to 70 aircraft; Ticonderoga class, Aegis guided missile cruisers; a destroyer squadron; two attack submarines, and a combined ammunition, oiler and supply ship.

The Defense Production Act and aviation biofuels

To ensure that a commercial market for advanced biofuels  developed, the US Government recently invoked the Defense Production Act of 1950, issuing a presidential finding the advanced biofuels were total to national security.

The DPA authorizes the President and Congress to directly invest in the commercialization of vital defense technologies that would otherwise not reach (or too slowly reach) commercial-scale production at affordable prices. In a joint announcement by DOE, USDA and the U.S. Navy, each branch of government is making available $170 million in previously authorized funding, and expects that figure to be matched at least 1:1 by the private sector, to provide $1 billion towards commercialization of advanced biofuels.

However, the US House has voted not to approve the Navy’s use of existing appropriations to fund its commitment, and the DOE has not yet won approval for its commitment, which would be funded out of its 2012 budget request.

New ideas for the financing aviation biofuels

Here at the Digest, we continue to see the struggles of early-stage biofuels companies to finalize commercial-scale scale-up of their technologies. The venture capital community generally funds the pilot and demonstration stages of development — and project finance is generally available for the second commercial-scale project. But who funds the first commercial projects — especially if the U.S. government DPA strategy fails?

Our take: get creative. For example, why could airlines, that are urgently seeking affordable aviation biofuels, provide the financing in the form of advanced payments for aviation biofuel orders?

Here’s how such a scheme might work. (In our example, we are using a $400 million, 38 million gallon plant producing in-spec aviation biofuels at $4 per gallon. Actual project capital requirements may vary.)

Step 1. A consortium of 10 airlines each provide $30 million, which will ultimately pay for 7.5 million gallon initial orders at $4 per gallon, for each airline. The cash is provided in the form of a three-year construction loan, payable at the airline’s own cost of capital. Investors in the advanced biofuels company provide the project equity of around $100 million.

Step 2. Working with the USDA, the project secures a 15-year, affordable feedstock supply; the airlines provide 15-year off take contracts, with the U.S. Navy providing a backup off take guarantee on the full faith and credit of the United States.

Step 3. A 38 million-gallon advanced aviation biofuel facility is constructed using the airline financing and project equity.

Step 4. Following completion, start-up and demonstration of the facility – essentially, taking out the technology risk – the project is refinanced at commercially-viable rates using the traditional project lending sources, or the bond market.

Step 5. The airline’s debt portion is converted to pre-paid orders, and the 38 million gallon facility delivers 75 million gallons of fuel to the airline buyers over a two-year period.

Step 6. Following completion of step four, the project moves to a “business as usual” relationship with its buyers.

Would such a step work? Bright financial minds can say better. But it does provide a financing vehicle without a U.S. government loan guarantee, or direct U.S. investment — and delivers commercial-scale aviation biofuels to the market within five years. Such a scheme could be repeated to achieve the scale necessary to meet military and aviation needs, and could be duplicated in other countries.

This article was originally pusblished on BiofuelsDigest.com and was republished with permission.