9. Policy Instability
“You have to have three things,” former Terrabon CEO Gary Luce told the Digest last year. “A, you have to be able to compete on price. B, you have to be able to attract commodity equity and debt. C, you have to have stability in the policy.”
Why does policy instability matter, and why is it a scary challenge? It’s the chicken and egg aspect. You can’t have stable policy without capital formation that delivers on policy goals. But you don’t get capital formation, in new technology sectors, without policy stability.
“Equity is not really the issue,” asserted Luce. “There is a lot of money on the sidelines available to work. We have got to build debt, it is really about debt formation. You need 40-50 percent debt on the early plants – and with debt it is all about the off-take contracts, and the protection from RFS2 sitting on top of those off take contracts. Later on, the debt component will be even higher as the technologies prove out, and the stability of RFS is confirmed.
“With debt investors, the question for them on RFS is real – “is this thing really going to go away, what is the time frame I can count on, to get the cash flows from this project to pay that debt down?”
“The market is going to clear on the equity side. But equity won’t go to the dance by itself.”
“The RFS2 debate, itself is now becoming a factor in creating instability. It doesn’t matter whether that is right or wrong. What matters is that the debate itself is creating a large set of uncertainties in the minds of investors. With the technologies that are out there, and the costs they have at scale, we know that the policy will be stable if the capital can be formed, because the sector will be powered by the difference it is making – the way it has transformed the cost and supply chain for fuel, and the way it has transformed the value of feedstocks.
As BIO’s Brent Erickson put it, “In addition to hurting consumers at the pump and harming the economy, the continued volatility in the oil markets undermines military readiness, putting our national security at risk…The technology being developed by [cellulosic and advanced biofuel] companies, in large part due to the regulatory and financial certainty provided by the RFS, is helping the U.S. economy by mitigating the impact high and volatile global oil prices have on all facets of the economy and reducing gas prices at the pump for American consumers.”