Biodiesel a concern as renewable fuel subsidies end

A couple of key federal subsidies for the renewable fuel industry are about to end, cutting billions of dollars tax credits for the ethanol and biodiesel industries.

Congress could renew the tax credits when it returns to Washington early in 2012, but they are set to expire at year's end Saturday. Representatives of the well-established corn ethanol industry say their business will do just fine without the support, but those in the still-developing biodiesel sector are concerned.

Minnesota's ethanol industry makes about $2.5 billion worth of the fuel a year, nearly all of it from corn. Walk through one of the state's 21 ethanol plants and you'll smell the distinctive odor of all that corn fermenting into alcohol.

"It's a sweet smell to it," said Brian Ketscher, CEO of Highwater Ethanol near Lamberton in southwest Minnesota. "And it's the start of the ethanol process."

For Kletscher, that fermentation process also is the smell of money. His company has made millions of dollars in profits in each of its first two years of operation.

Kletscher hopes his company's good fortune continues, even after the industry's 45-cent-a gallon tax credit expires.

This year, the federal government paid gasoline companies $6 billion to blend ethanol into their fuel, continuing a subsidy that has been in place since 2004.

Congress put the subsidies in place to give a financial boost to the ethanol and biodiesel industries. The approach aimed to improve profits, help already operating biorefineries remain solvent and create a financial climate that would encourage the construction of new plants.

The companies passed much of the credit on to consumers, helping hold down the price of ethanol and boosting sales of the renewable fuel. Without the credit, gasoline prices likely will creep up a few cents a gallon.

But Kletscher predicts that even without the federal subsidy, the ethanol industry will continue to make money.

"[The] ethanol industry is here to stay, there's no ifs, ands, or buts about that," he said.

That's despite widespread criticism of the industry. Livestock producers say turning corn into fuel instead of food has raised the price of the grain so high it's hurting their profits. Many environmental groups say ethanol pollutes and promotes intensive agricultural practices which damage farmland.

Kletscher said ethanol helps wean the nation off foreign oil. He's optimistic the industry will survive the loss of the subsidy, noting that ethanol producers have found ways to operate more efficiently. For example, Kletscher said his plant has cut its water use almost in half. It also has reduced energy costs.

Although Kletscher would like to see the federal tax credit continue, he doubts there are enough votes in Congress to preserve the subsidy.

"We planned to have it there, but we knew eventually it would go away," Kletscher said. "And with the economy where it's went, we understand as an industry we need to do our part in cutting the federal deficit."

One federal program that will help ethanol survive is the nation's renewable fuel standard, passed by Congress in 2005. It requires gasoline companies to blend most of the nation's ethanol output into their fuel. That provides a built-in market for Highwater and the rest of the nation's more than 200 ethanol plants.

The standard will also help keep another farm-based fuel in business. Biodiesel, made mostly from soybean oil, also is losing a valued federal tax credit.

"From my perspective, is a safety net," said Steven Rupp, vice president at Ever Cat Fuels, a Minnesota biodiesel producer.

"It's better to have a tax credit than to not have a tax credit," he said.

Rupp's company makes about 3 million gallons of biodiesel fuel a year at its plant in the east central Minnesota town of Isanti. Most of that fuel is made from waste cooking oil. Rupp said the federal tax credit helps attract investment money for new biodiesel plants.

"It's very difficult, when you go to a bank, to provide them with financial models and information and projections when you can't really, with any certainty, say whether or not that tax credit is going to be around," he said.

But Rupp is confident that biodiesel producers will continue to make money once the tax credit expires. That's because a biodiesel renewable fuel standard mandates that U.S. refiners blend at least a billion gallons of biodiesel into their products in 2012. While it doesn't guarantee producers a set price for their fuel, it does guarantee a market.

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