After a number of delays, the Obama administration has issued proposed rules for the full implementation of the Biomass Crop Assistance Program (BCAP), a biomass subsidy designed to spur the development of biofuel and alternative energy markets. Upon issuing new guidelines, the U.S. Department of Agriculture (USDA) immediately suspended payments under the temporary program developed last year. This means that local Farm Service Agency (FSA) offices will no longer accept new applications for matching payments under BCAP until the full program is adopted.
For applications received prior to the suspension of the program on February 8, payments will continue through March 31. The government has instituted a 60-day comment period for interested parties to provide feedback on the BCAP program, including new provisions.
The USDA has made some major changes to the program because it swelled well beyond initial projections as non-target industries, such as the forest products sector, rushed for matching payments. Costs soared to an estimated $2.1 billion in 2010, which has caused the USDA to put the brakes on the program and to reconsider how to calculate subsidies.
The draft rule was proposed by the Commodity Credit Corporation (CCC), a government owned and operated entity of the USDA intended to stabilize, support and protect farm income and prices.
BCAP subsidies could open up a world of possibilities for the forest products industry. Alternately praised and criticized by different sectors, much of its impact is still guesswork and dependent on local timber market dynamics. Sawmills and pallet manufacturers could qualify as eligible conversion facilities if they convert renewable biomass into heat, power, or advanced biofuels such as wood pellets or wood chips.
The BCAP program was initially designed to spur development of cutting edge technology and alternative energy markets primarily with crops, such as switch grass, not conventional wood biomass used in proven technology, such as wood co-generation facilities. Although the initial program did not exclude these facilities, they were not the target. One of the main reasons they will likely continue to be allowed is that wood biomass remains the most widely used renewable energy source in the country. It may be difficult for BCAP to be seen as a success in the short term if traditional wood biomass sectors are excluded.
BCAP Program Changes
The pilot program authorized payments of up to $45 per dry ton to producers for delivered eligible materials to recognized conversion facilities. Now, it appears the new rules will cap those amounts in some way. The government has suggested the following three options:
1.) One option is to provide matching payments at the rate of $1 for each $1 per dry ton as stipulated in the initial program with a cap on those biomass facilities that convert wood wastes or wood residues into heat or power for the facility. In those cases, a historical baseline of heat or power the facility produces from these materials will be established by the Deputy Administrator and payments will be made only for materials delivered to those facilities for conversion to heat or power above that baseline.
2.) A second option is to tailor the matching payments through a “tiered approach” designed to encourage advanced biofuels production. In this option, biomass conversion facilities converting eligible material to any use other than advanced biofuel — such as heat, power, renewable energy or bio-based products — would be able to receive payments at some point below the maximum rate. Another approach would be to develop a payment rate based directly on the value of lowering carbon emissions.
3.) Finally, a third option is to vary the matching payments to encourage additional biomass production beyond a historical baseline. Under this option, the government would calculate the matching payment at the rate of $1 for each $1 per dry ton paid by the qualified biomass conversion facility and then reduce the actual amount paid based on the difference from the baseline. For example, full payment could be provided for delivery of eligible material to new facilities, certain public buildings, facilities, or property (such as schools, universities, military facilities or federal and state buildings) that convert from fossil fuel consumption to renewable biomass feedstocks.
These changes are just proposals and the USDA is open for comments to help shape the final policy. The federal government has also proposed the following changes:
• The two-year period for matching payment eligibility would begin on the date of issue of the first matching payment, not after initial approval as stipulated in the original rule.
• The original rule called for measuring the moisture content of each load of biomass; the new rule accepts industry standards for measuring moisture content, including random sampling and the use of historical statistical data.
• The proposed rule replaces “arm’s length transaction” language with related-party transaction requirements. Related-party transaction restrictions will allow cooperatives and stockholders of a privately or publicly held company who deliver eligible material to that company to remain eligible.
• The original rules required that forest biomass be harvested in accordance with a forest stewardship plan and follow all state regulations. The proposed rule has expanded the types of plans acceptable to include the American Tree Farm Program, the Sustainable Forestry Initiatives Program and State Best Management Practices Programs.
Industry Reaction
Many raised the question of how this subsidy would impact existing markets for wood residues. The draft takes this under consideration and proposes that only wood chips and shavings that would not otherwise be used for higher-value products, such as composite wood panels, be eligible for the subsidy. The shortcoming in this area is that the rule does not address how this would be regulated or monitored. The term “otherwise used” is vague and could be interpreted in several different ways.
It appears that the wood composite and panel industry, which was concerned about the impact of BCAP on its raw material supplies, may have gotten some of what it wanted by efforts to reduce payments to existing wood biomass markets and facilities. Companies that have already signed up and have started receiving BCAP payments are now in limbo waiting for the full program to be enacted, which likely won’t happen until sometime this summer. These companies may need to lobby during the comment period for special consideration so that their eligibility time frame is not drastically reduced.
In spite of the fact that the conversion facilities will not be receiving any payments from the program, they may still be able to benefit by lowering the price they pay for incoming biomass. Producers in the BCAP program may be willing to sell at a lower price, as they will actually receive double what the facility pays them once they receive the matching payments from BCAP.
For logging companies located near eligible conversion facilities, signing up for the matching payments is worth the time. BCAP funds could make removing slash economically viable in some areas.
Market distortion remains a large concern for many as how it will play out is still unknown. The subsidies would allow conversion facilities to pay less for incoming biomass since the supplier will receive a matching payment from the FSA.
Donna Harman, president and CEO of the American Forest & Paper Association, said, “AF&PA urges USDA to work to 1.) minimize BCAP’s distortions to existing markets for biomass, 2.) expedite BCAP’s provisions intended to increase the supply of biomass, and 3.) implement the program in a fair and transparent way that guarantees all stakeholders’ concerns are given fair consideration.”
BCAP History
BCAP was authorized as part of the 2008 Farm Bill, but it is just beginning to be implemented. It is part of the Obama Administration’s goal to aggressively accelerate the development of advanced biofuels that will be carried out by the Biofuels Interagency Working Group, chaired by the secretaries of the U.S. Departments of Agriculture and Energy and the administrator of the Environmental Protection Agency (EPA).
“Biofuels and other forms of renewable energy can be a major component of our strategy for reducing our dependence on imported energy,” said Senator John Thune, author of BCAP. “Providing incentives for the production of biofuels from non-edible sources will hasten the spread of next generation biofuels and create economic opportunity in places where traditional biofuel was not possible.”
The CCC is looking for public comment on the draft. A 60 day comment period was started with the publication of the draft in the Federal Register.
Comments can be submitted at www.regulations.gov until April 9. The entire proposed rule can be downloaded at http://edocket.access.gpo.gov/2010/2010-2556.htm
