House Agriculture Subcommittee on Conservation, Credit, Energy, and Research - Public Hearing Hearing

Mascoma Corporation is an innovative biofuels company committed to developing environmentally sustainable, low cost, low carbon biofuels from cellulosic biomass. The company's corporate office and R&D laboratories are based in Lebanon, New Hampshire. Mascoma is producing cellulosic ethanol on a demonstration scale at its facility in Rome, New York. Its affiliate, Frontier Renewable Resources, is developing a commercial scale production facility in Kinross, Michigan.

Background on Mascoma's Technology and Facilities

As being described today, there are a number of different technologies that may be used to transform excess and waste biomass to ethanol, and long term, to other biofuels and biochemicals. Depending upon available feedstocks and other region and site-specific factors, different cellulosic conversion processes will better suit specific regions of the country. For example, wood chips may be used in northern climates, sugar cane in the Gulf Coast, and corn stover in the Midwest. A diverse portfolio of technologies and fuels will be required to meet the United States liquid fuels demand in the coming years, and Mascoma is confident that we can meet that challenge. We know that the technologies exist to convert cellulosic material into fuels. Our focus now is to scale up our process to operate on a cost competitive commercial basis.

Mascoma's Consolidated BioProcessing method converts non-food biomass feedstocks into cellulosic ethanol through the use of a patented process that eliminates the need for costly enzymes and additives. This transformative technology enables ethanol competitively priced with gasoline to be derived from cellulose in a manner not previously possible. The processing steps involve:

1.Sustainable harvesting of pulpwood (the feedstock we are using in our first plant).

2.Pulpwood chipping.

3.Pretreating the feedstock by cooking and processing the wood chips into a softened material (similar to peat moss).

4.Combining the pretreated material with proprietary microorganisms in a fermenter, and fermenting the cellulose into ethanol.

5.Recovering ethanol and lignin from the process. Cellulosic ethanol is blended with gasoline as a low carbon motor fuel. The unconverted fiber, called lignin, is used as a low carbon boiler fuel or converted into other non-ethanol fuels.

Since several different biological actions that carry out this transformation are consolidated into a single type of microorganism, our method is referred to as Consolidated BioProcessing or CBP. The technology is derived from an array of molecular tools used to manipulate the makeup of the organisms. Unlike other biological methods of producing ethanol, Mascoma's CBP process eliminates the need to add expensive enzymes used to convert cellulose into the sugars needed to produce ethanol. Since enzymes are one of the highest cost components of cellulosic ethanol production, eliminating them greatly decreases the cost of production.

Mascoma's aim is to develop the lowest cost technology for low carbon cellulose ethanol production that will, in turn, be used in commercial scale ethanol facilities in rural America that will create new economic opportunities for local feedstock providers, create jobs, and lessen our dependence on foreign oil.

Efforts Underway to Develop First Commercial Facility

Mascoma, in conjunction with J.M. Longyear, is actively developing the first commercial scale production facility through its affiliate Frontier Renewable Resources in Kinross, Michigan. The facility will utilize sustainable, lower-value wood products such as pulpwood chips to produce up to 80 million gallons of cellulosic ethanol per year. We have spent considerable time analyzing feedstock availability to ensure sufficient supplies of pulpwood. The feedstock supply will exclude wood chips from sawlogs or veneer logs, which are too valuable for use in biofuel production.

I want to thank the Committee for its leadership and work to reconcile the definitions of renewable biomass included in the 2008 Farm Bill and the Renewable Fuels Standard in the 2007 Energy Bill. The clarification included in the American Clean Energy and Security Act of 2009 is of significant help to us in obtaining our feedstock supply.

We have made substantial strides forward in developing the Kinross site by combining significant private capital with grant assistance from both the State of Michigan and the United States Department of Energy Office of Energy Efficiency and Renewable Energy's Biomass Program. Site acquisition and preliminary design engineering are complete. Key technology milestones are on track. Significant progress has been made on environmental and permitting processes. Letters of intent for construction and off-take agreements are in place.

The Kinross biorefinery will be located in a rural area in the Upper Peninsula of Michigan. The plant will be constructed on a site near a decommissioned U.S. Air Force base. Kinross Township is located in Chippewa County, Michigan, a sizable rural county of 2,700 square miles. At the time of the 2000 U.S. Census, Chippewa County had a population of only 38,543, while Kinross Township had a population of 5,922. The construction and operation of a cellulosic ethanol plant in this area will create jobs and develop demand for underutilized regional hardwood timber resources, providing support for the local economy within a 150-mile or greater radius. Once operational, the plant will employ an estimated 50-60 highly skilled people. According to the State of Michigan, the construction, maintenance, and operation of this facility will create approximately 450 indirect jobs, for an estimated total of 500 regional jobs created by this project over the next five years. After the financial success of the facility is proven at 20 million gallons of cellulosic ethanol production per year, further expansion of the facility up to 80 million gallons per year is anticipated. This future expansion will amplify the longevity of new jobs created by this activity.

Like the other cellulosic companies, we continue efforts to secure sufficient financing to complete the project. The first commercial biorefineries capable of producing 20 to 40 million gallons of cellulosic biofuel per year will cost more than $200 million to construct. These commercial scale facilities, once under operation, will lead to rapid de-risking of the technology, and open the path to significant cost reductions as operating data becomes available and larger scale plants are constructed. Securing financing for a first-of-a-kind facility is often challenging. The difficult capital market conditions over the past year and a half have made financing even tougher, particularly for commercial debt financing. Thus, continued federal government support is critical to keep the cellulosic fuels industry on track to meet the production mandates of the RFS and meet the promise of new jobs, less dependence on imported fuels, and enhanced national security.

Experiences with USDA and DOE Loan Guarantee Programs

The USDA and DOE loan guarantee programs could be valuable tools to help commercialize new technologies. Unfortunately, they have not, to date, proven to be the catalyst for quickly developing commercial scale cellulosic facilities.

Given the current USDA loan guarantee structure, challenging credit market climate, and new technology of cellulosic projects, banks are reluctant to provide project financing and to use the USDA loan guarantee program to fund commercial scale cellulosic ethanol projects. Earlier this year, Mascoma and its financial advisors contacted 174 commercial lenders seeking a bank partner to apply for a USDA loan guarantee for the Kinross project. We spent significant time and money on the loan guarantee application process. Only two lenders were willing to work with us. We selected one, but in the end were unable to move forward due to structural problems with the USDA loan guarantee program requirements. Other first-mover cellulosic companies had similar experiences with their projects.

Lenders told us that they need several adjustments to the USDA loan guarantee program in order to meet their credit and pricing guidelines. For example, as the project size increases, the loan guarantee amount reduces. This discourages larger projects with more impact on jobs, climate and energy independence. Other areas that need addressing include:

* holding a minimum of 50% of the non-guaranteed portion of the loan;

* requiring identical terms for the non-guaranteed and guaranteed loan portions despite much different risk profiles; and

* limiting to 1% the difference between the interest rate on the guaranteed portion of the loan and the weighted average interest rate of the full loan amount.

In addition, we recommend several other program improvements that would improve funding prospects:

* allowing biorefinery applicants to use the Federal Financing Bank as the sponsor lender, similar to the DOE loan guarantee program;

* authorizing guarantees of a revolving credit facility for project working capital needs;

* allowing the replacement of the non-guaranteed portion of the loan with equity or subordinated debt at market rates to provide more flexibility and options in the financing structure; and

* increasing the percentage of guaranteed debt for projects over $125 million to enhance recruitment of sponsor bank support.

We are working with other industry leaders to encourage USDA to address these issues moving forward.

We appreciate this Committee's efforts to create a workable loan guarantee program at USDA and hope the Department of Energy's loan guarantee program will also evolve to eliminate present, although perhaps unintended, significant hurdles for developing commercial cellulosic ethanol facilities. In the most recent round of applications, it seems to us that DOE may have applied the same evaluation criteria for both mature and developing technologies. This has the consequence of bias in favor of mature technologies and companies versus new ones like advanced cellulosic fuels.

The cellulosic industry will develop as quickly as the first plants are constructed and proven. To speed the current trajectory of construction, more direct, risk-tolerant assistance will be required.

Refundable Investment Tax Credit Would Encourage Equity Investment

While not within the jurisdiction of this Committee, I want to briefly raise a concept that a coalition of several leading ethanol companies, including Mascoma, are advocating. The American Recovery and Reinvestment Act of 2009 included a provision making the Investment Tax Credit for renewable electricity generation, including wind and solar, refundable through a monetized Treasury Department grant. To date, over $1 billion has been awarded through this program to help develop renewable energy projects across the country. This mechanism is proving to be an effective and efficient means of jump-starting development of renewable electricity projects. We believe that providing a similar 30 to 40 percent refundable investment tax credit for advanced biofuels projects would be significant in helping attract private capital needed to build the next generation commercial production facilities.

As we look at the RFSII mandated levels of advanced and cellulosic fuels in the near term, it is critical that the first wave of cellulosic ethanol facilities close their financing and begin construction as quickly as possible. Given the current constraints of the USDA and DOE loan guarantee programs, a monetized investment tax credit is one of the few policy mechanisms that can be employed in a timely manner to help ensure cellulosic ethanol production capacity comes on line in time to comply with the mandates of the RFS.

Conclusion

We, at Mascoma, very much appreciate the significant federal support to help develop a commercial cellulosic biofuels industry. We are confident in our technology and our ability to produce cellulosic biofuels in a cost-competitive manner and appreciate the ability to leverage federal support moving forward. From significant investment of funds in the 2008 Farm Bill's energy title for advanced biofuels, to the expanded Renewable Fuels Standard in the 2007 Energy Bill, to the cellulosic ethanol production tax incentive, to Department of Energy's grant funding, Congress has provided important support to help this industry succeed.

However, given the current economic conditions, we will need continued federal involvement and commitment to seeing the promise of the cellulosic industry come to fruition. I look forward to continuing to work with the Committee in that regard.

Thank you.

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