Biomass Crop Assistance Program, Part 1 Suspended

The USDA proposed new rules for the program on February 4. A 60-day comment period follows the announcement. After the comment period, the USDA will develop a more final set of implementation standards. Once these rules are announced, applications for the program will once again be accepted. For applications received prior to the suspension of the program, payments will continue through March 31.

The new rules highlight the fact that the 2009 implementation—based on the Notice of Funds Availability—was a sort of rapid prototyping. It allowed the USDA to get a small version of the program up and running so it could evaluate the effects of the program on markets, the total cost of the program, and whether the program accomplished its goals. It appears the process was successful.

Proposed New Rules

The most significant proposed change is to the amount of the payments themselves. In the original rules, suppliers to any facility that produced electricity either for sale to the grid or for its own use were eligible for a dollar for dollar matching payment, up to $45/ton, for every dry ton of delivered eligible material. The new rules recognize that this payment amount would make the program cost prohibitive. Based on an early report that the USDA would spend $517 million in the first quarter of 2010 alone, it was widely speculated that the program would cost $2 billion per year.

The new rules offer three options for structuring payments.

1. A dollar for dollar per bone dry ton (BDT) matching payment EXCEPT for suppliers of facilities converting wood wastes and residues into heat or electricity for their own use. Suppliers to these facilities would receive dollar for dollar matching payments on eligible materials used to produce heat or electricity ABOVE the facilities historic baseline. This payment structure would incent the idea of "additionality," driving more renewable energy production rather than rewarding those who have been producing renewable energy for years, sometimes decades.
2. A tiered approach where suppliers to biofuels facilities would receive the dollar for dollar per BDT matching payment, not to exceed $45/BDT. Suppliers to facilities producing heat, power, renewable energy or biobased products would receive a lesser amount, roughly $16 per BDT or an amount based on the value of lower carbon emissions. This payment structure would incent biofuels production over other types of renewable energy.
3. A dollar for dollar per BDT matching payment for all facilities based on production above an historic baseline. The full payment, up to $45/BDT, would go to new facilities and facilities like schools, and public buildings that convert from fossil fuel use to renewable biomass, for eligible materials showing exceptional promise and innovation, and for consumption above a baseline. Payments would be reduced for facilities that do not increase production over their historic levels. This structure would also incent additionality, but it would also provide some level of payment to those who have historically produced their own heat and electricity from biomass.

Another major change in policy concerns the eligible materials list. The new rules prohibit payments for mill residues that are used to make higher value products, like composite panels. In our last issue, we described the advocacy efforts of the Composite Panel Association (CPA) to remove from the eligible materials list the mill residues used by composite panel makers. While the new rules are not final, it appears efforts by the CPA have been successful.

Other rule changes are likely to get less feedback:

• Originally, suppliers were eligible for matching payments for up to two years after they filed their first application; under the new rules, the two-year clock starts ticking when suppliers receive their first payment.
• 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 rules slightly modify the requirement for “arms-length transactions.” The program still precludes payments for “related-party transactions” but allows facility stockholders or cooperative members to participate.
• The original rules required that forest biomass be harvested in accordance with a forest stewardship plan. 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.

With a proposed cost of $2 billion per year, pausing the program to ensure the government gets it right will be welcome news to many. And for those who will be adversely affected by the new rules, the comment period is critical. The CPA has demonstrated that the USDA is willing to listen and act when an entire industry is being disadvantaged.

We think it unlikely that new applications for payments will be accepted before June, a potential disadvantage to suppliers who have already received their first payments and have set the two-year clock in motion. If you are in this category, we recommend you take advantage of the comment period and provide feedback asking for the 2-year period be suspended as long as new applications are not being accepted. The most robust feedback, however, is likely to come from the restructuring of the payments.

Finally, the new estimate of program costs now stands at $392 million for matching payments in 2010. The proposed rules indicate a total of $2.1 billion will be spent on this part of BCAP between 2010 and 2013. No funding is provided after 2013.