November 5, 2006

Harvesting Green Power

The November 13th issue of Business Week features a Special Report on the agricultural development of ethanol. It also has an annotated slide show called Farming for Fuels, From Grease to Grass.

The focus of this article is the conversion of agricultural feedstock into biofuels and how it is transforming American agriculture. Renewable "Green Power" is rejuvenating the profits of farming and helping to stem the exodus of many who would otherwise leave for the city. As stated below, emerging greenhouse gas legislation like California's AB 32, provides farmers with a new income opportunity from selling carbon credits as they plant and grow crops and trees that store carbon as they grow.

But this is only part of the impact that "green power" will play in the decades ahead. We will also see the conversion of unrecycled wastes into biofuels, green electricity, and ethanol. Our forests, brownfields, and wildfire tender boxes will need reassessment as both potential sources of greenhouse gases and as carbon "sinks" - safe renewable havens for storing carbon that would otherwise contribute to global warming. We need to spur research and development in our technical institutions for energy, automotive, and architectural retooling. What we learn now will help to provide new answers to energy, global warming, and waste management problems in years to come.

Here are some excerpts from the Business Week article. I recommend reading it in its entirety:

Harvesting Green Power
Business Week, Special Report (November 13, 2006)

Alternative energy, once a cause célèbre for bands of tree huggers, has emerged as a pillar of the nation's strategy for energy independence, economic security, and the battle against global warming. For all the talk of green rooftops on Chicago's skyscrapers and wind farms off the coast of Nantucket, there will be no national transition to "green power" without a widespread conversion of our rural farm economy, with its unparalleled abundance of wind, sunlight, and energy-rich crops.

But this transformation of the farm belt raises a host of concerns. To make even a small dent in imports of oil from the Middle East, an increasing portion of food crops will have to be converted to fuel. That could push up the cost of food on the dinner table. And global warming? Critics of America's budding ethanol economy say that if you factor in all the natural resources needed to cultivate corn and transform it into ethanol, the environmental gains are less than meet the eye.

Pioneers in agricultural biotech say they will soon be able to address some of these worries with better biofuels. But such breakthroughs require heavy investment in research. And given the wild fluctuations in oil prices, which have fallen by more than 20% in the past several months, research funding may not continue at today's heady pace.

If Americans start to buy more energy from the Midwest rather than the Middle East, green energy boosters say it will eventually help stabilize energy prices and shrink oil imports. Over the long term, wind power could grow from less than 1% of the U.S. power supply today to 20%. Ethanol and biodiesel, now around 4% of transportation fuels, could go to 20% or more.

Admittedly these are optimistic projections. Still, in Washington, lawmakers trumpet them as they tout the merits of energy independence. But to farmers, long at the mercy of fickle commodity prices and woefully dependent on government handouts, green mainly means money. Suppose the U.S. were to reduce imports of oil and oil byproducts by 20% and replace that with homegrown biofuels: In the course of one year--assuming prices average about $50 per barrel--farm communities and other biofuel players would reap some $50 billion that, in the past, would have flowed to foreign oil producers.

Still, there are harsh reminders that the fortunes of alternative energy remain tethered to oil prices. At $70 for a barrel of oil, it costs $2.60 to make a gallon of gasoline, vs. around $1.25 for ethanol, estimates Paul Ho, a director at Credit Suisse First Boston's (CSB ) energy group. But the gap shrinks as oil prices fall. Most experts figure that oil would have to duck below $30 for months at a stretch before the economics of ethanol stop making sense. Yet even with oil trading at just $60 and ethanol giant Archer Daniels Midland reporting bumper profits, Wall Street is getting skittish. Ethanol stocks like Aventine Renewable Energy Holdings (AVR ) and VeraSun Energy (VSE ) are 42% and 20% off their initial public offering prices, respectively, while producer Hawkeye Energy has delayed its IPO. "People are forgetting the high energy prices in the summer. It's crazy," says Jacob Golbitz, research director for consulting firm HighQuest Partners.

It helps that alternative-energy markets are propped up by state and federal mandates to push more ethanol into fuel tanks and more green power onto the grid. The new nationwide renewable fuel standard, for example, calls for 7.5 billion gallons of ethanol production by 2012. Most experts think demand will far outpace those government-set levels, driven in part by state requirements for biofuels and the growing consumer preference for cleaner gas.

Farmers have other ways to play in emerging green markets. One is trapping carbon emissions by planting long-lived trees that lock up carbon dioxide as they grow. Many companies believe that, in the near future, the U.S. government will soon start to impose caps on greenhouse gases, following the lead of governments in Europe and Asia. If that happens, a market will emerge enabling companies to buy and sell credits--essentially rights to emit.

While farmers wait for the cellulosic revolution, they're enjoying the spike in commodity prices caused by demand for biofuels. Corn has sold for an average of $2 to $2.50 a bushel since the 1970s. But agrarian economists predict corn prices will hit a new long-term level north of $3. Across a typical year's crop, that's an extra $9billion going to farmers.

That means that Uncle Sam won't have to kick in as much money to support them, since some of the current corn subsidies are based on the price of commodities. "It depends on how high prices go, but subsidies could be cut by $5 billion to $10 billion a year," says professor Christopher Hurt of Purdue University. Still, he admits, some of those savings will be offset by the increasing amount of money the government is spending on biofuel. Today, fuel blenders receive a 51 cents-per-gallon tax credit for ethanol.

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