Biofuels industry at crossroads as military waits for lower prices.

• Author: Beidel, Eric
• Position: Energy

Military leaders like to say that their aircraft, ships and personnel can't tell the difference between petroleum and biofuel.

But their budgets can.

Planes, ships and helicopters all have completed successful tests using alternative fuels. But the Defense Department has been paying per-gallon rates for biofuels that make volatile standard oil prices look like steals.

It's the classic chicken and the egg conundrum.

Industry needs the military to buy big providing a demand signal that could help reduce prices, but a lot of things have to be sorted out in the young market before the Pentagon can afford to do that.

Proponents say that the biofuels industry is at a crucial juncture and needs the right mix of policy, action and financial support to cross the bridge to commercialization. But if any leg of that support goes weak, the military may have to wait even longer for green fuel to reach competitive prices.

To be sure, the costs have been coming down. The Navy is paying $12 million for 450,000 gallons of biofuel to power a carrier strike group off the coast of Hawaii this year. That $26.6-per-gallon purchase is nowhere near the $2.50 the service pays for each gallon of petroleum. (It has been stated that it would be about $16 per gallon if it were mixed with standard jet fuel.) But it can be considered a good deal when compared to what the Navy paid biofuels supplier Solazyme Inc. under a previous contract.

The service in 2009 spent $8.5 million for 20,000 gallons of algae-based fuel. That works out to $425 per gallon. In the fall of that year; the Defense Logistics Agency paid Montana's Sustainable Oils $2.7 million for 40,000 gallons of fuel from the camelina plant. That's about $67.50 per gallon.

The makers of biofuel have not moved to full-scale production. So the military is still paying research-and-development costs as part of the contracts.

During a recent discussion hosted by the Pew Charitable Trusts, former Republican senator from Virginia John Warner, a strong proponent of the Pentagon's green energy efforts, put the question to two executives whose companies have been big players in the nascent biofuels industry.

"How much per gallon does the military pay you?" he asked.

It took the gentlemen - Vice President of Renewable Energy and Chemicals at Honeywell UOP Jim Rekoske and Solazyme President Harrison Dillon - about 15 minutes to sidestep the question.

It's unfair to count the contracts currently being rewarded as per-gallon fuel purchases, Dillon said.

"All of our contracts with DoD are [research and development]," he said. "They involve research, purchase of new equipment and actual production of fuel ... The cost has come down in each of these contracts and we are confident that at full commercial scale we can...