The government's relationship with biofuels has proved a lesson in mixed signals. Yes, ethanol blends of 15% were approved for gasoline in 2013, yet another sign of the dominance of the biofuel industry. But late 2013 also saw the EPA call take-back on its 2014 biofuel production mandate, when the agency proposed lowering the amount of renewable fuels in blended products and cutting the volume requirement target for 2014.

Such cutbacks, especially from the biofuel-friendly EPA, come at a vital crossroads for many in-flux biofuel companies. Some, like Solazyme (NASDAQ:TVIA), have seen recent jumps in growth and want to maintain their elevating prices. Others, like BioFuel Energy, have recently been forced to sell plants and want to keep a bad situation from getting worse. It's no wonder that major players like KiOR (NASDAQ: KIOR) and Clean Energy Fuels (NASDAQ:CLNE) are grinding their teeth concerning the shortage. In many cases biofuels have bet plenty of debt and infrastructure on the continued growth of demand for blended fuel and more renewable energy. The EPA announcement shows precisely the opposite – that the government believes biofuel demand will fall, a warning sign for many energy investors.

A tale of two forces
The problem is that the EPA is being pulled in two different directions. The November proposal considered dropping the volume requirement of advanced biofuels in 2014 by 20% from 2013. A similar proposal allowed petroleum refiners to drop the amount of renewable fuel in blended gas from 18.15 billion gallons in total to 15.21 billion – another change from the 2007 Renewable Fuel Standard plan. The bottom line? Less demand for biofuels, less room for biofuel growth, and (bio-energy companies fear) fewer interested investors.

For oil companies, this is all great news. Biofuel companies take a hit, blended fuel requirements drop, and traditional fuel prices benefit – they can see the results in their profit margins and avoid investing as much in expensive blended fuel operations. For refineries it is just one more step in the long conflict with renewable energy, and some suspect oil companies have been putting a lot of pressure on the government to ensure cuts like those proposed by the EPA are created and go through. Agricultural companies also eye biofuels with suspicions, despite new technologies that promise advanced biofuels from stock like plant waste, wood byproducts, and feedstocks that avoid a deleterious impact on corn prices.

For biofuel companies, the new decisions are anything but freeing. The Advanced Biofuels Association called it the industry's "worst nightmare." The majority of biofuels companies are still hard at work building infrastructure and gathering necessary capital for expansion. The EPA's latest signals threaten that flow of capital and could stop the growth of high-biofuel blends before it truly begins.

What will the EPA do next?
So far, no permanent decision has been made. The EPA spent January collecting public opinions and a number of letters complaining about the proposal. It will review the options and then either change the mandates or leave them as they are.

Regardless of the final outcome, the EPA's up-and-down decision making highlights a serious problem with the now maturing biofuel market. Bio-energy companies are in a difficult stage, caught between government subsidies and market independence. Government initiatives like the EPA mandate are awkward, committee-oriented things. Biofuel companies deserve more than such an unwieldy crutch...or at least more than a crutch tied to little more than the arbitrary darts of an environmental agency. The 2014 decisions made by the EPA will show if better methods of regulation are on their way, or if we will keep watching this dance in the long term.


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