US black liquor credit winding down; cellulosic biofuel, biomass benefits unlikely

By James McLaren, Senior Editor, PPI Pulp & Paper Week, RISI

SAN FRANCISCO, Nov. 9, 2009 (RISI) - Black liquor funding for US pulp and paper mills -- which was on track to total more than $7 billion -- appears to have only eight weeks remaining as industry sources said that federal funding will end on time at yearend and two other programs will not amount to as much funding as previously anticipated.

Even with language expected to be included in pending health care reform legislation that would disqualify black liquor, US alternative energy tax credits to kraft pulp producers for black liquor combustion are seen to expire as scheduled at the end of this year without being revoked early. They will not be extended to next year, contacts added.

The industry will also be excluded from a cellulosic biofuel credit available in 2009-2011, and a biomass subsidy will be limited to woodfiber consumption and will likely exclude black liquor, greatly reducing a potential windfall to pulp and paper mills next year.

The newer assessments come after reports that began last month speculated that a cellulosic biofuel producer tax credit -- worth double the $0.50/gal tax credit under the alternative energy tax credit this year -- could provide up to $25 billion to the industry through 2011. The separate Biomass Crop Assistance Program (BCAP) was estimated with a potential value of more than $4 billion to the industry in 2010 but appears it will be much more limited.

Black liquor II.

The cellulosic biofuel producer credit, referred to as "black liquor II," lacks an essential ruling from the US Environmental Protection Agency (EPA), under clean air and transportation biofuel considerations, that would define black liquor as a biofuel. EPA is not expected to do so, sources said. The $1.01/gal credit is a non-refundable tax credit, restricting its value to companies with a tax liability, even if they qualified for the program, which they will not.

The legislation tied to health care reform will exclude black liquor from the cellulosic credit, with reports saying the savings of an estimated $24 billion from the paper industry could be used to offset costs of the health care bill. But sources noted, despite earlier reports, the industry was never likely to be part of the cellulosic program.

"We don't think we qualify for this and aren't pursuing it," an American Forest & Paper Assn official told Pulp & Paper Week.

Biomass cap.

After reports speculated black liquor would qualify for payments under BCAP, the USDA (US Dept of Agriculture) Farm Service Agency (FSA) on Oct. 28 released new eligible materials definitions that exclude black liquor, limiting the program to woody biomass including residual woodchips and bark. A knowledgeable source said the FSA guideline was not the draft rules of the program but was a strong indicator that black liquor combustion would not be included.

That restricts payments to biomass material suppliers to pulp and paper mills with wood-fired energy and cogeneration plants. Up to 15% of pulpwood volumes defined as biomass eventually used as energy are eligible for the up to $45/dry ton payment, which could help the mill negotiate for lower pulpwood prices.

A biomass market contact said though the parties can share the cost benefit, to include black liquor "would have been double dipping," for the mill.

Reports earlier speculated the paper industry could gain $4 billion and lumber mills up to $1 billion under BCAP. Newer estimates lower the benefit to $600 million to paper mills. But industry contacts indicated the total BCAP program itself would be limited to about $500 million, of which the pulp industry would share a small fraction.

Overall, the BCAP payments without black liquor appear a boon to the wave of new biomass energy and wood pellet plants, and giving them a leg up in competing with pulp mills for fiber and driving up costs.

"All fiber users should get equal treatment," said a contact. "It would be troubling to see BCAP subsidize pellets for export to Europe."

"At risk are any mill that consumes pulpwood in the open market but does not have wood-fired cogeneration," the biomass contact said.

Yet the limited size of the BCAP program would also soften the impact on woodfiber costs, sources added.

Pulp and paper mills were reportedly flocking to register as approved biomass conversion facilities, with FSA's latest approved site list showing 10 more pulp mills qualifying since September, to a total of 28 mills. Eight of them are Smurfit-Stone Container mills.