CO2 pipeline opponents doubt certainty of $1 billion corn-based jet fuel project

From left, Steve Westra of the Governor’s Office of Economic Development, Lt. Gov. Larry Rhoden, Gevo CEO Patrick Gruber, Lake Preston Mayor Andy Wienk and First Gentleman Bryon Noem participate in a ceremonial groundbreaking for Gevo’s Net-Zero 1 project near Lake Preston on Sept. 15, 2022. (Courtesy Lt. Gov. Larry Rhoden/Twitter)

John Hult, South Dakota Searchlight

The largest economic development project in South Dakota history hinges on two things: a carbon pipeline and a $950 million federal loan guarantee.

If the former doesn’t happen, according to the company’s CEO, the money secured through the latter won’t land in South Dakota.

But opponents of the project and the Summit Carbon Solutions pipeline tied to it doubt the company will build in South Dakota or anywhere else.

The project in question is an approximately $1 billion sustainable aviation fuel facility in Lake Preston, dubbed “Net-Zero 1” by Gevo, the Colorado-based carbon abatement firm.

Many state leaders, including Gov. Kristi Noem, have expressed enthusiasm for Net-Zero 1. Her son-in-law, Kyle Peters, is a registered lobbyist for Gevo. Senate Majority Leader Casey Crabtree has described both the pipeline and Gevo projects as critical to the future of South Dakota’s ag industry.

Gevo secured $12.3 million in project assistance through the state’s Reinvestment Payment Plan in 2022, on top of $500,000 in incentives for water infrastructure.

Doug Sombke of the South Dakota Farmers Union isn’t as enthusiastic. He thinks Gevo’s business plan is a house of cards, built on sustainable aviation fuel tax credits that could disappear under a Republican presidential administration and uncertainty on the method the federal government will use to calculate carbon sequestration values.

“This is such a wild-ass dream it’s not even funny,” Sombke said.

In public forums and legislative hearings on pipeline-related bills, opponents have begun pointing to Gevo’s stock price to suggest that the company isn’t healthy enough to trust. It trades below $1 on the NASDAQ and has since mid-January, and has made a handful of recent lists of stocks to avoid in the business press.

“I think they’re desperate,” said Ed Fischbach, a Mellette-area farmer and vocal opponent of the pipeline and aviation fuel projects. “To be honest with you, I don’t think they’re financially stable, and they’re running out of time.”

The question of time has created a measure of desperation from pipeline opponents, as well. Lawmakers in Pierre are debating Senate Bill 201, which in its current form would offer counties per-mile payments from pipeline companies and certain landowner protections while forcing the state Public Utilities Commission to overrule “unreasonable” local ordinances that restrict pipeline siting.

Fischbach sees the bill as an attempt by lawmakers to fast-track the pipeline, and to secure Gevo’s future. SB 201 has passed the Senate and the House in different versions, and a conference committee will try to work out the differences during the final days of the legislative session next week.

“We seem to just bend over backwards and give these companies free rein, basically, to try to get them here,” Fischbach said.

Gevo: ‘bizarre questions’

In an interview with South Dakota Searchlight, Gevo CEO Patrick Gruber described the viability questions coming in from the anti-pipeline side of the aisle as “bizarre.”

Companies working in the sustainable aviation fuels business are all laboring under the reality of its nascency, in an investment environment with significant uncertainty on the regulations that will govern it.

In that space, Gruber said, Gevo is as solid as a company can be.

“We have $380 million of cash on the balance sheet,” Gruber said. “We are the most liquid company on the planet who does development like this.”

Eric Frey, Gevo’s vice president of finance and strategy, told investors in an online “fireside chat” with Water Tower Research that the company feels it’s been undervalued. He made similar statements the following week in an online presentation for Renmark Financial Communications.

Gevo isn’t the only renewable fuels company to see a drop in stock prices in recent months, Gruber said. But more importantly, the financing for Net-Zero 1 isn’t tied to Gevo’s market gains or losses. It’s a “special purpose vehicle” project, meaning it’s a separate entity for financing purposes, isolated from the company as a whole.

“It’s a different equity set, different investors. It’s infrastructure people, along with us,” Gruber said. “Our stock price is actually irrelevant.”

Gruber and others see sustainable aviation fuel as an inevitability in a world that increasingly values carbon dioxide abatement to reduce emissions of the heat-trapping gas into the atmosphere.

Airlines have made commitments to purchase sustainable fuel as an offset to their carbon footprints. The Biden administration wants to see 400 billion gallons mixed with conventional jet fuel by 2030, and the Inflation Reduction Act lays out per-gallon payments for it, based on carbon score calculations that have yet to be finalized.

Sustainable aviation fuel is produced now, but is sold by just two U.S. companies and represents 0.1% of all jet fuel, with 15.8 million gallons produced in 2022.

At the moment, it is only produced using beef tallow or discarded oil. The Inflation Reduction Act has incentives meant to encourage the production of 3 billion gallons by 2030.

Gruber calls ethanol-to-jet fuel the clearest, most cost-effective source path to a production ramp up: the infrastructure is in place, the product works and corn is abundantly available.

Ethanol as a starting point wins on price and practicality, he said, and “it’s by a lot.”

Lower carbon intensity, higher growth potential

The “threat” to leave South Dakota, Gruber said, is just economic reality.

The project’s federal financing is tied directly to Gevo’s ability to push down the carbon score of its product.

To get the federal loan and a return on investment, Gevo needs to take full advantage of the carbon abatement dollars made available through federal and state governments.

Every point below 50 on a 100-point carbon intensity scale is worth money. Gevo has committed to fuels that score zero, but Gruber told lawmakers during a virtual listening session on Monday that they can get to -30 or lower, and produce a fuel that can compete in price with conventional jet fuel.

Cutting the carbon score is the reason Gevo picked Lake Preston: 71% of the area’s farmers use sustainable practices like no-till agriculture, which could translate to a lower carbon score for its corn. It’s why Gevo founded a company called Verity to track and verify carbon scores from corn plant to final product through on-farm data collection.

It’s also why Gevo aims to build a wind farm near its plant: Turning ethanol into jet fuel is energy intensive – too intensive to turn out a low-carbon product without a renewable energy source.

All those factors are part of securing the $950 million federal loan guarantee, which Gevo first sought last August and expects to have by the end of this year.

But without a carbon capture pipeline to further drive down the carbon intensity score, Gruber said, the company wouldn’t get that guarantee. Carbon emissions from the plant would be captured, placed in the pipeline and transported to North Dakota for underground sequestration, along with emissions from numerous ethanol plants in multiple states.

There are “lots of states” more committed to carbon abatement than South Dakota, and some where sequestration can happen without a pipeline.

“Make no mistake, I am going to get a project financed,” Gruber said.

He doesn’t want to leave South Dakota. By the end of this year, he expects the company will have pumped $200 million into the Lake Preston project.

Skeptics: carbon market unreliable

Sombke counts himself a carbon abatement skeptic.

Aside from a northwest Iowa plant that produces renewable natural gas from livestock waste, he said, Gevo’s business is built on capturing carbon. Its Luverne, Minnesota, ethanol plant is idle for now; its Texas-based plant makes aviation fuel to prove it can be done.

The political mathematics of carbon abatement are too fluid to be taken seriously as a business proposition, he said.

“I think there’s a lot of smoke and mirrors, and I think it’s a lot of hopeful thinking,” Sombke said.

The method of measuring carbon intensity (CI) is just one issue. The Inflation Reduction Act called on the Department of Treasury and Internal Revenue Service to create a framework for measuring CI for the calculation of sustainable aviation fuel tax credits.

Of the options, Gevo and most agriculture organizations prefer the Greenhouse gases, Regulated Emissions, and Energy use in Transportation model, also known as GREET. South Dakota’s congressional delegation wants that model used to calculate the impact of all biofuels.

The Biden administration recently announced its intention to work on a GREET update that would meet the law’s expectations, and an update on those efforts is expected on Friday.

But that model is one of several options. If GREET isn’t adopted, the climate smart ag practices built into Gevo’s business plan wouldn’t be worth as much on the carbon ledger.

There are also questions about the political appetite for carbon abatement if former president and climate change skeptic Donald Trump returns to the White House.

Trump did sign off on the carbon sequestration tax credits that would be used by the Summit Carbon Solutions pipeline during his time in office. But he’s also signaled a desire to overturn the Inflation Reduction Act, the federal law that established the sustainable aviation fuel tax credits.

The Heritage Foundation, an influential conservative think tank, has argued for an immediate repeal of the act in its “Mandate for Leadership” position paper, part of its “Project 2025” effort to guide conservative policy.

“The next Administration should also push for legislation to fully repeal recently passed subsidies in the tax code, including the dozens of credits and tax breaks for green energy companies in Subtitle D of the Inflation Reduction Act,” the document says.

“These tax incentives can go away in a flash,” said Doug Durante of the Clean Fuels Foundation, a biofuels lobbying organization based in Washington, D.C.

Durante sees a simpler path forward for ethanol and emissions reductions: higher blends of ethanol. The Biden administration has pulled back on its push for electric vehicles and heavy cuts to tailpipe emissions by 2030, Reuters reported earlier this month.

With millions of gas-powered vehicles on the road and a slowing demand for EVs, more ethanol makes a lot of sense from a climate perspective, Durante said.

“We’re going to be using trillions of gallons of gasoline for who knows how long,” Durante said. “We only put 15 billion gallons of ethanol in it.”

Sombke agrees on that point. He’d like to see the U.S. push for 20% ethanol in all vehicles, as Brazil has done.

As for carbon abatement credits, he’d much rather see them flow to farmers directly than to companies like Gevo, which has contracted with farmers to buy corn grown using climate-smart practices.

“They’re farming the farmer here,” Sombke said. “Even though the farmer might get paid a little bit more, there’s others that are going to be making more money off of it.”

Gevo: Carbon abatement is the future

Gruber’s not especially concerned about the political winds or a lack of subsidies in the long term.

If carbon credits disappear, he said, that won’t change the trajectory of history. Consumers, particularly younger consumers, are concerned about climate change and are willing to pay more for it.

Republicans who express skepticism about climate change still see the benefit in economic development, he said, which resonates as a strong argument in favor of carbon abatement.

The Conservative Political Action Committee’s recent conference in Florida saw Gov. Noem – who trumpeted Gevo as an economic development win for South Dakota – tied with Vivek Ramaswamy in a straw poll for the group’s preferred vice presidential pick.

On Feb. 19, the New York Times reported that “more than half of the announced major clean energy projects and 67 percent of all announced jobs” have landed in Republican congressional districts.

Encouraging companies to pay farmers more for crops produced using carbon-friendly ag practices, Gruber said, is a win for rural America.

An audience listens to a hearing on proposed pipeline legislation at the Capitol in Pierre on Feb. 15, 2024. (Joshua Haiar/South Dakota Searchlight)
An audience listens to a hearing on proposed pipeline legislation at the Capitol in Pierre on Feb. 15, 2024. (Joshua Haiar/South Dakota Searchlight) 

“You might not value it, but by God somebody else does,” Gruber said. “Why wouldn’t you want to get paid for the good work that you’re doing?”

Most farmers understand that and want to take part, he argues.

Lake Preston-area farmer Paul Casper is among them. Casper was an early Gevo backer, and has had Verity software installed in his equipment for three years to help the company prove its worth. Once equipped, he said, the system logs every movement, every spray of fertilizer and anything else he does on his field, with GPS tracking to note where he’s doing it.

“Whenever you start the combine or sprayer up, it’s collecting data,” Casper said.

He was already practicing no- and low-till agriculture across his 4,000 acres by the time he met Gevo representatives. As the years passed, other Lake Preston-area farmers noticed how much Casper’s healthier, undisrupted soil produced, and followed suit.

The Verity software has made him even more vigilant about how many times he goes out into the field. Even without a per-bushel price boost, he said, he’s saving money on fuel.

Moving from fuel savings to a future where sequestration is worth money is Casper’s hope. But he also sees it as a necessity for the ethanol industry that’s propped up farmers in South Dakota for decades.

Staying out of the game, he said, will hurt the state in the long run.

“If you don’t sequester carbon, your competition is going to be doing it. That’s going to put us in a real bad place with regards to selling our corn into ethanol and moving that ethanol out of here,” Casper said. “We need to get this done.”