For biodiesel industry, it's been a rough year

OKLAHOMA CITY — An alternative fuel for diesel engines is off to a shaky start this year though it emits fewer pollutants and cuts down on petroleum use because it's made from environmentally friendly waste and vegetable oil.

A federal tax credit that provided makers of biodiesel $1 for every gallon expired Friday. As a result, some U.S. producers say they will shut down without the government subsidy.

Biodiesel's woes come on top of a year of problems for the fledgling biofuel industry — an irony given the push to cut down on greenhouse gases and ease the nation's need for foreign oil.

A key driver for the alternative fuel — the high cost of oil — disappeared as diesel prices dropped 18 percent since the beginning of the recession. Then in March the European Union placed import-killing tariffs on biodiesel and other biofuels.

It was a huge hit for U.S. biofuel makers, with Europe taking 95 percent of all global exports.

Biodiesel, which is usually blended with traditional fuel, had over the past few years been the fastest growing fuel among fleet vehicles like buses, snow plows and garbage trucks.

Those fleets, however, can shift to traditional fuel, as some have, when the prices of diesel drops.

The biodiesel industry is now operating at only 15 percent of its potential capacity, according to the National Biodiesel Board, largely because the price of traditional diesel has collapsed. There are close to 180 biodiesel plants operating in about 40 states.

The country's largest biodiesel refinery, in Houston, sits idle.

Another major refinery operated by Seattle-based Imperium in Hoquiam was restarted recently to meet alternative-fuel mandates in Oregon and British Columbia after being shut down after an explosion in December.

The loss of the tax credit, which helps pay salaries, buy new equipment, and in good times to turn a profit, will hit small producers particularly hard.

A one-year extension of the biodiesel tax credit was included in a bill that was approved by the U.S. House recently, but it never made it through the Senate.

Lawmakers say the tax-credit will be retroactive if approved.

Production will cease in Valliant, Okla., where Dwight Francis created a startup this year as the local timber economy tanked.

For each of the 12,000 gallons of biodiesel that Francis produces each week, he has received a $1 tax credit to help keep operations going.

His company has been riding out the economic downturn until now, thanks to the tax credit.

"By the time you buy the feedstock and the chemicals to produce the fuel, you have more money in it than you get for the fuel without the tax credit," Francis said. "We won't be producing any without the tax credit."

Ethanol producers, for instance, were hit by a string of bankruptcies, next-generation biofuels were stung by scandal.

This summer a federal jury found that Cello Energy, a next-generation biofuel company that specialized in plants-to-fuel technology, had defrauded investors. That is expected to leave the Environmental Protection Agency far short of the millions of gallons of biofuel it had planned to blend into traditional fuel this year.

VeraSun, the country's second largest ethanol producer, filed for Chapter 11 bankruptcy protection in October and its assets sold. Other ethanol refineries were swept up for pennies on the dollar.

"You could say the entire biofuels industry has had a rough year," said Robert McCormick, principal engineer at the Department of Energy's National Renewable Energy Laboratory.

There is little chance that the U.S. will reach alternative-fuel benchmarks of 36 billion gallons a year by 2022 in hopes of weaning the nation off foreign oil.

Still, ethanol producers appear to be bouncing back and maintain unflagging political support.

And the Department of Energy announced last month that next-generation biofuels would get more than $600 million in federal funding.