The U.S. military has emerged as a key ally for fledgling producers of non-food-based biofuels, who find themselves threatened by looming budget cuts and growing political hostility to renewable energy funding. A U.S. Navy plan to cut its fossil fuel use in half by 2020 is only part of the story.

      Efforts to throw biofuels a lifeline now run across three U.S. government agencies, as the defense, energy and agriculture departments pitch in on a $510 million package.

      The money is being corralled under a law dating back to the Korean War that gives a leg up to sectors deemed necessary for defense. This support is cherished for being more predictable than the private sector, or even other parts of government.

      The problem is that money alone will not be enough to see many biofuels firms through to commercialization, which is especially frustrating for those whose business models work fine, in theory, with petroleum at around $100 a barrel.

      "We're in for a tough time. We shouldn't kid ourselves," said Lee Edwards, chief executive of Virent, which makes fuel from various feedstocks including sweet sorghum and plant biomass.

      Edwards spoke at a conference in San Francisco, which has become a biofuels hub due to the Bay Area's flush venture capital community and the early forays of regional players LS9, Amyris Inc, Codexis Inc and Solazyme Inc.

      On top of tax credits expiring next month, biofuels companies fear what will come out of a congressional "super committee" charged with slashing the deficit. If it fails to reach agreement, sharp cuts to defense spending could follow.

      Barring an unforeseen breakthrough, the U.S. congressional "super committee" is expected to concede failure on Monday in its bid to reach a deal to cut the federal deficit by at least $1.2 trillion, senior congressional aides said on Sunday.

      "What this committee comes up with will very much influence how this industry goes forward," Harry Baumes, head of energy policy and new uses for the Department of Agriculture's chief economist, told the Advanced Biofuels Markets conference.

BUDGET SQUEEZE

      Shares of biofuel companies have plunged since the U.S. budget battle began this summer, with Solazyme down by half and others faring even worse.

      Backers of military support view the Defense Production Act (DPA) as a way of dodging some of the cuts to come.

      Joelle Simonpietri, an early proponent of the DPA effort, said it was no accident that the two keenest potential biofuels customers are the Navy and commercial airlines, since both spend huge amounts of money on jet fuel.

      "It's not just green washing," said Simonpietri, who was until recently the deputy head of the Defense Department's U.S. Pacific Command innovation and experimentation energy office.

      "There are actual strategic reasons why, because if you're a commercial airline and your fuel budget went from 30 percent of operations to 70 percent in one year, and three of your brethren just went bankrupt, you tend to look at your fuel costs very closely."

      Some airlines made babysteps into the space this month when United Airlines flew the first U.S. biofuel commercial flight from Houston to Chicago on a mix of 40 percent Solazyme algae-based fuel, and Alaska Airlines announced several flights on a mix with 20 percent cooking oil-derived fuel.

      The potential for airlines to burn biofuels clearly dwarfs what's needed for defense. But the Pentagon is a reliable buyer that is in for the long haul since fuel security is strategic.

      "The airline market is huge, but can you bank on a 10-year deal with an airline? Will they be still around then?" said an experienced biofuels entrepreneur, who had just returned from a Washington D.C. trip to make his case for the industry.

FROM TRUMAN TO OBAMA

      That is where the DPA Title III Program comes in. Signed by President Harry Truman in 1950, it played a vital role in building up U.S. supplies of certain metals for the military.

      President Barack Obama recently authorized the $510 million for biofuels, and the military is now collecting feedback before holding an "industry day" in the months ahead in order to attract private-sector funding to qualifying projects.

      "To justify the funding for the DPA, we actually have to be able to show the business case," Simonpietri said.

      Solazyme is about to produce fuel from a plant in Peoria, Illinois, and venture capitalist and Solazyme director Dan Miller said Navy demand drives that. "It's the anti-Solyndra," he said of the biofuels push. "It's the one that worked."

      The failure of solar firm Solyndra did cast a pall over renewable energy politics by giving ammunition to critics in Congress. But the military's heavy involvement should help shelter biofuels from the fallout.

      "The DOD (Department of Defense) is a buffer against anything the rest of the government does," George Boyajian, vice president of business development at Primus Green Energy, a maker of gasoline from wood pellets, said in an interview.

       He said Primus would not rely on subsidies, but needed Agriculture Department support to ensure feedstock supply. A Primus test plant will start up in mid-2012 in Pennsylvania.

DOLLED UP

      For others who had counted on subsidies to smooth the path to market, new lines of business outside the fuel space present easy, if small, early wins. Solazyme had some initial success selling algae-based skin care through Sephora stores and TV channel QVC, on which 8,000 units sold out in eight minutes.

      "This is the leading edge of how I build a company that's going to be successful in all these other markets," said Solazyme CEO Jonathan Wolfson, who sees the fuels, nutrition and cosmetics as a combined $1.5 trillion opportunity.

      Codexis is developing chemical agents for shampoo and toothpaste, while Amyris is making cosmetics with a partner.
Partnerships are seen as important, with biofuels support also coming from major oil companies. Royal Dutch Shell Plc invested in Codexis, Chevron Corp provided early backing for LS9 and Solazyme, and BP Plc and Exxon Mobil Corp have also made large biofuels investments.

      Batting away the skepticism of environmental circles, Codexis CEO Alan Shaw says his industry must work with Big Oil to crack the massive, but low-profit-margin, market for fuels.

      "Say what you like about oil companies," Shaw said, "this is their business, and they want to stay in business."