Company behind proposed Lake Preston jet fuel plant buoyed by federal carbon credit ruling

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The company that aims to place a massive jet fuel plant in Lake Preston told investors Thursday that updated guidance from the federal government on biofuel carbon credits could be a boon to its prospects of success.

Englewood, Colorado-based Gevo wants to build a plant to turn ethanol into sustainable aviation fuel in South Dakota, with a project cost of $1 billion or more. President Joe Biden’s Inflation Reduction Act included billions of dollars to encourage the production of such fuel, which currently represents a miniscule slice of the overall aviation fuel market. 

Gov. Kristi Noem, whose son-in-law is a registered lobbyist for Gevo, has called the company’s Net Zero-1 plant “the largest economic development project in South Dakota history.”

Critics in South Dakota have questioned if Net Zero-1 will ever come to fruition, citing Gevo’s sub-$1 stock price and its reliance on federal subsidies.

During Thursday’s fourth-quarter earnings call, CEO Patrick Gruber and other company executives talked up multiple pathways to profitability, some of which are untethered to its Lake Preston aspirations. 

Gevo currently operates a renewable natural gas plant in northwest Iowa, for example. It also has software called Verity to track the carbon footprint of farm fields, which Gruber says will be valuable to any industry that values carbon reductions. 

The company ended the first quarter with cash, cash equivalents and restricted cash of $340.6 million. Updated guidance on how the federal government will calculate the carbon scores of biofuel feedstocks, which offers points for low-carbon corn or soybeans, are a positive development, Gruber said.

“We’ve got money. I don’t like our stock price at all, but by God we’re making progress,” Gruber said.

Moving parts, uncertainties

Several dominoes must fall in Gevo’s direction for the NZ-1 plant – its largest project – to become a permanent fixture in rural Kingsbury County.

The project’s economics are linked to Gevo’s ability to offset high production costs with carbon credits from the federal government. The Biden bill’s incentives for sustainable aviation fuel are part of a series of policies that hope to reduce the release of carbon dioxide into the atmosphere, as the gas contributes to climate change.

Gevo is in the process of securing a $950 million federal loan guarantee from the U.S. Department of Energy to stake its claim in a lower-carbon future. To secure the loan, Gevo needs to prove that NZ-1’s fuel will hit the carbon reduction mark – specifically, by producing biofuels that reduce greenhouse gas emissions by 50% compared to traditional fuel.

To do that, Gruber and other company representatives have repeatedly said Net Zero-1 can’t pencil out to profit in South Dakota without access to a carbon capture pipeline from Summit Carbon Solutions. Linking to the pipeline would reduce the Gevo fuel’s carbon score, thereby boosting its market value.

That $8 billion pipeline remains unbuilt and mired in controversy. Like Gevo, it would take advantage of federal tax credits, in its case cashing in by capturing carbon dioxide gas from 57 Midwestern ethanol plants and pumping it to a sequestration site in North Dakota. 

The Summit project has sparked blowback and lawsuits from landowners – one of which landed in front of the South Dakota Supreme Court and awaits a ruling – and a host of legislative proposals. A “landowner bill of rights” passed in the waning hours of the 2024 legislative session was sold as a compromise between the company and its detractors, but some Summit opponents nonetheless hope to challenge it by way of a ballot initiative this fall.

On Thursday, Gevo Chief Operating Officer Chris Ryan reiterated the importance of the carbon pipeline. Hooking into the pipeline would help Gevo reduce its carbon intensity score and, by extension, the market value of its products to airlines that aim to reduce their own carbon footprints.

“We want to see the CO2 pipeline in South Dakota move forward, to keep Lake Preston as our most attractive site for producing sustainable aviation fuel,” Ryan said. “But we’ve developed a slate of potential sites that we’ve prequalified for future Net Zero projects.”

Eric Frey, Gevo’s vice president of finance, declined to disclose those locations in an email after the earnings call.

Lake Preston is attractive for reasons beyond a pipeline, though. Ryan mentioned its proximity to rail transport, and its relative proximity to airports in Chicago and Minneapolis.

“Both of those airports are in states with a sustainable aviation fuel tax credit of $1.50 a gallon,” Ryan said. 

Many Lake Preston-area farmers already use “climate smart” agriculture practices like no-till planting or the use of certain kinds of fertilizer, he said. 

The company had initially planned to spend up to $175 million on the fuel plant project this year. On the earnings call, Ryan said that figure has dropped to between $90 million and $125 million, largely as a result of holding off on certain construction costs until the federal loan guarantee is secured.

CEO: Carbon model bodes well

Summit’s future is uncertain, but another piece of Gevo’s economic puzzle is closer to solid, Gruber said Thursday. 

The CEO heralded a final decision from the U.S. Treasury Department on a carbon score calculation model from Argonne National Laboratories called Greenhouse Gases, Regulated Emissions, and Energy Use in Technologies (GREET).

The Biden infrastructure package directed the Department of Energy to use a different model for calculating the emission reductions of sustainable aviation fuel at first. Agriculture groups in the U.S., however, pilloried that initial model as Eurocentric and unable to account for climate-friendly farming practices in the U.S. 

The Energy Department announced its intention to use GREET last fall in response, but the agency also ruled that the model needed an update for use as a standard for sustainable aviation fuel. It offers credits for “bundling” ag practices like no-till and cover cropping. 

That updated model earned its final approval Monday for use in what are called 40B tax credits, which expire in 2024. The following year, the credits will transition to what the infrastructure law called 45Z credits.

The acceptance of the GREET model for the first round of aviation fuel credits bodes well for its prospects next year, Gruber told investors Thursday. 

“It recognizes the many carbon reductions we’ve been talking about,” Gruber said. “It’s moving properly towards the recognition of climate-smart ag.”

Some farm groups have expressed concerns about the updated GREET model, with the president of the American Soybean Association arguing that cover cropping isn’t realistic in all parts of the country.

Gruber gave a nod to concerns about “bundling” practices on the earnings call, but still called the updated guidance a step in the right direction. Gevo’s hope is to see the model be updated again to recognize what he called “field-level” carbon tracking – through the company’s Verity platform – that would negate the need for bundling by measuring carbon emissions directly for each climate smart practice employed on the farm.

Paul Bloom, Gevo’s chief carbon officer, told investors that Verity, through which some farmers in Lake Preston are already collecting payments, will help farmers prove the low-carbon worth of their crops.

“We want farmers to be rewarded for reducing their carbon footprint and helping foster rural economic development with agriculture done right,” Bloom said.

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