On October 27, 2010, the USDA published its final rule for the Biomass Crop Assistance Program (“BCAP”). BCAP is a federal program providing incentive payments for the production of biomass crops used for heat, power, bio-based products, and biofuels. With this final rule, a reinvented BCAP program will resume after an unconventional path to implementation.

BCAP was created by the Food, Conservation, and Energy Act of 2008 (commonly referred to as the “2008 Farm Bill”). Payments began after USDA published a Notice of Funds Availability (“NOFA”) in June 2009. The framework of the NOFA soon created widespread unintended consequences by significantly increasing the price of raw timber and undermining an industry that has used sawdust and wood shavings to make cabinetry.

In response, USDA issued a BCAP proposed rule the following February that terminated the NOFA. Since that time, USDA has received over 24,000 comments on the proposed rule. The final rule incorporated some of these comments as significant changes to the proposed rule. The following is a summary of BCAP in its final rule form.

Matching Payments

BCAP will provide matching payments for eligible materials sold to a qualified biomass conversion facility (“BCF”). USDA will soon provide a chart of eligible materials on the FSA website that will be updated during the program’s term. Both the material owner and BCF must be registered for the BCAP program. An eligible material owner is a person or entity with the legal rights to collect or harvest the crop, regardless of whether that owner is the actual producer. Matching payments are available to material owners for a term of two years and only for material harvested directly from land and in compliance with conservation and sustainability standards established by USDA.

The matching payments will be $1 for every $1 paid by the BCF per dry ton, up to $45 per dry ton. The proposed rule offered alternative formulas for matching payments that gave more favorable payments to certain types of biomass and, for facilities that have purchased biomass in the past, limited payments to biomass above its historical level of purchases. However, in response to comments, USDA adopted a simple formula for matching payments that rewards all eligible transactions equally.

Consistent with the proposed rule, matching payments will only be available for materials that are not used for a “higher-value product.” However, a significant change from the proposed rule is that a determination of whether or not material is used for such a higher-value product will vary by geographic regions, as determined by USDA. Examples of “higher-value products” include mulch, fiberboard, nursery media, lumber or paper. This change strikes a balance between the fear of established industries, such as paper and wood products, that BCAP would force them to pay much higher prices for their supply, and the frustration of material owners whose only feasible customers are biomass facilities.

Another significant change from the proposed rule is the removal of the prohibition against related party transactions. The proposed rule wanted to prevent entities with both cropland and a BCF from maxing out the BCAP incentives through internal sales of eligible material. In other words, the BCF could always pay $45 per dry ton even if the market price was less so as to maximize the federal dollars received by the business. However, as the primary goal of BCAP is to establish a self-sustaining biomass market, it was decided that discouraging such vertical integration should be avoided. Instead, the final rule requires fair market prices be paid for eligible materials receiving matching payments. This rule restricts the ability to abuse the BCAP matching payments through related party transactions and also discourages a BCF from paying a lower rate to BCAP participating producers as compared to others.

Establishment and Annual Payments

BCAP also provides for establishment of project areas through application by a group of producers or a BCF. If an area is so designated by USDA, producers within that area will be eligible for establishment and annual payments. The producer will enter into a contract with USDA in which it establishes a conservation plan and commits to using land for growing biomass crops.

The terms of such a contract will be up to five years for annual and non-woody perennial crops, and up to 15 years for woody perennial crops. The contracts may provide for up to 75% of the cost of establishing perennial crops on the land covered by the contract.

Further, annual payments may be made under the terms of the contract in amounts depending on the rental value of the land and other variables. Any annual payments will be reduced upon sale of the harvested crop by a percentage that varies depending on the ultimate use of the crop – 1% if delivered to a BCF for conversion into cellulosic biofuels; 10% if delivered to a BCF for conversion into advanced biofuels; 25% if delivered to a BCF for conversion into heat, power, or biobased products; and 100% if used for a purpose other than conversion into heat, power, biobased products, or advanced biofuels.

Conclusion

Those monitoring the BCAP program have been anxiously waiting for nearly nine months. Upon publication of the final rule the program is officially underway. Producers or biomass conversion facilities with further questions or seeking advice should feel free to contact an attorney.