Rock-bottom natural gas prices are undercutting Minnesota's taxpayer-supported efforts to expand home-grown energy sources like wood chips and cornstalks.

Minnesota has spent more than $11 million in taxpayer and utility funds to advance technologies that burn biomass for heat and electric generation or convert it to a synthetic gas. Now, it's getting difficult for the technology to compete.

"The era of low-priced natural gas has blunted opportunities for biomass and other renewables," said Doug Tiffany, an agricultural economist at the University of Minnesota.

Natural gas prices have dropped by half since their peak in 2008 as exploration using hydraulic fracturing opened new gas fields in shale formations beneath Texas, Pennsylvania and elsewhere.

What's been a bonanza for those states has been just the opposite for Chippewa Valley Ethanol in Benson, Minn., 125 miles west of the Twin Cities. The cooperative spent more than $20 million in 2008 on a system that gasifies wood chips and corncobs.

The technology worked, and for a time furnished about 20 percent of the adjacent ethanol plant's process heat. But as the price of natural gas dropped, the plant resumed using it. The gasifier has been idle more than a year.

"The opportunity to displace natural gas has basically gone away, at least in the near term, with the shale-gas revolution," said William Lee, CEO of Frontline BioEnergy, the Ames, Iowa-based company whose biomass-gasification technology was used in Benson. He said the company is adapting its technology to gasify refuse, which may offer better economics.

State support for biomass

More than a dozen major biomass-to-energy projects are operating in Minnesota. Some are connected to the pulpwood industry, or sell electricity to Minneapolis-based Xcel Energy to fulfill a state renewable energy requirement.

Minnesota agriculture officials hoped the state's emerging biomass business would blossom like the ethanol industry, offering farmers and loggers new markets for crop residue and timber slash.

The state Agriculture Department, its Next Generation Energy Board and the state-mandated Xcel Energy Renewable Development Fund have handed out nearly $5.4 million in biomass-related research and development funds since 2005. The Xcel fund gets its money from ratepayers.

The operators of two recent biomass projects -- at the University of Minnesota Morris and Rahr Malting Co. in Shakopee -- say they probably would be saving money if they had stayed with natural gas. Neither had decided to abandon biomass, however.

"We are stuck in a situation where I start wishing for the price of natural gas to go up, which is not good for everyone else," said Stacy Cook, vice president of operations for Koda Energy, a $60 million privately financed joint venture of Rahr and the Shakopee Mdewakanton Dakota Community.

Cook said the Rahr family and the Dakota community are committed to the combined heat and power plant that burns agricultural byproducts, wood or energy crops. It supplies electricity to Xcel and process heat to the malt plant.

"They are looking at a 30-year picture," Cook said of the plant's owners. "If you start looking too short-term, it gets too depressing."

In Morris, Minn., the university has begun heating campus buildings by gasifying biomass to replace natural gas. The $8.9 million project, partly financed with state bonds, also is used in research.

"We are trying to reduce our carbon footprint," said Michael Vangstad, the campus maintenance and operations supervisor. "We have a wind tower that produces electricity along with this biomass [gasifier]."

The university buys corncobs under a contract tied to the price of natural gas, said Lowell Rasmussen, vice chancellor for finance and facilities. If biomass gets too expensive "we move right back to natural gas," he said.

Natural gas prices may not stay low. Last week, the U.S. Energy Department projected that gas prices could rise 54 percent by 2018 if liquefied natural gas becomes a major export commodity.

Challenge and opportunity

Using biomass for energy always has posed challenges because the moisture and density of plant material varies, and handling and shipping it boosts the cost, industry officials say.

Two biomass energy projects that received $600,000 in grants -- at a seed company in Williams, Minn., and at an ethanol plant in Little Falls -- are not operating because of technical problems.

Mike Burns, senior vice president of operations for Evergreen Energy, the for-profit subsidiary of District Energy St. Paul, said its boiler burns biomass, mostly wood chips from urban tree trimmers, at about the same cost as natural gas. That's because the venture has the infrastructure and know-how to collect and burn it, he said. The energy heats downtown buildings and generates power.

"If someone has got natural gas infrastructure and is looking to justify making a capital investment in starting to burn an alternative fuel, that's a tough one in this environment," Burns said.

Yet some biomass projects still are being pursued.

In Minnesota's Arrowhead region, the cities of Ely and Grand Marais are studying wood-burning district heating, though decisions are about a year away. Neither city is served by natural gas pipelines, so biomass potentially is a competitive option.

Other efforts focus on converting agricultural wastes like manure or cheese whey into renewable natural gas using bacteria and a process called anaerobic digestion. In Le Sueur, a municipal power wholesaler plans to build a $30 million power plant that relies on this technology. Two byproducts, fertilizer and solid fuel, will add value to the venture, said Kelsey Dahlen, project director for Avant Energy of Minneapolis.

"You produce not only a biogas that has valuable use, but you are recapturing a lot of soil nutrients," said Dan O'Neill, a senior vice president at Northland Securities in Minneapolis, which is helping to finance anaerobic digesters in Renville, Minn., and elsewhere.

At least for now, the economics of biomass as an energy source have changed.

"There are still some opportunities," said Dean Current, program director for the Center for Integrated Natural Resources and Agricultural Management at the U's St. Paul campus. "But definitely not as many as there used to be."

David Shaffer • 612-673-7090