By Ucilia Wang, GigaOM

To promote biofuel production, the U.S. government is becomingboth the investor and the customer. The White House announced onTuesday a $510 million investment to speed up biofuel productionfor the military and beyond.

The money will come from the U.S. Departments of Agriculture andEnergy, as well as the U.S. Navy, and it will go to biofuelproducers over the next three years that promise to pony up atleast the same funding amount to build commercial plants. Theproject came as a response to aplan laid out by President Obama in March of this year toreduce the country’s reliance on imported oil.

Agriculture Secretary Tom Vilsack said theinitiative is unusual because it brings together three agenciesto tackle three thorny obstacles that have prevented the massproduction of biofuel. The agriculture department will work onsecuring feedstocks while the energy department will look for theright technologies. The Navy, which as a huge fleet of ships andplanes, will be the customer.

The Navy aims to replace half of the fossil fuel-derived energywith domestic fuels, said the Navy Secretary Ray Mabus. That goalwill require 8 million barrels of biofuel per year by 2020, headded.

Fuel produced from the initiative also will be used by theprivate sector. But the government is emphasizing the needs of themilitary to have a strong source of domestic fuels.

Private opportunities

Details of how the money will be doled out and who are thelikely beneficiaries haven’t been worked out. The threesecretaries said they want to distribute the money evenly acrossthe country to help create jobs in rural areas and provide a newsource of income for farmers and ranchers.

The secretaries also said they are looking for technologies thatwill turn non-food feedstocks into drop-in replacement for existingfuels for jets and diesel fuels. Drop-in replacement fuels bydefinition should easily blend with or completely replace fossilfuels, and ideally they wouldn’t require any specialinfrastructures for its delivery from the refineries tocustomers.

There already are companies working on fossil fuel replacementtechnologies, such as Gevo ( GEVO - Get Report) , KiOR ( KIOR) and Solazyme ( SZYM) , which has produced fuels from algae for fieldtests by the Navy.

The Navy has been testing biofuels from Solazyme and others. Italso announced a similar cross-department biofuel initiative withthe agriculture department before. In 2010, the two agencies signedan agreement to share “technical, program management andfinancial expertise.”

Both the agriculture and energy departments have given manyloans and loan guarantees to biofuel producers in the past twoyears. Biofuel producers have relied on government for financialsupport because they aren’t able to secure private money, ordo so cheaply, for their first commercial plant.

Although the federal government has mandates to graduallyincrease the amount of biofuel in the nation’s supply,whether the money is well spent remains to be seen. Many of therecipients are working on setting up the plant. Biofuel productionand sales haven’t jumped substantially in the country partlybecause producers are finding it difficult to nail down theirprocesses of converting biomass into fuels. Another issue has beenfinding investors willing to finance refineries.

Image courtesy of Solazyme

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