RPT-U.S Air Force tests biofuel at $59 per gallon

* Aim was to certify fuel for use in Air Force jets

* Similar Navy purchases provoked Republican outcry

* Former military officers push back on biofuel criticism

By David Alexander

WASHINGTON, July 15 (Reuters) - The U.S. Navy angered Republicans by spending $26 a gallon for biofuels for this week's Great Green Fleet demonstration, but the Air Force received little attention when it paid twice as much per gallon to test synthetic jet fuel last month.

The Air Force bought 11,000 gallons of alcohol-to-jet fuel from Gevo Inc, a Colorado biofuels company, at $59 a gallon in a program aimed at proving that new alternative fuels can be used reliably in military aircraft - once, that is, their pricing is competitive with petroleum, which now costs $3.60 a gallon.

The cost of the Air Force demonstration - $639,000 - was far less eye-catching than the $12 million the Navy spent for biofuels to power a carrier strike group on alternative energy for a day.

But it was part of the same Pentagon push, which has escalated under the administration of President Barack Obama, to adopt green solutions to rising fuel costs.

Some Republican lawmakers have criticized the high price-per-gallon paid by the Navy as wasteful Pentagon spending at a time of significant budget cuts and a shrinking fleet.

They have also blasted Obama for making green energy a cornerstone of his agenda, with federal funds flowing to alternative energy companies that may not make economic sense, as in the case of bankrupt solar-panel maker Solyndra.

Jeff Scheib, Gevo vice president for fuels, said the alcohol-to-jet fuel made for the Air Force was expensive as it came from a small demonstration plant in Silsbee, Texas, which makes only 7,500 to 8,000 gallons of biofuel a month.

Once the company builds a commercial-scale refinery, expected around 2015, "we believe we can be cost competitive on an all-in basis with petroleum jet fuel over the life of a contract," Scheib said.

Pentagon officials say alternative fuel development is strategically important because the United States relies too heavily on fossil fuels from foreign sources, leaving it vulnerable to price shocks and disruptions.

HUGE ANNUAL FUEL BILLS

The Air Force spends about $10 billion a year on energy, with nearly $9 billion of that being for jet fuel, Kevin Geiss, Air Force deputy assistant secretary for energy, said recently.

Planning is done two years in advance, so officials in 2009 were expecting jet fuel to cost about $2.37 a gallon in 2011. Instead, prices rose as high as $3.96 a gallon.

"What that results in, for this year, was about a billion dollar shortfall from what we had budgeted for in fuel," Geiss said.

Geiss said Air Force work on biofuels was focused on ensuring that products likely to achieve commercial-scale production are formulated correctly for use in aircraft engines. The Navy's mission is much broader, he said.

The Obama administration directed the Navy last year to work with the Agriculture and Energy departments to invest up to $510 million to help private industry partners develop a viable alternative energy market capable of producing cost-competitive marine and jet fuels.

Some companies involved in the push to build a biofuels industry have connections to prominent Democratic backers, further raising Republican skepticism of the effort.

Vinod Khosla, whose venture capital firm says it played a central role in funding and developing Gevo's business strategy, has given campaign contributions of $474,534 since 1996, 86 percent of which has gone to Democrats, according to data compiled by opensecrets.org. Khosla's firm owned a 27 percent stake in Gevo as of the company's March federal filing with the Securities and Exchange Commission.

Khosla also has close ties to another venture capital firm whose team includes Al Gore, the former vice president and Democratic presidential candidate in 2000.

Gevo did not immediately respond to queries about what role, if any, Khosla played in helping the firm secure government grants or contracts.

Republicans upset over Navy spending on biofuels are backing legislation that could bar the Pentagon from contracting for fuels that are more expensive than traditional petroleum, something that worries military officials.

The officials agree that purchases for operational quantities of fuel should be at competitive prices, but they warn that legislative language could restrict them and ultimately make it difficult for them to economize.

"Congress has been very vocal in not wanting us to pay a huge premium to use alternative fuels. I get that," Geiss said.

"Our goal is that it's got to be cost-competitive. But cost- competitive doesn't mean that you've got a bright line that you can't even .... (exceed by) a penny. I think in trying to define these lines, they may be presenting some challenges for us," he said.

Supporters of the alternative fuel industry argue that green energy spending will eventually help cushion price volatility. They have begun to push back against Republican criticism.

A coalition of groups, including the powerful American Farm Bureau Federation, bought full-page ads in a Capitol Hill publication this week with glossy photos of biofuels success stories.

Those featured Gevo's Luverne, Minnesota, plant for producing isobutanol, an alcohol that can be added to gasoline like ethanol or processed into other chemicals.

Admiral Jonathan Greenert, chief of naval operations, and a group of retired senior officers briefed about 100 Senate staffers on Thursday about the Navy's use of alternative fuels.

Dan Nolan, a retired Army colonel, said biofuels were currently too expensive to purchase in operational quantities but it made sense to begin testing because "strategically if we can start moving toward that  it's going to be worth every penny we invest in it now."

Despite Republican criticism over biofuel spending, the military is proceeding with its programs. Geiss said the Air Force expected to finish certification soon of the alternative fuels that appear to have the best chance of reaching commercial production in the coming years.

The Navy's Green Fleet demonstration takes place on Wednesday, and the service is moving ahead with plans to help fund biofuel refineries.

"At the end of the day," said Geiss, "if their program is successful, all of the services would benefit." (Additional reporting by Roberta Rampton and Marcus Stern; Editing by Marilyn W. Thompson and David Brunnstrom)