But the hay is then fed to critters. This dude is going through a relatively energy intense process to further process it into logs. I can't see how you could do this efficiently enough to regain the energy input. If I were a betting man, I would guess that the energy input out weighs the heating value.
Grass and trees grow by the same process (photosynthesis) and have similar chemical content (mostly cellulose). You should expect them to be more similar as fuel than different.
The processing is, of course, a relevant question, but hay processing is actually pretty efficient. It's a fairly uniform material, which makes it straightforward to process in bulk.
I spent almost every summer working in hay fields - started out just raking up what the tractor missed and moved on to bucking bales, then driving tractors - from when I was 6 or 7 until I graduated college.
I'd estimate our fuel use was in 1-2 gallon per ton range (including 4-tractor passes for cut, ted, rake, and bale). I'm not going to bother estimating transportation or log/pellet forming energy, because those both apply to wood sourced pellets, too. Grass does have higher nitrogen requirements than trees, but I'll mostly have to gloss over that for now, other than to mention that I think fertilizer costs usually work out in the ballpark of $10-20/ton.
Anyways, the result has 15-20% moisture content (cut grass dries out really fast in the windrows in the sun) of mostly cellulose with a similar heating value to wood - a little over 15 million BTU / ton. Burn 1/4 million BTU's worth of diesel, get 15 million BTU's worth of heating fuel feedstock.
Depending on climate, you can get in the ballpark of 5 tons per acre annually.
It does seem out of place to offer a public grant for this in a heavily forested state, however. In the Midwest, it would make more sense.
If the Grant doesn't go to them its just going to go to someone else
I very much dislike the Ted Stevens-esque "bridge to nowhere" thinking that seems to dominate many budget discussions.
Public money should not be spent just because it can be levied from the taxpayers. It should be levied based on what is actually needed. If it doesn't go to them, it should go back to the taxpayers unless that "someone else" serves an actual, compelling public need.