Fuels industry seeks its 'ethanol 2.0'

Today, ethanol produced in the United States--primarily used as an additive to gasoline--is produced mainly from corn. To achieve the president's goal of producing 35 billion gallons of alternative fuels a year by 2017, experts say production of so-called cellulosic ethanol--made from woody substances, such as straw or wood chips--would need to be brought on line at a large scale.

"If you are going to get the 35 billion gallons or any other number, you've got to do it with lower-cost raw materials and a higher energy yield," said Dan Pullman, vice president of investment bank McNamee Lawrence, which advises alternative energy companies. "There has got to be something better than corn, and that's recognized even by players in the corn ethanol space."

Many venture capitalists converging around the clean-technology area, are placing their money on cellulosic ethanol, sometimes referred to as second-generation ethanol. High-profile investor Vinod Khosla has invested in several ethanol companies focused on using alternative sources for ethanol, including Celunol, Mascoma and Cilion.

Yet even with the influx of investment in alternatives to corn-based ethanol and stepped-up political commitments to biofuels, many experts warn against expecting too much too soon from second-generation ethanol.

Industrial-scale production of ethanol from cellulosic feedstock has not yet been done and would require years of development, say experts. And alternative forms of ethanol face many of the same barriers to adoption that existing forms of ethanol do. Notably, very few ethanol or ethanol-ready pumps currently exist in the U.S. In addition, biofuels raise environmental concerns over land use and pollution.

"Cellulosic technologies aren't a panacea," said Nathaniel Greene, senior policy analyst at the National Resources Defense Council biofuels panel discussion, held at MIT. "We have to make a choice. We have to decide how much of the stuff we want and how much benefit we want to get."

Greene said that there's a "gold rush mentality" around new forms of ethanol among investors. He argued that technical innovation needs to be buttressed with policies encouraging energy efficiency and that policies should figure in the total environmental impact of new technologies.

Feedstocks and microbes
The Renewable Fuels Association--the main ethanol lobbying group in the United States--lauded Bush's stepped-up energy target, which is meant to reduce U.S. gasoline consumption by 20 percent over the next decade.

The Energy Policy Act of 2005 includes a program that set a goal of producing 7.5 billion gallons of renewable fuels by 2012. The president's new target would bump that figure up to 35 billion gallons by 2017.

The RFA said that U.S. ethanol production last year reached a record 4.9 billion gallons and that expanded production, now being constructed, will push that number up to 6 billion gallons of capacity by the middle of 2009.

The new goal "will stimulate new investment in cellulosic ethanol technologies and drive market opportunities for ethanol beyond existing blend levels," said RFA President Bob Dinneen in a statement.

Companies investing in cellulosic technology are pursuing various chemical processes and different "feedstocks" to produce ethanol, from corn stalks to straw.

There are a handful of production facilities being built now with cellulosic ethanol technology--Mascoma recently picked New York state for its first production site. With supporting policies, this form of ethanol could start to make a dent on the commercial market in three years, said John Howe, vice president of public affairs at Celunol, which has developed technology from making ethanol from the residual material of sugar cane harvesting.

"As is the case with many new energy technologies, we're talking about large-scale infrastructure, and it becomes an issue of financial risk in large commercial projects," Howe said. "The concept is well proven; it has been scaled to pilot projects and is moving to demonstrations."

"(Cellulosic) used to be five or six years out, but we could get it done in three years. The key is being able to build a plant that can do one to two million gallons," said William Baum, executive vice president of Diversa, which finds microbes in exotic locales and puts them to work turning raw materials into ethanol.

One advantage that cellulosic ethanol promises over corn-based ethanol is linked to greenhouse gases. Production of corn-based ethanol emits roughly the same amount of greenhouse gases as gasoline when figuring in factors such as fertilizers and the amount of fuel required to drive, according to a recent MIT review of the "ethanol debate." The study found that cellulosic ethanol production could generate significantly less pollutants than corn-based processes.

One of the most bullish people on cellulosic ethanol is investor Khosla, who foresees rapid development with the right financial backing. In an opinion piece published a day before the State of the Union, Khosla said, "My research has convinced me that the possibility of $1.25 per gallon or cheaper cellulosic fuels (is) less than three years away (though the question of putting plants in place and getting Wall Street to finance debt for such facilities still looms large)."

Energy portfolio
For economies structured around petroleum-based fuels, any switch to biofuels faces several challenges in order to be done sustainably, say experts.

Currently there are only about 1,100 ethanol pumps in the United States, and they are mainly clustered in the corn-producing states of the Midwest. For ethanol to be more than an additive to gasoline, more vehicles that can run on ethanol (as well as gasoline) need to be produced.

Other issues to weigh regarding biofuels are environmental, such as land degradation and water use, and whether ethanol production will drive up food prices by competing for land resources. Celunol's Howe noted that large-scale production of cellulosic ethanol would require hundreds of millions of acres of land and substantial demands on water.

And although plant-based fuels are considered renewable, some environmentalists argue that research dollars and promises attached to ethanol are misplaced because they distract from practices and technologies that reduce energy consumption.

Pullman suggested that the future of ethanol may vary depending on where it is produced. Regions rich in forests could create ethanol from cellulosic sources, while corn-growing areas focus on grain-based ethanol.

To convert more cars from petroleum-based gasoline, companies in the transportation industry should also pursue biodiesel and high-performance car batteries, Pullman added. Even with technical advancements, lasting changes in transportation fuels hinge on global politics, policies, and the existing industry infrastructures.

"The challenge with this clean-tech space is that it's a lot more like life sciences," he said. "You don't know for five or eight years that you got something that works at the cost and performance that you originally envisioned."

CNET News.com's Michael Kanellos contributed to this report.