Cellulosic ethanol: Next-generation biofuels edge to center

Timothy Gardner, Reuters 12 Jan 08;

NEW YORK (Reuters) - The quest by executives and venture capitalists to build a next-generation biofuels industry has made strides this year as oil reached $100 a barrel and the world's largest energy consumer laid down ambitious new mandates for alternative fuels.

Prices for the agricultural commodities that traditional biofuels are made from have soared to historic levels in recent months on global demand for both fuels and food, driving up all grain prices and hurting customers ranging from Mexican peasants to U.S. beer makers.

The price of corn, the traditional U.S. feedstock for ethanol, has hit an 11-year high, while soy, the country's main ingredient in biodiesel, set a record this week, adding further incentives to kick-start non-food sources for alternative fuels.

Cellulosic ethanol, a fuel that can be made from grasses and wood pulp, holds promise, but the first trickle of that fuel into the ocean of global motor fuel is not expected for at least four years.

"I think cellulosic ethanol will come. The question is how high will the price of food crops have to go before it becomes profitable to use new materials to make new fuels," said Lester Brown, the president of the Earth Policy Institute, who had predicted last year that corn prices would spike.

The Reuters Global Agriculture and Biofuels Summit, to be held in the Americas, Asia, and Europe on January 14 and 15, will explore these issues and more, including production wars between the world's biggest ethanol producers, and the struggles for profits between them and oil refiners.

The chief executive of the No. 1 U.S. ethanol company, Poet, and an executive from Archer Daniels Midland (ADM.N: Quote, Profile, Research) are scheduled to give their outlooks at the summit.

Versun Energy Corp (VSE.N: Quote, Profile, Research), which is merging with U.S. BioEnergy Corp (USBE.O: Quote, Profile, Research) to become the country's largest ethanol company, is also lined up to participate, along with Brazil's state oil company, Petrobras.

MANDATES

The new U.S. energy law signed by President George W. Bush late last month calls for output of ethanol made from corn to peak in 2015 and for new advanced biofuels to begin growing in overdrive that year.

By 2022, production of U.S. biofuels made from new sources -- even garbage that contains carbon -- is mandated to overtake output of corn ethanol, and the law calls for the country to boost overall blending of biofuels five-fold to 36 billion gallons per year.

Studies have found that switchgrass, expected to be a leading fuel source for cellulosic ethanol, could cut greenhouse gas emissions much more than gasoline and fuels made from corn and sugar. But the price of cellulosic ethanol is currently about double the price of corn-based ethanol. Whether companies can cut the costs is uncertain.

"Corn is still going to be grown to make ethanol. Whether (cellulosic) ever takes a chunk of crop land away from corn is all going to come down to economics," said Ken Vogel, a researcher for the U.S. Department of Agriculture.

Nagging questions linger about the wisdom of pushing the land harder over the next few years to fuel more vehicles, whether with industrial corn in the United States or palm oil in Asia.

And other countries, such as Argentina, Colombia, and the Democratic Republic of Congo, are beginning to take part in the boom.

The sky high grain prices threaten a recovery in profit margins this year for making corn ethanol. The smaller biodiesel industry may see new bankruptcies and closures.

But is cellulosic ethanol the answer?

Touted as ideal to grow on marginal lands where food crops can't be grown, it has received criticism from ecologists who say growing crops on such lands will lead to massive soil erosion.

(Editing by Walter Bagley)