Future of cellulosic ethanol remains uncertain

The idea of a biofuel made from something other than food was one of the stars of both the Bush and Obama administration's energy programs, but the future of cellulosic ethanol is in doubt.

Cellulosic ethanol is made from corn stalks, wood chips and other biomass, and by this time, it was widely expected there would be large scale plants producing it. But that hasn't happened because lenders won't touch cellulosic ethanol.

Many people still believe in the once-bright promise of cellulosic ethanol.

"Cellulosic ethanol presents a tremendous opportunity for our nation," said Jeff Broin, CEO of Sioux Falls-based ethanol producer, POET. "Congress has set a target of 16 billion gallons of cellulosic ethanol by 2022. This is a lofty goal, but it is achievable."

POET is the nation's largest ethanol producer. The Sioux Falls ethanol company has plans to build a cellulosic plant in northwest Iowa, but the start date keeps getting pushed back. Originally, POET officials said cellulosic ethanol production would start in 2009. Then it was 2010, then 2011. Now Broin said it will be 2012 at the earliest.

"With cellulosic ethanol, we've seen no shortage of skepticism lately," Broin told the National Press Club. "That skepticism has been fueled by some companies' lack of success and the industry's inability to scale up to meet government projected timelines."

High corn prices and low prices for the biofuel drove several large ethanol producers into bankruptcy over the past 18 months.

Broin and others in the industry are urging the federal government to raise the amount of ethanol it allows to be blended into gasoline. The current standard is 10 percent, but Broin and others want that increased to 15 percent. Broin said that would boost ethanol sales, and increase the odds that cellulosic operations would be profitable.

But beyond the E-15 issue as it is known, there's a more basic hurdle for the cellulosic industry to clear.

"You just can't get the financing," said Arnold Klann, who runs California-based BlueFire Ethanol, which is also planning to build a cellulosic plant.

"Besides BlueFire there's quite a few other companies as you're well aware that are all trying to build their first plants," Klann said. "And each one has different barriers, but fundamentally the least common denominator in all those barriers, whether they're technical or whatever, is the financing."

Klann said banks consider cellulosic plants too risky. There are small, pilot cellulosic plants operating but nothing on an industrial scale. Klann said lenders aren't willing to finance them because they're not sure a large facility will work.

"What we're hearing from all the lenders, and we've talked to over 50 of them, everybody wants to be first to finance the second project," said Klann. "No one wants to be first to finance the first, and that's what everybody's faced with right now."

Klann said the obvious funder of last resort is the federal government. The Department of Energy has a program to guarantee up to 80 percent of a bank loan for a cellulosic plant, but so far DOE hasn't approved any loan guarantees for cellulosic construction. Even with the benefit of a federal loan guarantee, banks might still consider cellulosic ethanol too risky.

Charles Elfsten owns Ocean Pacific Capital in California, which has helped finance eleven corn ethanol plants. But when it comes to cellulosic ethanol, Elfsten said he's not interested in even a general discussion.

"We wouldn't waste the time," Elfsten said. "It would be about a 35-38 second conversation. No interest whatsoever, none. No reputable institution that lends money is going to lend money on something that's unproven. They're just not going to do it."

In contrast to cellulosic ethanol, corn-derived ethanol attracted a lot of banker support. Ethanol insiders say that's because making alcohol from grain is a century-old, proven technology. The cellulosic process is brand new, and that's casting doubt on whether it will ever become a reality.

Congress initially called for 100 million gallons of cellulosic ethanol production this year. But in light of the industry's troubles, that goal has been slashed to just 6.5 million gallons, and it appears unlikely the industry will even be able to produce that.

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