From: Reuters
Published December 19, 2007 05:23 PM

U.S. energy law drives alternative to corn ethanol

By Timothy Gardner - Analysis

NEW YORK (Reuters) - The U.S. energy bill signed into law by President George W. Bush on Wednesday should drive a billion-dollar domestic business for a low-emissions domestic ethanol made from sources other than corn -- though it could take nearly a decade to go from the lab into car tanks.

The bill calls for the blending of 36 billion gallons per year of domestic alternative fuels like ethanol, a five-fold increase, into motor fuels by 2022.

"This standard can be viewed as technology-forcing as there is no prospect of producing this much biofuel from corn in the United States," Marc Levinson, an analyst for JP Morgan in New York, said in a research note.

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Indeed, the bill mandates production of cellulosic ethanol, a fuel that can be made from the woody parts of the corn plant, rather than corn kernels that are the source of traditional U.S. ethanol. It can also be made from nonfood energy crops like poplar trees, switchgrass, or wood waste.

The bill calls for U.S. ethanol to be at least 3 percent cellulosic by 2012 and at least 44 percent by 2022.

If the new fuel succeeds, it could invigorate the U.S. ethanol industry that has suffered from its own success. A 40 percent spike U.S. corn ethanol capacity this year has lead to complaints that it is causing food and feed prices to jump as producers plant more corn and less soy and other crops.

If the 2022 mandate is met, it could let corn ethanol producers reach a production ceiling that does not threaten food prices, while providing them and cellulosic producers revenues of about $50 to $70 billion, according to consultants McKinsey & Co.

Ron Oster, an analyst at Broadpoint Capital, Inc in Missouri, said the cellulosic industry will be the biggest beneficiary of the U.S. mandates.

CATALYST

Currently cellulosic is mostly a laboratory experiment that can cost about twice as much to make as traditional ethanol. But companies are salivating to enter the business.

"The whole industry has been waiting for a catalyst like this energy bill that will bring additional finance and funding to build out the commercial sector," Carlos Riva, president and CEO of Verenium Corp, a pure play cellulosic company, said in an interview.

Private company POET, the largest U.S. ethanol producer, hopes to make commercial levels of the fuel from corn cobs by 2012 to 2013.

Bill Caeser, an Atlanta-based partner at McKinsey, said the fuel could become commercially available by 2015 and costs could eventually slip below those for making corn ethanol.

He said cellulosic could boost the percentage of energy from ethanol in U.S. transportation fuel to about 16 percent by 2022, up from current levels of about 3 percent from ethanol made from corn. That could save the United States 1.5 million barrels of oil per day. Ethanol does not contain as much energy per gallon as gasoline, so its contribution to energy supplies is often measured in energy content rather than volume.

In addition, cellulosic could create a $3 billion to $5 billion industry in enzymes and fermentation organisms, which help break down the tough bits of the plants into fuel.

And cellulosic ethanol emits far less carbon dioxide, the main greenhouse gas, than corn-based ethanol, according to Caeser. Cellulosic emits 80 percent less carbon dioxide than regular gasoline, while corn-based emits only 20 percent less, he said.

(Reporting by Timothy Gardner; Editing by David Gregorio)

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