TechPulse 360

Biofuel producers have their fingers crossed on several key Washington policy decisions. They may be holding their fingers for some time.

The news from the halls of government wasn’t encouraging on Wednesday. A bill to extend the expired biodiesel tax credit failed in the Senate, a sign that renewing the ethanol credit later this year could also be politically sticky.

The EPA meanwhile balked on a measure to raise the blending cap for ethanol. A decision had been expected in June and now appears more likely by late summer, at the earliest.

About 50 cellulosic ethanol pilot plants operate in the U.S. Several hundred demonstration plants around the world await funding

The uncertainty from these delayed decisions is likely to keep the industry in financial limbo – just as it was hoping for something better. Since the depths of the recession early last year, financing for new plants has been hard to find. Money isn’t likely to flow freely any time soon.

Things could be so different. Cellulosic ethanol is finally coming of age. Technological kinks appear to be working themselves out, and pilot projects are ready to pass the baton to demonstration ones.

As many as several hundred second-generation cellulosic ethanol plants await funding and the certainty of government decisions could help them lock in money.

There is good reason to think they should move ahead, says Poul Ruben Andersen, global marketing director for Novozymes’ bioenergy business. Four cellulosic demonstration plants are in operation (two in the United States and two in Europe) and the results are favorable.

“It is still early days,” says Andersen. But “this makes us confident.” In the U.S., Iogen and Verenium operate facilities, while in Europe Inbicon and Abengoa are demonstrating production. The plants are similar size, each about 1.5 million gallons.

Just as important, the industry believes second-generation costs are coming down. Cellulosic ethanol is more expensive than corn ethanol, which sells at about $1.60 a gallon. Large-scale production should bring it to below $2, or under the comparable price of gasoline.

POET, the largest producer of corn ethanol, says its cellulosic pilot plant in South Dakota (one of about 50 industry-wide in the U.S.) is successful enough that production can move to the demonstration phase. It hopes to begin construction this summer in Iowa. The 25-million-gallon plant will use corncobs and discarded plant material from grain harvesting.

“We will continue to tweak this process and improve it,” says CEO Jeff Broin. For instance, the company is installing a $2 million pretreatment system to better simulate conditions at the demonstration facility It also recently discovered that a second anaerobic digester is more effective at producing power for the plant than a separate boiler.

Yet this next generation of plants requires government certainty before it can take root. A decision on tax credits is one necessary component. Investment credits, loan guarantees and more aggressive production targets also are critical, according to a report released this week by the Union of Concerned Scientists.

At the top of the list is the decision over blending limits. Carmakers worry an increase in the present 10 percent ethanol-gasoline limit could harm engines and catalytic converters. Industry executives hope for 15 percent or more.

At 20 or 22 percent, investors will be upbeat enough to begin funneling money into new demonstration plants, says Andersen. “That would pave the way.”

It also may get production back on track. The EPA had hoped for 100 million gallons of cellulosic ethanol this year, but scaled back the goal to 6.5 million as the realities of the industry became clear. Now it appears the 1 billion gallon mark won’t be hit until 2017, well behind schedule.

Once again, it doesn’t have to be this way. The National Academy of Sciences estimates enough raw material is available to produce 32 billion gallons of cellulosic ethanol, or double the government’s target for 2022. The academy says 400 million tons of biomass can be found each year in the United States from agricultural discards, fuel crops, forest residues and solid wastes.

Unfortunately, a bull-run in cellulosic ethanol doesn’t appear likely in the short term. Analysts continue to expect the technology to get to scale in 2012. At the present pace, this may not be the case.

That suggests industry fingers had better remain crossed.