Beyond the corn: The new frontier in ethanol is nonfood biofuel

EMMETSBURG, Iowa – The first large ethanol plants to produce biofuel from nonfood sources like corn cobs are starting operations in the Midwest amid industry worries that they might also be the last — at least in the United States.

After a decade of research and development, ethanol maker Poet Inc. and its Dutch partner Royal DSM recently produced the first cellulosic ethanol at a $275 million plant next to a cornfield in this northern Iowa town.

Two other companies are completing new cellulosic ethanol plants in Iowa and Kansas. By next year, they expect to be producing millions of gallons of the advanced biofuel.

"It was a big moment when we produced ethanol," said the Emmetsburg plant's general manager, Daron Wilson, who kept a vial from the first batch in August as a memento. "It was jubilation."

Yet the goal of producing ethanol from nonfood sources faces a murky future. Wavering U.S. policy on renewable fuels and the North American oil boom cast a shadow over the commercial triumph.

The next big cellulosic ethanol plants are planned or underway in Brazil, not the United States. Although the U.S. government has spent more than $1 billion to develop cellulosic technology, industry executives recently wrote to President Obama that other countries, including China, could "reap the economic and environmental rewards of technologies pioneered in America."

Most ethanol is fermented from corn kernels. The fuel made at the new Emmetsburg plant is derived from inedible parts of the corn plant. Straw and grasses also can be used because, like corn residue, they contain sugars that cellulosic technology can extract from the fibers.

"Cellulosic is kind of like corn ethanol was in the '80s," said Jeff Lautt, CEO of Sioux Falls, S.D.-based Poet, the nation's second-largest ethanol maker operating 27 traditional production plants including four in Minnesota. "It has a lot of promise, it needs some support to allow the innovation and continuous improvement to happen, but long term it can compete on its own just like corn ethanol."

Lautt and other industry officials said cellulosic ethanol can be produced today for $3 per gallon, but costs are sure to drop, making it competitive with corn ethanol, whose U.S. average rack price recently dropped below $2 per gallon.

Besides federal R&D grants, Congress has, at times, offered a $1 per gallon tax credit to promote advanced biofuels like cellulosic ethanol. The credit expired last year. In 2007, Congress enacted the renewable fuel standard that imposed a complex system of mandates to blend more ethanol into the nation's motor fuel. The oil industry has resisted it as onerous, costly and unworkable.

Ethanol makers say that without a blending mandate, it will be difficult if not impossible to raise investment capital for more U.S. cellulosic ethanol plants. The Obama administration, which has signaled it might dramatically alter the mandate, is expected to soon announce its policy.

The new Midwestern cellulosic ethanol plants represent big investments by deep-pocket companies that weathered longer-than-expected paths to commercial scale.

DuPont Cellulosic Ethanol, part of the Wilmington, Del.-based industrial giant, expects to complete in a few months its 30 million-gallon-per-year plant in Nevada, Iowa, at a cost of more than $200 million. Last week, DuPont said it will sell more than 500,000 gallons of the output annually to Procter & Gamble for its cold-water Tide laundry detergent. Tide, which has long used ethanol in its formula, will be the first detergent produced with cellulosic ethanol.

Abengoa is upbeat about its new plant's success, but is planning its next project in Brazil. That's already happened with Iogen Corp., an Ottawa-based company with similar cellulosic technology. Iogen is completing a plant in Brazil with ethanol maker Raízen Energia Participacoes. Both plants will make ethanol from bagasse, a fibrous material in sugar cane.

"America remains an exciting and important opportunity," Iogen CEO Brian Foody said in an interview. "It is important that U.S. policy find room for growth of ethanol use beyond the E10 level."

One problem facing the ethanol industry is that traditional ethanol plants have more than enough capacity to supply 10 percent of the U.S. fuel supply. Almost all gasoline is sold at that blend, E10.

Ethanol makers never planned on cutting back corn ethanol output to make way for the new cellulosic version. At Emmetsburg, the Poet-DSM cellulosic plant called "Project Liberty," stands next to a 9-year-old corn-ethanol plant.

"The truth is that there is only so much ethanol being bought in this country," said Paul Niznik, research manager and biofuels expert at Hart Energy Research & Consulting in Houston. "If you are making cellulosic ethanol, you are not competing against petroleum products, you are competing with other ethanol plants."

Once, ethanol marched in the vanguard to reduce U.S. oil imports. Now, the domestic shale oil boom also can claim the energy-independence banner. Oil imports are down to 40 percent of U.S. consumption, the lowest since 1996.

"In 2007 we were talking about peak oil — we don't talk about that anymore," said Jason Hill, assistant professor of bioproducts and biosystems engineering at the University of Minnesota. "The landscape has changed."

The game plan for cellulosic pioneers like Poet-DSM is to license their technology to other ethanol companies and earn fees on the intellectual property.

That might be difficult if investment dollars dry up for large, new ethanol plants. Yet there is another, new, low-cost cellulosic option that may appeal to ethanol plants looking to expand.

In September, the Galva cooperative officially flipped the switch on its system — $9 million worth of bolt-on equipment to boost the plant's ethanol output by 6 percent, and, eventually, 11 percent, said CEO Delayne Johnson in an interview.

"Our technology doesn't need any government subsidies to make it profitable," said Johnson, who believes the investment will pay off in three years.

Johnson said the technology also increases the ethanol plant's output of corn oil, and results in a higher ratio of protein in the animal-feed byproduct, making it more valuable. The U.S. Environmental Protection Agency says corn-fiber ethanol qualifies as an advanced biofuel, which gives it a higher value under the agency's blending requirements.

Some researchers have questioned whether cellulosic ethanol from cornfield residue truly helps reduce greenhouse gases linked to climate change. Hill said long-term studies are needed to resolve those scientific issues. Ethanol makers say cellulosic technology's low-carbon benefits are proved — and could offer business opportunities.

The industry is closely watching states like California that have or are considering low-carbon fuel standards. They could pave the way for cellulosic ethanol expansion beyond the Corn Belt, with production plants fed not by crop residue, but organic waste from garbage. Abengoa is piloting such a plant in Spain.

David Shaffer • 612-673-7090 Twitter: @ShafferStrib