Cellulosic-Ethanol Mandate Faces Snags

Cellulosic-ethanol production, a cornerstone of the U.S. government's plan to curb greenhouse-gas emissions, is earmarked to overtake corn ethanol over the next decade. But the industry's expected takeoff could be delayed by a year.

Several potholes make the path difficult, including regulatory delays, but the biggest hurdle is that dozens of commercial-scale and pilot facility projects haven't been able to secure enough financing to begin construction. The recession and tight credit markets have made it difficult to draw investors while the Department of Energy, which has committed $1.3 billion for bio-refinery projects, has been slow to dispense money. It is a chicken-and-egg problem: Both are waiting for each other to move first.

"The red tape and difficulty of putting it together is standing in the way of all the projects," said Frank Maisano, an energy specialist at Washington-based law firm Bracewell & Giuliani LLP.

The difficulties of cellulosic ethanol—a fuel made out of switch grass and other plant fibers—underscore how challenging the thicket of legislation applied in recent years has made it to move forward on reducing the U.S.'s carbon footprint.

Jim McMillan, research manager at the National Renewable Energy Laboratory, the Department of Energy's primary lab for renewable-energy research, said the review process is extensive and companies have to show they have raised money in these collaborative projects.

The fact that "we've been really slow to put a price on carbon," such as through a cap-and-trade program, has stalled investors' interest, he said.

At the same time, companies and institutional investors, wary of taking on risk, have been waiting for the government to disburse grants and expand the requirements for cellulosic ethanol. "They all want to be the first to finance the second project, they won't finance the first," said Arnold Klann, chairman and chief executive of BlueFire Ethanol Fuels. "The government has to take that role."

Big oil companies like Royal Dutch Shell and BP, which have spent tens of millions of dollars striking joint ventures with start-ups, are also relying on government incentives. Vercipia, a joint venture between BP and Verenium will break ground on a 136-million-liter-a-year 36-million-gallon-a-year Florida plant in 2010 after the DOE concludes the due-diligence phase.

Currently, the only production of cellulosic ethanol is coming from a handful of small-scale pilot plants in Montana, Wyoming, Alabama, New York, and South Dakota, which represent less than 5% of the 100-million-gallon mandate proposed by Congress for 2010. Given this shortfall, ethanol companies and petroleum refiners—normally at odds with one another—say that the mandate should be suspended. That mandate is expected to rise to 16 billion gallons in 2022.

"The whole schedule is going to have to be skewed by a year or a year-and-a-half or so," BlueFire's Mr. Klann said. "There is not enough cellulosic ethanol to be able to meet the mandate so consequently the EPA is going to have to delay the mandate—move the 100 million gallons—to 2011 or 2012."

Mr. Klann said the DOE's grant process has also been a bit disjointed, giving awards to projects that will take two to three years to complete while overlooking smaller shovel-ready projects that could meet the first 100 million gallon benchmark. For instance, BlueFire received $88 million in grants for a 19-million-gallon-a-year plant in Fulton, Miss., that will take 18 months to build while a project that is a fifth of its size in Lancaster, Pa., hasn't received funding even though it has the necessary permits to begin construction.

Charles Drevna, president of the National Petrochemical and Refiners Association, questions claims that current technology wouldn't be viable on a commercial scale and is pushing for the mandate to be suspended for 2010-2011.

source: online.wsj