The new frontier in ethanol production

The first large ethanol plants to produce biofuel from non-food sources like corn cobs are starting operations in the Midwest as the industry worries 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 $US275 million ($A297.54 million) plant next to a cornfield in Emmetsburg, Iowa.

Two other companies are completing new cellulosic ethanol plants in Iowa and Kansas. By 2015, they expect to be producing millions of gallons of the advanced biofuel.

Yet the goal of producing ethanol from non-food sources faces a murky future. Wavering US 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 are being built in Brazil, not the US. Although the US government has spent more than $US1 billion to develop cellulosic technology, industry executives recently wrote to President Barack 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 fibres.

The residue of corn cobs, husks and stalks collected from farmers' fields is ground up, subjected to acid, water, heat and enzymes to extract hidden sugars. Then they're fermented and distilled. The 200-proof alcohol is the same as that made from corn.

"Cellulosic is kind of like corn ethanol was in the '80s," said Jeff Lautt, chief executive of Poet, the nation's second-largest ethanol maker operating 27 traditional production plants. "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 say cellulosic ethanol can be produced today for $US3 per gallon, but costs are sure to drop, making it competitive with corn ethanol, whose US average rack price recently dropped below $US2 per gallon.

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 US cellulosic ethanol plants. The Obama administration, which has signalled it might change the mandate, is expected soon to announce its policy.

One problem facing the ethanol industry is that traditional ethanol plants have more than enough capacity to supply 10 per cent of the US fuel supply. Almost all petrol is sold at that blend, E10.

Ethanol makers never planned on cutting back corn ethanol output to make way for the new cellulosic version. That leaves one choice: higher blends like E15.

"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 US oil imports. Now, the domestic shale oil boom also can claim the energy-independence banner. Oil imports are down to 40 per cent of US 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."

What's next?

The game plan for cellulosic pioneers like Poet-DSM is to licence 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.

Quad County Corn Processors, a locally owned ethanol plant in Galva, Iowa, developed technology that extracts trapped sugars from fibrous parts of the corn kernel and ferments them in an ethanol plant's existing equipment. ICM Inc, the company that designed most of the US ethanol plants, offers a competing corn-fibre cellulosic technology.

In September, the Galva co-operative officially flipped the switch on its system - $US9 million worth of bolt-on equipment to boost the plant's ethanol output by six per cent, and, eventually, 11 per cent, chief executive Delayne Johnson said 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 US Environmental Protection Agency says corn-fibre ethanol qualifies as an advanced biofuel, which gives it a higher value under the agency's blending requirements.