The Rising Influence of Rising Affluence

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Valero Invests $50M in Cellulosic-Ethanol Plant

[What’s notable about this way of producing ethanol is that it does not consume food crops and hence does not incur the political drawback of raising food prices.]

http://online.wsj.com/article/SB10001424052748704803604576078202329991370.html

›JANUARY 13, 2011
By RUSSELL GOLD

Oil refiner Valero Energy Corp. plans to invest in one of the first commercial-scale plants to convert wood into ethanol, an unusual vote of confidence by a major oil company in the emerging technology used to produce so-called cellulosic biofuels.

The investment may also be a sign that nascent cellulosic-ethanol technology is turning a corner after years of struggling to commercialize new technology, secure financing and drive down operating costs.

There are already substantial, mature industries that turn corn into ethanol in the U.S. and sugarcane into ethanol in Brazil. But the U.S. has set aside funding to encourage the develop of fuel from wood and other plants that aren't used for food.

"You can make cellulosic ethanol today, the point is can you make it profitably?" asked George Stutzmann, Valero's vice president of alternative energy.

In this case, he said, the answer is yes, in part because of federal subsidies for cellulosic ethanol. Valero and its partner in the project, Mascoma Corp., are seeking federal loan guarantees for the new plant, which is to be built in Kinross, Mich., near the Canadian border.

Mascoma, a closely held company based in Lebanon, N.H., has been running a pilot plant in upstate New York for two years.

Problems may yet arise as the technology makes the leap to commercial-size operations. Even then, the projected output—40 million gallons a year—is a tiny fraction of the 138 billion gallons of gasoline consumed annually in the U.S.

But Valero is optimistic. "It is not going to happen tomorrow, but within 10 years, you could have a cellulosic industry," Mr. Stutzmann said.

Valero has agreed to purchase and distribute the ethanol produced at the Michigan plant, which could be operational by 2013. The refiner agreed to invest up to $50 million and expects a 50% stake in the project.

Mascoma and other investors will pay for the rest of the $350 million plant, assuming they get a critical loan guarantee from the Department of Energy for about $210 million of construction costs.

Paul Dickerson, who headed the Energy Department's Office of Energy Efficiency and Renewable Energy under President George W. Bush and is now a corporate lawyer, says the deal may be "the first key indicator" that the fuel could be produced at a price competitive with ethanol made from corn.

"The time has come," said Bill Brady, chief executive of Mascoma, to "show the world it can be done."

In 2006, Mr. Bush set out a goal to make cellulosic ethanol "practical and competitive within six years," as he said in his State of the Union address that year. But the industry has fallen well short of ambitious Congressional production targets.

In 2011, the government expects about 3.9 million gallons to be produced, far less than the 250 million gallon target.‹