More incentives needed for cellulosic ethanol

A worker pumps gasoline blended with 10% ethanol at the UPI Energy gas station in Chatham, Ontario, April 11, 2008.

SAN DIEGO (Reuters) - The U.S. government needs to ante up more in loan guarantees to convince lenders to back commercial development of cellulosic ethanol, Verenium Corp Chairman Carlos Riva said on Monday.

Riva said the 5-year U.S. farm law enacted last month was a good start in boosting cellulosic technology, which aims to produce large quantities of ethanol for fuel from switchgrass, crop residues and other plant cellulose wastes. Ethanol in the United States is now mostly made from corn.

The new farm law provides $320 million in loan guarantees for the next two years for construction of cellulosic refineries. But an additional $150 million may be allocated if lawmakers are able to find the funding.

But Riva said a moderately sized plant costs more than $150 million, so more guarantees are needed if the fledgling industry is to meet a renewable fuel standard goal of producing 16 billion gallons of cellulosic ethanol by 2022.

"They need to give a helping hand ... so the commercial lending industry can get involved. To meet the mandate ... we need a greater focus, more support," Riva said in an interview on the sidelines of the BIO International Convention.

"It's going to be very difficult to convince a commercial bank to take the technical risk associated with the new technology," he added.

Based in Cambridge, Massachusetts, Verenium operates one of the nation's first cellulosic ethanol pilot plants. It is in the start-up phase of a larger facility in Jennings, Louisiana, that would produce 1.4 million gallons of ethanol a year.

Verenium refines local feedstocks, including sugar cane bagasse and specially bred high energy sugar cane.

The company hopes to build six or more 30-50 million gallon ethanol plants by 2001, at a cost of roughly $200 million each. Verenium is scouting sites in Florida, Louisiana and Texas.

Verenium is talking to potential corporate partners about equity for its planned projects, expertise to source and manage its feed stocks, and marketing and logistics.

"There is a lot of interest," said Riva. "A lot of major corporates are starting to show an interest in this."

The company will know later this year if its economic projections -- a goal of producing ethanol at a cost of $2 a gallon or less -- are achievable immediately.

"We thought that was competitive with corn-based ethanol at $4 a bushel," Riva said of corn costs.

But corn prices have surged since 2005 and on Monday corn prices at the Chicago Board of Trade rose above $8 a bushel for the first time amid flooding in the U.S. Corn Belt.

Cellulose for ethanol has gained interest due to increased worries about U.S. reliance on foreign oil, oil prices above $130 a barrel, and a backlash against corn-based ethanol from livestock feeders and foodmakers blaming ethanol for soaring corn prices and food inflation.

Besides the loan guarantees to construct biorefineries, the new farm law includes a tax credit of $1.01 per gallon of cellulosic ethanol, allots $300 million for payments to encourage larger output of advanced biofuels, creates a program to help farmers establish perennial biomass crops, and sets aside money for research into biofuels.

"The farm bill was terrific," Riva said. "It gets past the debate about what kind of advanced biofuels we should have. They have eliminated a lot of uncertainty. We have to find alternatives for liquid fuels."