The ethanol boom has come and gone. But if you think the opportunity to profit from biofuels has come and gone as well, you're sorely mistaken.
You see, corn-based ethanol turned out to be a bust for many reasons. Its feedstock was in direct competition with food sources, its lifecycle carbon reduction was constantly in question and the energy return on energy invested (EROEI) turned out to be less than desirable—meaning the net energy produced was hardly more than the energy used to produce it.
Of course, with all the heavy capital expenditures that went into developing a corn-based ethanol market, we'll continue to see that product produced. Especially since federal mandates require a certain amount of ethanol to be present in the nation's gas tanks.
In fact, right now there are 139 ethanol biorefineries operating in the US with a capacity of 7.9 billion gallons per year (bgy). Also right now, there are 62 plants under construction and seven expansions underway that will bring an additional 5.57 bgy online.
That gives the US a total projected capacity of over 13.5 bgy.
But the recent energy bill signed into law on December 19, 2007 calls for the blending of 36 bgy of domestic alternative fuels to be blended into our nation's fuel supply by 2022.
Basic math tells me there is a 22.5 bgy discrepancy. Sounds like an opportunity, right?
Cellulosic Ethanol Production
According to JP Morgan Analyst Marc Levinson, ". . . there is no prospect of producing this much [36 bgy] biofuel from corn in the United States."
That's why the Energy Bill also mandates the production of cellulosic ethanol, a fuel that can be made from the cellulose of many plants, rather than competing with corn. It's the stuff Bush is referring in to when he talks so enthusiastically about switchgrass—though it can be made from many sources.
The Energy Bill requires that 3% of ethanol be derived from cellulosic sources by 2012, and 44% by 2022. That means, by my estimates, we'll need to produce 405 million gallons of cellulosic ethanol in 2012 and 15.84 billion gallons in 2022.
I'd consider that a heck of an opportunity, especially since construction only recently began on the first cellulosic pilot plants in the nation. This is truly a ground floor opportunity.
According to consultants McKinsey & Co., "If the 2022 mandate is met, it could let corn ethanol producers reach a production ceiling that does not threaten food prices, while providing them and cellulosic producers revenues of about $50 to $70 billion."
Of course, I believe the cellulosic industry will be the biggest beneficiary. But, until recently, the industry was shrouded in doubt about whether or not it was profitable, how much it actually reduced lifecycle carbon emissions, and even it could be produced on a mass scale.
Now, reports are coming out that ease all those fears.
Bill Caeser, an analyst from McKinsey & Co. says cellulosic ethanol can become commercially available by 2015. And POET, a private ethanol company, hopes to be making commercial amounts of it by mid-2012.
Caeser also said cellulosic could boost the percentage of energy from ethanol in US transportation fuel to about 16% by 2022, up from current levels of about 3% from ethanol made from corn. That could save the United States 1.5 million barrels of oil per day.
You see, ethanol does not contain as much energy per gallon as gasoline, so its contribution to energy supplies is often measured in energy content rather than volume. Some have even said that it takes a gallon of gasoline to make a gallon of biofuel.
But a new study from plant scientist Ken Vogel found cellulosic ethanol actually has positive net energy yield. In a study for the federal government's Agricultural Research Service in Nebraska, Vogel calculated all the energy that went in to producing cellulosic ethanol.
According to Vogel, the study included, "the energy used to make the tractors, the energy used to make the seed to plant the field, the energy used to produce the herbicide, the energy used to produce the fertilizer, [and] the energy used in the harvesting process."
For every unit of energy used to grow the feedstock, Vogel says he could get almost 5.5 units worth of ethanol. That's even more efficient than making ethanol from corn.
And cellulosic ethanol emits far less carbon dioxide, the main greenhouse gas, than corn-based ethanol. Cellulosic emits 80% less carbon dioxide than regular gasoline, while corn-based ethanol emits only 20 % less.
With so many benefits, there's got to be an investment opportunity.
Cellulosic Ethanol Companies
While investors in corn-based ethanol companies may have done well early on, there hasn't been anything positive to say about the long-term for some time now. Take a look at the following charts from ethanol frontrunners Pacific Ethanol Inc (NASDAQ: PEIX) and VeraSun Energy Corporation (NYSE: VSE):
But the publicly traded cellulosic ethanol companies should prove to fair better. And not just production companies, but chemical companies as well.
In fact, cellulosic ethanol could create a $3 billion to $5 billion industry in enzymes and fermentation organisms, which help break down the tough bits of the plants into fuel.
Companies in the cellulosic sector include Verenium Corporation (NASDAQ: VRNM) and Bluefire Ethanol Fuels Inc. (OTC: BFRE). Both of those companies have received federal funding and should prove to be a good bet going forward.
It would also be wise to look at paper and pulp companies like Domtar Corp. (NYSE: UFS), that could start selling their byproducts as cellulosic ethanol feedstocks.
Beyond the few limited options thus far, I'll be covering every advancement in this industry in the pages of the Green Chip Stocks.
Until next time,