Ethanol: Pluses and Minuses

I recently posted on Vinod Khosla's Ethanol presentation over at the Googleplex . This recent article from Businessweek lists some of the well-known objections to Ethanol. Vinod argues, and I think rightly so, that as the use of Ethanol becomes widespread the costs will come down and will be competitive with gasoline. He also mentioned that cellulosic Ethanol is the "killer app". What I'm confused about is the time horizon before cellulosic Ethanol becomes viable. The Business Week article indicates that it is decade away. I'll have to watch Vinod's presentation to see if that matches his estimate:

CORN GUZZLERS
Growing crop-based fuel makes sense on paper. General Motors Corp. (GM ) Chairman and CEO G. Richard Wagoner Jr. promotes ethanol as one of the best ways to cut oil imports and clean up emissions. "There is nothing that can be done over the next five years to address [energy] issues that's better than ethanol," he says.

But while ethanol brings a near-term payoff, Wagoner admits that "it's not free." To GM, the cost to make the engine ethanol-friendly is just a couple hundred dollars per vehicle. For consumers, however, the economics don't yet add up. Fuel made from 85% ethanol and 15% gas, or E85, now costs more than gasoline in many markets. Throw in the fact that it is 25% less efficient than gasoline, and the consumer's bill at the pump is much more. A Chevrolet Tahoe SUV running on E85 costs about $3,500 a year to fuel at $3 a gallon, an $800 premium over the cost to run an all-gas model.

Wagoner's solution could help America wean itself from foreign oil. But not the way ethanol producers are making the stuff today. From the diesel tractors tilling the fields and harvesting corn to the trucks shipping kernels to the boilers in the processing plants, making ethanol requires 1 energy unit of fossil fuel for every 1.3 energy units of ethanol produced.

CELLULOSIC GAINS
Far more promising is an energy crop that's still a decade away or more. Cellulosic ethanol refers to alcohol that's cooked up from the whole corn plant -- the stalk, leaves, cob and all -- rather than just the kernels. It offers a massive boost in ethanol's potential. By tapping other crops and forest waste, along with corn, the Energy Dept. estimates that the U.S. could produce 1.3 billion tons of biomass per year, which could yield enough ethanol to replace around one-third of America's liquid fuel needs by 2030, up from barely 2% today.

But before the cellulosic industry starts crowing about reducing oil imports, there's a decade or so of R&D to be done. The challenges, explains Greg Stephanopolous, a professor of chemical engineering at Massachusetts Institute of Technology, lie in finding better ways to break down the cellulose into sugars, then breeding new microorganisms that can thrive on the unusual mix of sugars and complex chemicals in woody plant matter and spit out useful ethanol at the end.

Over the past decade both Archer Daniels Midland Co. (ADM ) and DuPont (DD ) have engineered ways to make new kinds of biodegradable polymers. Given that precedent, Stephanopolous estimates it will take 10 years and $500 million to come up with industrial processes to make cellulosic ethanol. "That's the downside," he says. "The upside is the potential to replace tens of billions of dollars in oil imports. It's a no-brainer."