Photo:ASurroca, Creative Commons, Flickr
So the ethanol industry continues its uphill battle. United States-based ethanol pureplays such as Aventine Renewable Energy (AVR), VeraSun Energy (VSE), and USBioEnergy (USBE) continue to receive a blind eye from investors as their stock prices languish. In previous postings, we have discussed how the ethanol industry is at an inflection point, which would support a near-term bearish outlook. However, there have since been some developments that will help to further define the marketplace over the long run.

Both the Senate and the House of Representatives released their versions of the 2007 Energy Bill this summer, and both versions are heavily skewed toward thebiofuels sector. This is due to the President's "Twenty in Ten" plan, which is aimed at reducing U.S. gasoline consumption by 20% over the next ten years. These versions are largely complementary toward one another, with the Senate portion focused largely on providing ethanol production incentives, and the House portion containing provisions for an ethanol distribution infrastructure and for the advancement of cellulosic technology.

Much of the fate of our energy policy now lies in the ability of the House and Senate to reconcile the differences with the President, and vice-versa . While there were few provisions for the advancement of other important segments of clean tech, such as solar and fuel cells, it is impossible to disagree with the fact that our nation is addicted to oil.

On a more micro level, VSE has taken some bold steps to try to become the industry leader. Most notably, the company has shelled out $725 million to purchase three 110-million gallon ethanol plants from ASAlliances Biofuels. Funded by a combination of debt, equity, and cash, this acquisition will give VSE the capacity to produce one billion gallons of ethanol per year by the end of 2008. This will put VSE in the same league as industry leaders Archer Daniels Midland (ADM) and Poet Energy (formerly known as The Broin Companies).

Additionally, VSE has inked an important distribution deal with national grocery chain Kroger (KR) that will allow for the sale of VSE's patented VE85 fuel to be sold at the retail level. With only 1,200 stations across the entire country that currently dispense the E85 blend of fuel, these types of partnerships are essential to help ease the distribution constraints. Moreover, VSE has made its first step toward commercializing cellulosic ethanol technology by investing an undisclosed sum into SunOpta, a developer of such a technology. To that I say "it's about time," although this could serve as a springboard for some of its competitors to do the same. With poor input/output yields, corn-based ethanol will only get us so far, however it serves as a good segue into more promising technologies.

Spain-based Abengoa Bioenergy (ABG.MC) has also taken a step forward in the introduction of cellulosic-based ethanol. Last month, the company announced it will spend $400 million to build a 115 million gallon per year ethanol facility in Kansas, of which 30 million will be dedicated to cellulosic ethanol production, and thus marketh our country's first foray into next generation fuel.

While the completion date was not announced, this project will at least give ethanol investors something to look forward to. I can only imagine that there will be future announcements of a similar vein. The development of the ethanol industry has, and will continue to develop in incremental steps. This is one of those steps.

 
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Disclosure: I currently do not have any exposure to ethanol in my portfolio, however I know that one day I will.