While the corn ethanol industry seems to have a limited lifespan, the sustainability of the biofuels sector can be maintained via a technology known as cellulosic ethanol.  This type of fuel can be processed by means of sugar fermentation, where either pure cane sugar can be used directly, or a variety of feedstocks (switchgrass, rapeseed, wood chips, municipal waste, etc.) can be used and then broken down into sugar.

Cellulosic ethanol therefore offers the advantage of a much larger supply base and does not cut into the global food supply.  This allows for more price stability in the marketplace.  Additionally, the U.S. DOE has estimated that the energy input/output ratio is 2.5-3x more efficient than the corn ethanol process.  Moreover, the environmental benefits of this technology are substantial, as over 85% of greenhouse gases emitted are eliminated when compared to traditional petroleum.

Cellulosic ethanol is indeed the next-generation technology for the biofuels sector, but it is not without its own roadblocks, namely mass production and funding.  The enzymes required to break down the feedstock into sugar are not yet commercially produced and are a few years away from that stage, creating a bottleneck in the industry’s growth.  A general lack of outside funding for the pure players in the field is also an issue.  In a 4Q06 interview with BlueFire Ethanol CEO Arnold Klann, it appears that the financial sector has not yet embraced cellulosic ethanol as the perceived technology and production risks are too large.  In the meantime, the federal government has not yet bridged this financial gap, serving as another constraint for U.S.-based cellulosic players such as BlueFire Ethanol (BFRE ) and Celunol.  

We don’t know for sure how cellulosic ethanol will compete with other forms of fuel on a cost basis, largely because it is not yet commercially available.  Should the technology advance enough and scale properly then it can be a viable long-term solution to our petroleum needs.  There will also be a lot of profits to be captured, producing a potential windfall for investors.  Until then, however, there seems to be too much risk for this technology and that is apparently keeping a large amount of investors on the sidelines.

As a whole, the ethanol industry has approached an inflection point – where it is a known fact that corn-based ethanol does not have a sustainable future, yet the wheels are not yet turning fast enough for the remedy.  So what needs to happen in order for progress to resume?  Stay tuned for the final chapter in this series.