Biofuel Development a Burning Priority for Obama Camp

By Greg Burns
Chicago Tribune
July 9, 2009

Even with new rules in the offing that would slap handcuffs on oil traders, a prospect that sent shares of Chicago-based CME Group tumbling, the feds are more eager than ever to promote oil-free gasohol. They especially love the stuff brewed from wood chips, corn cobs, switch grass and other forms of cellulose.

Yet cellulosic ethanol, as it's called, remains more of a promise than a reality. So far, no one has produced it on a mass commercial scale at a price that would rival ethanol made from corn or sugar cane.

For a shining moment, the fuel-from-sawdust movement attracted a fortune in private investment, before venture capital funds dried up across the globe. Now, however, at least a few of those bucks are being clawed back the hard way.

The wood chips hit the shredder in Alabama at the end of June, when a federal jury ordered a cellulosic energy company and its executives to pay $10.4 million in a fraud suit brought by an unhappy investor. It's a complex case focused on allegations of bad-faith business practices that involved Silicon Valley visionary Vinod Khosla, whose firm denied any wrongdoing.

But the case also highlighted a once-eager convert's loss of faith in cellulosic fuel.

"This was supposedly a breakthrough technology," said investor George Landegger, who runs the privately held pulp producer Parsons & Whittemore Inc. "This particular one is worthless."

Will any live up to the hype? The potential for scaling up beyond a lab or pilot program "has yet to be proven," he said.

For its part, Cello Energy LLC vowed to continue fighting the legal case and moving ahead with its plant startup.

"It would be wrong to read the lawsuit as any kind of scientific referendum on the ultimate success or failure of the cellulosic fuel process," the company said in a statement.

The fight between Landegger and Cello has a bigger dimension. Government officials were counting on the Alabama-based company to meet 50 percent of the bio-requirement under the nation's motor-fuel standards for next year.

That's not happening, said David Woodburn, research analyst at ThinkEquity LLC in Chicago.

Counting all the demonstration projects, pilot plants and one or two bigger ventures, then assuming that all perform at maximum advertised capacity, only 39 million gallons of a required 100 million will be produced in 2010, he calculates. That's a tiny fraction of the fuel used by U.S. cars and trucks in a year. In 2011, the requirement rises to 250 million, but production to no more than 82 million.

Federal officials may delay imposing the standards, and the production shortfall may in turn trigger further incentives for development.

Certainly, the government shows no sign of backing off. Announcing an additional $787 million for biofuel research and commercialization in May, Chu reportedly sounded an optimistic note: Corn-based ethanol was "a good start," he said, but "research will lead the way to give us much better options."

Landegger worries those research dollars could be wasted. By the time he severed ties with Cello, he said, "It was no longer a biofuel enterprise. It was a grant-requesting enterprise."