UPDATE 2-U.S. Govt cuts use of next-generation biofuels

Tue Jun 21, 2011 11:21pm BST

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* EPA cuts cellulosic ethanol target for second year

* Cellulosic ethanol costs much more than corn-based fuel

* Study says price-viable cellulosic ethanol years away (Recasts, adds more details about cellulosic ethanol)

By Timothy Gardner and Tom Doggett

WASHINGTON, June 21 (Reuters) - The dream of making a green motor fuel from switchgrass or wood chips got kicked down the road for a few more years after the U.S. government on Tuesday slashed its proposed mandate for next-generation biofuels.

For the second year in a row, the Environmental Protection Agency cut the amount of cellulosic ethanol that must be mixed into motor fuel.

Next year, only 3.45 million to 12.9 million gallons of cellulosic biofuel will have to be mixed into the country's gasoline pool by fuel blenders, far below the original goal of 500 million gallons. EPA slashed the target for this year to 6 million gallons from the 250 million gallons required in the renewable fuels standard Congress passed in 2005.

Cellulosic ethanol is made from grasses, wood chips and agricultural waste, which environmentalists and consumer groups say is better than using a food crop such as corn to make the fuel.

Cellulosic has been envisioned as a key part of boosting the amount of renewable fuels used in the United States. Congress had mandated that 36 billion gallons of biofuels should be used in the United States by 2022.

Congress has mandated corn ethanol would top out at 15 billion gallons by 2015, and that is on track. The EPA on Tuesday proposed increasing the use of corn-based ethanol to 13.2 billion gallons next year, matching what Congress required.

But cellulosic is supposed to keep growing every year until it reaches 16 billion gallons by 2022. So far it has failed to live up to expectations.

The revised mandate could affect companies working to develop cellulosic including Solazyme (SZYM.O), CleanTech Biofuels (CLTH.PK), Coskata Inc, and KiOR Inc, which recently filed with the Securities and Exchange Commission to go public.

The main problem is the cost of producing cellulosic is still high and it may be years before that can brought down to compete with corn-based ethanol.

MAGIC FORMULA ELUSIVE

Second-generation biofuel producers must rely on expensive enzymes. So the ethanol industry must depend largely on the corn crop, fueling criticism the business is driving up food prices worldwide.

"They've been looking for the magic formula for a cheap enzyme that will break down the cellulose but they're still far from it," said Rick Kment, an ethanol analyst at Telvent DTN.

Enzymes used to make cellulosic can cost up to $2 per gallon. When the costs of building and maintaining biorefineries, labor, and transportation are added to the enzyme costs, cellulosic is far more expensive than gasoline.

In addition, the available amount of research and development money for advanced biofuels has fallen.

A new study this month concluded there is an 11-year gap between wood-based biofuels production and its commercial viability.

"Major technical hurdles will likely disrupt commercialization for most of the technologies under development," said Bruce Schiamberg of the Schiamberg Group, the co-author of the study.

But the EPA was hopeful. "The agency remains optimistic that the commercial availability of cellulosic biofuel will continue to grow in the years ahead," EPA said.

About 11 percent of all motor fuel used in 2012 will come from biofuels, up sharply from about 8 percent this year, the EPA said.

With ethanol output this year expected to total 13.5 billion gallons, ethanol producers already exceed the 2012 target of 13.2 billion gallons. This year's corn-based ethanol use target is 12.6 billion gallons.

U.S. senators voted overwhelmingly last week for an amendment to end the support payments and the tariff wall that protects the ethanol sector. The amendment is far from coming law, however.

The EPA will take public comment on its proposal through Aug. 11, and then finalize the renewable fuel standard in November.

(Additional reporting by Ayesha Rascoe; Editing by Marguerita Choy, Lisa Shumaker and David Gregorio)

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