Ethanol in the Spotlight

With the nation seeking ways to clean up the environment and reduce dependence on foreign oil, ethanol is suddenly getting fresh buzz.

Ethanol, a fuel made out of crops like corn and sugar, shows promise because it produces fewer greenhouse gases than gasoline, can be made in the United States and, with new technologies, is becoming much cheaper to produce, supporters say.

The timing is right. With gasoline prices still lofty, mounting evidence of global warming, and enactment last year of a U.S. energy bill requiring increased use of renewable fuels, the rush to find an alternative to gasoline is on.

So now, a wide array of people in Silicon Valley -- including entrepreneurs, venture capitalists such as Vinod Khosla, and scientists at companies like Palo Alto-based Genencor -- are jumping into ethanol. In part, they hope to reap profits from research at places like Stanford University and University of California-Berkeley, where scientists are working on ways to ferment ethanol more efficiently, starting with enzymes derived from a cotton-eating fungus. Ethanol, in short, appeals to Silicon Valley's hankering to apply technology to solve big problems.

The local enthusiasts join a growing circle of ethanol supporters elsewhere -- including Microsoft's Bill Gates, British mogul Richard Branson and big oil companies -- who have recently committed big bucks to ethanol ventures.

``The science in this area is stunning,'' says Marty Lagod, a venture capitalist with Firelake Capital in Palo Alto, who is searching to invest. ``But it's still early,'' he says, referring to the high risk still surrounding ethanol start-ups.

From corn, for decades

Not that ethanol production is new. Large agribusinesses in the Midwest have been making it out of corn for decades as an additive in gasoline -- but at subsidized prices.

But now ethanol is getting fresh support in Congress and the White House. The Energy Policy Act of 2005 more than triples the amount of plant-based fuels -- much of it ethanol -- that must be used nationwide, to 7.5 billion gallons by 2012 from 2.5 billion gallons last year. And President Bush talked up ethanol in his State of the Union last month and in subsequent speeches.

There are several ways to produce ethanol, and yet each seems to have a catch holding it back from more widespread adoption.

The cheapest way is using sugar cane, which has helped Brazil make a major shift to ethanol. But geography and tariffs make it less feasible in the United States.

The next most attractive method is producing ethanol from corn, the main type of U.S.-made ethanol. While making corn ethanol is considerably cleaner than refining petroleum, it still costs significantly more to make than gasoline. And it's impractical in states like California, located far from Midwest corn fields.

Cellulosic ethanol

What has technologists in Silicon Valley and elsewhere buzzing is the emerging science of cellulosic ethanol. The process shreds switchgrass, wood chips or other plant byproducts such as corn stalks, and then adds special enzymes to break down the mass of cell walls of these plants, or cellulose, into sugars. These sugars can then be used to ferment ethanol.

By some estimates, cellulosic ethanol promises to reduce greenhouse emissions by 60 to 80 percent and, once in widespread commercial production, could cost about the same as corn ethanol to make.

But the real bonus, supporters say, is that cellulosic ethanol could radically improve energy output over gasoline and corn ethanol. With gasoline, you only get 0.8 units of energy output for every unit of fossil fuel used in production. With cellulosic ethanol, you get five units out for every unit of fossil fuel used. That's because the sun is doing all the work.

Problem is, most experts say commercial production of cellulosic ethanol is still three years away.

Meanwhile, venture capitalist Khosla is the most high-profile ethanol convert in the tech world. He's pushing policies to speed up the shift to ethanol, advocating a government mandate for car companies to produce so-called ``flex fuel'' cars, or vehicles that can run on fuel that's up to 85 percent ethanol. He's also funding a state ballot initiative to slap a tax on oil extracted in California.

Khosla, who previously funded telecom companies like Juniper Networks, Siara and Cerent, says he now has two investments in companies focused on cellulosic ethanol, including BC International of Dedham, Mass. He still has an office at Kleiner Perkins Caufield & Byers in Menlo Park but two years ago left the firm and formed his own, Khosla Ventures, to invest in new technologies, including ethanol.

At first, he assumed the sector wouldn't be profitable and was committed to ethanol projects out of concern for the environment, he said. But the more he dabbled, the more attractive it became: ``Now I think it makes sense because it's a great investment; that's not where I started.''

Ethanol has the best chance of replacing petroleum, he says: ``None of the other options, including hydrogen, are realistic,'' he says.

Genencor

Palo Alto's Genencor is working to produce better biological enzymes for the cellulosic process. Executives at Genencor, like those at competitors Iogen and another producer, Davis-based Novozymes, say they have come up with a reliable enzyme needed to break down plant fibers into sugar that can be distilled into ethanol. It's a complicated procedure which includes blasts of steam, vats, long sitting times and distilling, akin to wine-making.

Stanford's Global Climate and Energy Project, meanwhile, is funding research by Stanford biology professor Christopher Somerville and genetics professor, Gavin Sherlock.

Somerville started a company in Hayward, Mendel Biotechnology, developing an enzyme for switchgrass that will be ready, he says, in six or seven years, at the earliest. He has raised double-digit millions in venture backing, led by Biotechnology Value Fund in San Francisco.

Sherlock is developing a mixture of two yeasts -- similar to the hybrid yeast that makes lager beer -- that is intended to increase yields for cellulosic ethanol production.

And there are even more experimental projects in the pipeline. Craig Venter, the entrepreneurial scientist who mapped the human genome, has started a company where he intends to string together genes to create ethanol from scratch. He's backed with $30 million from Menlo Park's Draper Fisher Jurvetson.

Major companies

It isn't just the Silicon Valley types taking a risk on ethanol; business heavyweights are looking for ways to invest, too.

Microsoft's Bill Gates last year committed to an $84 million investment in Pacific Ethanol of Fresno, the only publicly traded company focused on ethanol. The company plans to build five corn ethanol plants in California and intends to start producing cellulosic ethanol.

Richard Branson's Virgin Group has started a subsidiary, Virgin Fuels, to invest in alternative energy, including corn and cellulosic ethanol plants. In a recent interview with Fortune magazine, Branson said Virgin Group was prepared to invest $300 million to $400 million over the next two to three years.

The big oil companies also are jumping into the fray. Shell is backing Canada's Iogen, which has a test cellulosic plant in Ottawa that it hopes to expand into large-scale production. But the factory is only one-tenth of the size needed to be profitable, experts say.

Even so, transitioning from an oil-based economy will be like turning a giant oceanliner. After cellulosic ethanol becomes available, experts say it will take years, even decades, for a nation full of gasoline cars to make the conversion.

Of the more than 140 million cars in the United States, only 4 million now are ``flex fuel'' vehicles, equipped to run on ethanol. That gives gas station owners few incentives to supply more ethanol. Only 587 of 170,000 service stations nationwide sell E85, the mixture of 85 percent ethanol and 15 percent gasoline that is the most common mixture of ethanol-based fuel. The state has only four E85 pumps, two of which are in the Bay Area. Neither is open to the public.

``We have a huge chicken and egg problem here,'' said Somerville, the Stanford biology professor.

Moreover, few players are willing to risk being the first to sink $100 million or more into building a cellulosic ethanol plant.

The first mover is likely to make mistakes, says Jack Huttner, spokesman for Genencor.

``The pioneer is going to spend a whole lot more money figuring out systems that are complicated and challenging,'' Hutter says. ``There's not a very compelling business reason to be that pioneer.''

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