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The already dismal outlook for cellulosic biofuels–a type of fuel made from sources such as grass and wood chips–just got worse. For the second year in a row, the U.S. Environmental Protection Agency will drastically cut the amount of cellulosic biofuels that oil companies are required to blend into their fuel stocks under its Renewable Fuels Standard. This year’s mandate was supposed to be 100 million gallons of cellulosic biofuels, but that was reduced to 6.5 million. Last month, the EPA announced that it would lower the requirement in 2011, from 250 million to somewhere between five million and 17.1 million gallons.

The EPA is doing this because not enough cellulosic biofuel is being produced to meet the targets. So far, no commercial plants have been built–just some small pilot and demonstration-scale plants.

The market for cellulosic biofuels seemed assured after Congress passed the Renewable Fuels Standard in 2007, which by 2022 would require 16 billion gallons of these fuels every year. It required gasoline and diesel companies to blend biofuels made from cellulosic materials into their supplies. Now the companies hoping to provide cellulosic biofuels to the oil industry are struggling, and they are years behind schedule, having failed to collect the financing needed to build large commercial biorefineries.

Several leaders in the cellulosic biofuels industry argue that the technology is ready–it’s just that the recession has severely limited the amount of financing available, and the funds that are available for clean energy are largely going to solar and wind projects, which are getting more direct government support. The mandates could provide vital help, they argue, by encouraging oil companies to give their backing to cellulosic biofuel.

“There are production facilities that are queued up to be built, but they’re getting hung up by the capital markets and the bankers,” says John McCarthy, CEO of the cellulosic ethanol startup Qteros, based in Marlborough, MA. Maintaining the original levels of the mandates would help open up financing, and lowering them “has taken the legs out from under that required demand,” he says. “Unless the EPA and the White House hold firm on the level of mandated demand, then you might as well not have a Renewable Fuels Standard.”

According to the Biotechnology Industry Association (BIO), at least a dozen commercial cellulosic biofuel projects are ready to be built, pending financing, that together could supply a couple hundred million gallons of fuel. Commercial plants are expected to cost between $100 million, for a plant added to an existing corn ethanol facility, to as much as $600 million, including financing costs, for a completely new facility.

Several cellulosic biofuel industry leaders are calling on Congress to change a law that directed EPA to lower the mandates to match cellulosic ethanol supplies. Under their scenario, if the mandate were to exceed the amount of cellulosic fuel produced, so that oil companies could not buy enough to satisfy the requirement, they would be penalized. “If the EPA chose not to waive those gallons, the oil companies would have to pay a per-gallon penalty” for the amount that they could not blend, says Matthew Carr, a policy director at BIO.

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Credit: Coskata

Tagged: Energy, energy, renewable energy, biofuel, cellulosic ethanol, government, funding

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