Cellulosic Ethanol Plant Opening in California... ..

The article below is very big news... while there is expected to be consolidation in the ethanol industry that should be expected since it in its infancy stage as an industry.

The bigger news is the opening of a Cellulosic Refinery in Southern California. One of the first. Low cost to make and abundant raw materials. Very good news to the alternative/renewable fuel movement. I am keeping my eyes on Bluefire....

Big ethanol shakeout coming?

As the U.S. tries to free itself from Big Oil's grip, larger biofuel producers look to stake their claim in a growing business.

By Jeff Cox, CNNMoney.com contributing writer

August 15 2007: 10:48 AM EDT

NEW YORK (CNNMoney.com) -- Get ready: It may still be a fairly new industry, but there's probably a big shakeout brewing in the fast-growing ethanol business.

The rising cost of raw materials and demand for newer and better technology has Big Ethanol poised to take control of the $23 billion biofuel industry.

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In the decades since corn ethanol production began in the United States, a small army of plants has popped up across the national landscape. Most produce around 50 million gallons a year or less, and have survived in Midwest markets where corn is plentiful and demand for flex-fuels sufficient.

But as the industry evolves, corn prices climb and the nation gets much more aggressive in developing biofuels, smaller plants that rely on dated technology stand less of a chance of surviving.

In fact, some operators of plants on the low end of the production scale are already getting jittery about what will happen to them if corn continues to linger around $4 a bushel and the cost to transport ethanol stays high.

"They have every reason to be nervous," said Peter Gray, head of the energy and natural resources division at KPMG Corporate Finance, the investment banking arm of KPMG. "Ethanol is part of the solution in the U.S. and part of the problem. What we've had here is massive overbuild."

Gray predicts widespread consolidation in the industry as the nation moves toward its goal of producing 36 billion gallons of ethanol by 2022, nearly half of which must come from corn. As for which plants will survive, Gray pointed to plants that produce at least 100 million gallons a year as a line of demarcation for sustainability.

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Some 124 U.S. ethanol plants now produce about 6.5 billion gallons a year, an average of about 52 million gallons per plant. Capacity ranges from mega producers Archer Daniels Midland (Charts, Fortune 500) (1.07 billion gallons) and POET Ethanol Products (1.04 billion), to mom-and-pop operators Agri-Energy (21 million) and Renova Energy (5 million). Another 76 plants are under construction with plans to add 6.4 billion gallons to the ethanol stream.

Eric Mosbey, CEO of Lincolnland Agri-Energy of Palestine, Ill., runs a 3-year-old plant that produces about 45 million gallons a year, and he's comfortable with where his facility stands - at least for now.

"Every facility is different. It depends on when they started up, how much debt they're carrying," Mosbey said. "There's no question there's economies of scale."

Foremost among the driving forces will be the price of corn, which hit a high around $4.25 a bushel earlier this year, though December corn traded at $3.44 Tuesday. KPMG's Gray said the smart companies will be the ones to forge strategic alliances with corn producers to help contain costs.

Ethanol startup Biofuel Energy Corp. (Charts) has entered into just such a partnership with Cargill Inc., which will supply corn under a 20-year contract.

Other companies have taken different approaches on the path to survival, in what will become an intensely competitive sector over the next two decades.

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Gordon Ommen, CEO of U.S. BioEnergy, said his company has gotten actively involved in ethanol takeovers and is targeting companies with solid markets and up-to-date technology, without as much regard to production capacity. U.S. BioEnergy (Charts), though, has been keeping its acquisitions, spread throughout the Midwest, to moderate-size plants.

"The very small plants don't work for us, and we're not sure if they work for others or not," Ommen said. "The sizes we believe are efficient are the 50-million and 100-million gallon plants. We think both of those work well, depending on the market."

Ommen said he's comfortable with how corn prices have moved in recent months. He acknowledged, though, that larger plants will have stronger staying power if corn prices take another run toward $4 or beyond and profits shrink for ethanol companies.

"We think the large, efficient, low-cost producers such as U.S. BioEnergy will continue to operate and operate effectively if there are down cycles in the market," he said. "We don't know what will happen to smaller, less-efficient plants."

Of course, there are those who are staying out of the corn business altogether and building ethanol plants that use other biomass products, such as switchgrass, wood chips, landfill waste and corn stalks, rather than corn itself.

Arnold Klann is chairman of BlueFire Ethanol, a company that produces fuel from green waste and wood waste from landfills, which he says is cheaper than corn ethanol and not subject to the volatility of corn prices.

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"Our production costs are sub-one dollar, so we're always going to be below the cost of corn-based guys, pure and simply," Klann said.

BlueFire (Charts) only actually produces its brand of cellulosic ethanol at its Japan facility, but expects to be up and running at an Irvine, Calif., plant within a year. The plant will produce just 3.2 million gallons a year but could give BlueFire a leg up on the rest of the cellulosic industry as it will be among the first non-corn ethanol plants in this country to go on line.

The California-based company plans another 20 plants over the next seven years, a sign it will become a Big Ethanol leader, but on the cellulosic side. The company earlier this year received up to $40 million from the federal government as part of a pilot program for cellulosic refineries.

"When you look at the cost of production mode for grain, the larger the plant the more competitive you are. Your embedded costs go down, that's true for any industry," Klann said.

"Corn will always play a role on the energy side, but I think cellulose on the long term is going to play a much larger role because there's more cellulosic feedstock out there than replacement corn."