Celluosic fuel could sink to $1/gallon in 10 years

MENLO PARK, Calif (Reuters) - The cost of producing a new ethanol made from crop wastes, hardy grasses and fast-growing trees could sink to less than $1 a gallon in 10 years as output rises, a leading Silicon Valley venture capitalist said on Tuesday.

"I expect within 10 years production costs will be below $1 a gallon for ethanol in this country from cellulosic feedstocks if we ramp up production," Vinod Khosla, the head of venture capital firm Khosla Ventures, said in an interview as part of the Reuters Global Summit on Biofuels.

Cellulosic ethanol uses microbes such as fungi to break down the woody bits of plants -- or cellulose. Currently there are no commercial-scale distilleries, but there are several pilot facilities. It currently costs several dollars a gallon to produce the new fuel.

Traditional U.S. ethanol is mostly made from the starch of corn, which demands costly inputs such as fertilizer derived from natural gas, irrigation and annual planting. Traditional ethanol has to be transported by rail and truck from the nation's heartland to cities on the coasts, adding to costs and emissions.

Cellulosic ethanol supporters say the new fuel could be cheaper than traditional ethanol because its feedstocks, mainly crop waste, switchgrass, and poplar, can be grown on marginal lands much closer to where the fuel is burned, such as the U.S. Southeast and Northeast.

The United States currently produces about 5 billion gallons a year of traditional ethanol. Demand has risen on high oil prices and low domestic crude production, pushing the country to set a goal of making 60 billion gpy of all ethanol by 2030.

"We think in the end these cellulosic technologies will be cheaper than corn-based technologies, or the same cost, and will compete with oil very, very effectively," said Khosla.

"Once we cross 10 billion gallons (of cellulosic) there is no question in my mind we will be below $1 a gallon," he said. "It won't happen on the first 1 billion gallons, it may happen on the first 5 billion, it will definitely happen on the first 10 billion gallons."

Kholsa Ventures and a syndicate of venture capitalist firms have backed cellulosic ethanol company Mascoma Corp with seed money of $39 million. Mascoma hopes to build the first U.S. commercial-scale cellulosic plant in New York.