In Alternative Energy Hunt, Ethanol Under the Gun

Yet many in the industry still express faith that ethanol can forge ahead, even in the wake of bad publicity, dubious economics, questionable environmental benefits, difficulty in securing credit, and an uncertain political landscape.

Neil Kohler, CEO of Pacific Ethanol, which needed a $40 million cash infusion to shore up its balance sheet earlier this year, said the industry is being victimized by misinformation.

"I'm an optimist and I believe that over time, truth prevails," Kohler says. "The increased price of fuel has had more than twice the impact on the rising price of food than has the raw materials, the cereal grains. Whether it be the loaf of bread or gallon of milk, the oil price has been driving the price of food."

Yet the companies that have kept their heads above water have done so because the cost of ethanol has risen right along with the cost of gasoline, and sales have sustained profitability.

"The raw materials cost certainly has risen. Fortunately, the price of ethanol has moved right along with it," Kohler says. "It's all related to oil. The high price of corn is all about oil, the higher value of ethanol in the marketplace is all about oil—all of these things are interconnected. They've all been sort of keeping pace with one another in a rapidly upward trend."

In the meantime, ethanol production forges ahead.

Some 61 new facilities will add five billion gallons of ethanol to the fuel stream in the next few years, says Renewable Fuels Association spokesman Matt Hartwig, while more than 15 planned facilities have been scrapped.

Hartwig acknowledges that construction has slowed, due both to ethanol's inherent problems and the credit crunch gripping the banking industry.

But as things stand now, 134 ethanol plants are producing 7.2 billion gallons a year, just a shade below the 7.5 billion gallons the federal government's target for 2012.

"Certainly you have seen a little bit of a slowdown in new construction," Hartwig says. "The Renewable Fuels Standard passed in December is specific and pragmatic in its approach, recognizing that given today's technology there is a limit as to how much ethanol can be produced from corn."

The government agrees. The RFS dictates that fully 21 billion of the 36 billion gallons of ethanol produced by the 2012 target date must come from sources other than ethanol, even though no cellulosic ethanol plants—those that would process ethanol from crops other than corn—are currently in operation.

Meanwhile, finding new financing to produce all this new ethanol remains a struggle.

"It's very hard right now to get financing because of some of the restructuring of credit issues and weakening profitability estimates," says Rick Kment, biofuels analyst at DTN in Omaha, Neb. "At the same time, plants that already had financing secured continue to move forward through the construction phase and continue to plan on opening doors at or near the time when they were supposed to start operating."

CONTINUED: Ethanol and Washington: A Relationship on the Rocks

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