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Biofuels or bio-fools? Vinod Khosla, a Silicon Valley legend, is leading the venture capital rush into replacements for gasoline: biofuels made from corn and rougher stuff like switchgrass. But if prices fall and political subsidies vanish, the bubble may burst.

Article Excerpt
ON SEPTEMBER 21, 1901, in the small town of Jennings, a group of men working for W. Scott Heywood became the first to find oil within the borders of Louisiana. Heywood's luck didn't last. The well soon clogged with sand and dirt and was abandoned. But today, Louisiana produces more than 50 million barrels of crude oil and condensate per year, so a sign outside Jennings (pop. 10,986) commemorates that lucky strike.

Then, on February 16, 2007, Jennings reached another milestone. Louisiana Governor Kathleen Blanco visited the town to cut the ribbon for a different sort of energy project: a 50,000-gallon pilot plant to produce cellulosic ethanol.

Like gasoline refined from crude oil, ethanol--that is, ethyl alcohol--is a fuel that can be engineered to power cars and trucks. While normally made from fermented kernels of corn, ethanol can be concocted from the cellulose (a sugar-based polymer) found in almost any vegetable matter, including fast-growing prairie grass and the husks and stalks of corn itself. To expand ethanol production to a truly useful level in the United States, these other, rougher sources of fermentation--which produce what's called cellulosic ethanol--are essential. "If ethanol is to be a significant solution to our transportation needs," said Alan Greenspan, former chairman of the Federal Reserve, "it will have to be cellulosic."

Up until now, however, low yields and high costs have made cellulosic ethanol a commercial dud. Then, a few years ago, a small company called Celunol Corporation, based in Cambridge, Massachusetts, licensed a handful of patented genetically modified bacteria developed by scientists at the University of Florida.

These flexible E. coli strains can convert the cellulose in a wide range of substances into ethanol quickly and cheaply, allowing the company to build plants next to any available source: waste lots around cities, orange peels in Florida, and sugarcane in Jennings, where Celunol built the pilot plant that Governor Blanco inaugurated in February. Celunol is planning a full-scale cellulosic plant with a capacity 500 times that of the pilot, not far from Heywood's well. "I love the irony of it," says Carlos Riva, the chief executive of Celunol. "This is worthy of two signposts."

Riva, who is 53, built his career in the conventional energy business. With degrees from MIT, Stanford, and the Harvard Business School, he once worked for construction company Amec, directing global strategy for building oil and gas infrastructure. He later served as CEO of InterGen, a power generation firm that's a joint venture between Shell and Bechtel. But when Riva wound up as a private energy investor in Britain a few years ago, it didn't take him long to decide that cellulosic ethanol was the Next Big Thing.

It was a simple question of math. In 2005, Congress passed the Energy Policy Act, which required 7.5 billion gallons of renewable fuels--mostly ethanol--to be blended into gasoline per year by 2012. Then, in his State of the Union Address this year, President Bush called for increasing that mandate to 35 billion gallons by 2017, both to help the environment and to reduce America's reliance on foreign imports of fossil fuels. The ethanol mandate advocated by the president represents one-fourth of the gasoline consumed last year in the United States.

Politically powerful farmers and agricultural processors cheered both the new law and the speech. With industry capacity for ethanol now around 5 billion gallons annually, traditional corn ethanol makers have embarked on a building binge. But many experts...