The New New Fuel: Cellulosic Ethanol

BURLINGAME, CALIF. - Turning wood chips into fuel isn't quite like turning water into wine, but it's still a pretty impressive feat. On Tuesday, a company backed by Vinod Khosla, one of Silicon Valley's most successful venture capitalists, will break ground on a plant that will do just that.

Range Fuels, a Colorado-based start-up funded by Khosla Ventures, is building the first commercial-scale plant in the U.S. (and very likely in the world) that will produce the next generation of ethanol--called cellulosic ethanol--in the small town of Soperton, Ga., about three hours south of Atlanta. So far ethanol in the U.S. has been produced almost exclusively from corn. In Brazil, ethanol is produced from sugar cane.

"This plant establishes the fact that the technology for next-generation ethanol is here," Vinod Khosla said, in an interview with Forbes.com. "This is ethanol that has 75% less carbon emissions, 75% less land use and 75% less water use" than ethanol produced from corn. The carbon emissions and use of natural resources are common criticisms of the corn-ethanol industry.

These are not the best of times for ethanol producers. A supply glut has put a hold on construction of a number of ethanol plants in the U.S., including a plant in Iowa planned by VeraSun Energy (nyse: VSE - news - people ). Ethanol futures prices have fallen from slightly more than $4 a gallon in mid-2006 to below $2 a gallon currently.

But Khosla isn't at all dismayed by the current rough patch for ethanol. "I believe it's a short-term thing. There are worldwide markets for this [fuel]. We happen to be talking about a market [the U.S.] that is protected. Range intends to be a global provider," he says.

The U.S. imposes a 51-cent-per-gallon tariff on ethanol imported from other countries. Matt Hartwig, a spokesman for the Renewable Fuels Association, says the tariff on imported ethanol offsets a tax incentive given to the petroleum industry to entice those producers to blend ethanol into gasoline.

Forbes, Nov. 5, 2007