Des Moines Register
08-30-06
Investor touts E85, flex-fuel cars
By ANNE FITZGERALD
REGISTER AGRIBUSINESS WRITER
Ames, Ia. — The ethanol industry needs to push for widespread use of E85 fuel
to sustain the industry's rapid growth, and U.S. automakers need to rapidly
produce more vehicles capable of using the biofuel, a leading venture capitalist
said Tuesday.
"Corn ethanol puts us on a trajectory to energy independence," said Vinod
Khosla, co-founder of Sun Microsystems and owner of a venture capital company
in California that has invested in eight ethanol companies in the United States.
Speaking at Iowa State University's annual bioeconomy conference in Ames,
which concluded Tuesday, Khosla said he believes the nation can "replace our
dependence on gas with home-grown fuels within the next 25 years."
Every year, hundreds of billions of dollars are invested in the oil industry, and the
ethanol industry can capture some of that investment, Khosla said.
"If you make it attractive and Wall Street funds it in incremental steps ... that's
how we get there," he said.
The booming ethanol industry runs the risk of over-producing ethanol for lowerlevel blends, Khosla said.
E10, or gasoline containing 10 percent ethanol, is the most common ethanol
blend on the market and does not require vehicles using it to be reconfigured. To
run on E85, which contains up to 85 percent ethanol, vehicles must be made with
that flexibility, but it costs just $35 per vehicle to include that feature, Khosla said.
Another key difference between the two fuels: E85 is a much larger market than
the lower ethanol blends.
In his address, the venture capitalist said U.S. automakers need to speed
production of flexible-fuel vehicles. He pointed to Brazil, which in three years
shifted from a national fleet of less than 4 percent flex-fuel vehicles to about 80
percent.
Khosla also said that:
• The volume of ethanol that can be produced from an acre of corn will increase
from about 500 gallons to nearly 3,000 gallons within 25 years.
• The United States should lift tariffs on Brazilian ethanol imports to help fill
demand for the alternative fuel while this nation builds production capacity.
• The federal government should require that 70 percent of new U.S. cars be flexfuel vehicles.
• E85 be available for sale at 10 percent of the nation's large chain, or brandname, gas stations.
• The federal ethanol subsidy be made flexible, decreasing when crude oil prices
are high and increasing when the price of oil falls.
• Crops other than corn, including miscanthus and switchgrass, have potential to
boost biofuels production.
Corn will continue to play a leading role in the evolving biorenewables business,
he said. If the corn-based ethanol industry had not been developed, he and other
investors would not be investing in cellulosic ethanol ventures.
Khosla said after his address that the market is so big that the entire nation
would benefit, not just key ethanol-producing states like Iowa, which leads the
nation in production of both ethanol and biodiesel.
"The potential is humongous," he said.
Khosla said the biorenewables industry is at a pivotal point.
Enthusiasm is raging for making consumer and industrial products from corn and
other plant materials, rather than from petroleum, but investors - and the industry
- need to be careful, he said.
"Whenever there is over-enthusiasm, I think you have the risk of getting a
bubble," Khosla said. "We have to be cautious to not let that happen. ... We need
to make sure it's (investment) based on facts, not on hype."
Energy could be defining issue in 2008
Several speakers at the conference said they expect energy security and
biorenewables to become key issues in the 2008 presidential race.
"I hope this becomes a defining issue with the presidential election," said Vinod
Khosla, co-founder of Sun Microsystems now running his own venture capital
company. "It should be. It's tied to energy security. It's tied to terrorism. It's tied to
climate change."
Lee Lynd, a professor of engineering at Dartmouth College who also delivered a
keynote address at the bioeconomy conference, said energy is an issue that can
bring national and farm political agendas together. In addition, he said,
biorenewables can bring otherwise opposing camps, such as environmentalists
and farm groups, to the same table.
"Energy is what's making people jump up and down," he said.
Lender: Strong ethanol market has risks
Ames, Ia. — A "perfect storm" of political and market conditions have all
converged this year to make ethanol a lucrative investment, a leading lender to
the industry said Tuesday at the Biobased Industry Conference at Iowa State
University.
This year "will be nothing short of extraordinary," said Bob Egerton, a regional
president of the agribusiness banking group at CoBank in Denver, a part of the
Farm Credit System that specializes in loaning to cooperatives.
Egerton also warned that there are significant risks lurking for ethanol, including
loss of government support and oversupply.
CoBank is the single largest lender to ethanol plants, Egerton said. The bank has
loaned money to plants with a production capacity of 2.1 billion gallons, or 30
percent of the production capacity of U.S. plants either in operation or in the
planning process.
Strong earnings this year have come from the passage of an energy bill that sets
minimum consumption standards for renewable fuels; high oil prices; low corn
prices; and phaseout of a competing gasoline oxygenate called MTBE.
This year's handsome ethanol profits come following a 23 percent average
annual return on ethanol investments during the past five years, according to
Iowa State, Egerton said.
Yet, he cautioned, there are warnings that ethanol earnings might not be as
lucrative as they have been.
There is no correlation between the price of corn - ethanol's dominant feedstock and the price of ethanol, which is pegged to gasoline prices. Also, he said, there
is no guarantee that oil prices will remain high.
Intense construction of ethanol plants in recent years also raises the specter of
an overbuilt industry where supplies exceed demand, he said.
Government tax breaks for ethanol could end and, with them, some of the
financial benefits that ethanol now enjoys.
Emerging technologies for alternative renewable fuels - such as ethanol made
from biomass or other feedstocks of the future - could undercut the
competitiveness of ethanol made from corn, he said.
Transportation bottlenecks and shortcomings in the distribution system of ethanol
also could disrupt markets, he said.
Even with the potential risks, Egerton said, CoBank is committed to financing
renewable fuels.
Thomas Dorr, U.S. Department of Agriculture undersecretary for rural
development, said at the conference that financing the emerging bioeconomy
must come from private capital sources, including rural residents whose farmland
is unencumbered by debt.
"Rural America is awash in financial resources," Dorr said. "We need to find a
way to leverage these assets and harness its potential to create wealth."
— Jerry Perkins