Investing in Cellulosic Ethanol

Think investing in ethanol is dead?

Think not.

While the cult-like following of corn-based ethanol companies has completely waned, it’s younger, more efficient brother is ready to come on the scene in a big way.

I’m talking, of course, about investing in cellulosic ethanol.

Cellulosic Ethanol: An Introduction

If you’re not familiar with cellulosic ethanol, here’s a quick lesson.

In order to produce cellulosic ethanol, the cellulose must first be extracted from the feedstock.

This has proven to be very expensive and time-consuming because the carbohydrate polymers (cellulose and hemicellulose) are firmly bound to the lignin, which is a complex compound, mostly derived from wood, and a vital part of plants’ cell walls.

This can be done one of three ways.

In the first method, called cellulolysis, the feedstock is first pretreated to separate the cellulose from the lignin.

The cellulose molecules, which are long chains of sugar molecules, are then broken down into individual sugars. This is done with either a chemical acid reaction or an enzymatic reaction.

The chemical process, used by Bluefire Ethanol (OTCBB: BFRE), attacks the cellulose with acid in the presence of heat and pressure. The reaction produces individual sugar molecules, which can then be neutralized and fermented into ethanol.

The other option uses Mother Nature as its driving force. It uses bacterial enzymes, like the ones in the stomachs of ruminants. These specialized enzymes break the cellulose down into individual glucose molecules, which are then fermented into ethanol.

This has become the heart of the cellulosic ethanol industry: engineering the best enzymes to break down the cellulose into usable sugar.

It all comes down to which company can get the most usable sugars from its feedstocks. And the race is still wide open.

The second method is called gasification. In gasification, the carbon in the raw material is converted into synthesis gas using what a process called partial combustion.

What remains is carbon monoxide, carbon dioxide, and hydrogen. That mixture is then fermented into ethanol and water using a microorganism named Clostridium Ijungdahlii. From there, the mixture is distilled to separate the ethanol from the water.

These two processes make cellulosic ethanol much more attractive–both economically and environmentally–than its corn-based counterpart.

For starters, the choice of feedstocks is much broader. Instead of competing with grains used as food, cellulosic ethanol is better suited to used specialized energy crops like switchgrass and miscanthus.

These sources don’t compete with food resources and can be grown more cheaply on marginal lands.

And, since there is greater access to grasses than to corn, the capacities for cellulosic ethanol are much higher than for corn ethanol.

And so are the investment possibilities.

Investing in Cellulosic Ethanol

Given the current state of the equity markets, it’s not advisable to recklessly buy stocks, especially if you have only short-term goals in mind.

The credit markets are simply too tight to suggest some of the companies operating in the nascent cellulosic ethanol industry could provide significant returns in the next quarter or so.

But if you’re looking to hold onto to shares for a while, investing in cellulosic ethanol could be for you.

Like the rest of the market, these shares have been severely beaten down. But with a little guidance (my part) and a little patience (your part) these cellulosic ethanol companies will offer hefty long-term gains:

• Pacific Ethanol (NASDAQ: PEIX), under $1.50
• Verasun Energy (NYSE: VSE), under $2.50
• Verenium, (NASDAQ: VRNM), under $1.75 and
• Bluefire Ethanol (OTCBB: BFRE), under $1.50

Be sure to stick to those price guides, as this article is a snapshot in time, and cannot be applied as the market shifts. As long as these companies remain under those prices, they’re all a buy.

Just one last thing. It seems with all the financial turmoil and the upcoming election that cellulosic ethanol has all but been lost in the news cycle.

I’m going to leave you with a slew of headlines–all from October–that prove otherwise. It’s easy for stories about renewable energy to get lost in all that’s going on right now.

• Tennessee Breaks Ground on Cellulosic Ethanol Pilot Plant
• Department of Energy to invest $26M in cellulosic ethanol plant
• Brazilian companies to push for cellulosic ethanol
• General Motors forms 10-state ethanol partnership
• Poet gets $76 million for cellulosic production
• Novozymes wins $12.3M ethanol contract from feds

To green energy, and green profits,

Chris Hunter