September 4, 2006

Khosla Revs All Cylinders to Back Ethanol

Vinod Khosla has been all over the media and world lately debating all comers on The Oil Drum, co-sponsoring of California Prop. 87, distributing his 23-page defense of ethanol (distilled here), and accelerating the march of Khosla Ventures to invest in a dizzying array of ethanol start-ups (like recently announced Cilion below). While I don't agree with all his moves, it is clear he is putting his money where his vision is. Now if he could just throw a few bucks in support of Sen. David Roberti's BioEnergy Producers Association which is fighting the good regulatory fight in Sacramento I would be happy...

Is Ethanol Controversial? Should it be?
by Vinod Khosla

The message of this paper is (1) corn ethanol is not perfect but it is the best alternative among our realistic options (2) corn ethanol primes the pump for better options, be it cellulosic ethanol from enzymes or gasification, butanol, or other “biohols” from the same feedstocks and similar technologies, (3) even corn ethanol, though it will never meet all our gasoline replacement needs, is not your father’s ethanol – it can be and has been improved substantially in many ways and made properly can be environmentally almost as good as cellulosic ethanol, (4) corn ethanol properly managed can result in lower prices for gasoline (reduces gasoline use as E85) and a much lower prices fuel for basically today’s automobile engines without the need to revolutionize the automobile industry.

A Hierarchy of goals!
We have a hierarchy of goals for the USA when it comes to transportation fuels and oil. First, on energy and economic goals, we want a lower cost of transportation fuels, we want lower level of imports to improve our trade balance, we want to be less dependent on foreign oil and we want to have more energy security and independence, and if possible create more farm incomes and US jobs.

When we reach beyond these goals to our environmental goals, we need to worry about energy balance, land use, monoculture crops, health effects, and a host of other issues. It fortunately turns out that the many of the factors that drive economics will also benefit the environment. Even corn ethanol today has better energy balance than gasoline with about a 20% reduction in greenhouse gases and it is getting better everyday.

Not your father’s ethanol anymore or the “Energy Balance” Debate: The energy required to produce corn ethanol is declining every year. Corn yields are increasing and fertilizer intensity is decreasing, improving its energy balance.

Once ethanol becomes a substantial market, all parts of the production process, crops & feedstocks, manufacturing, chemistries, transportation, and more will be the subject of intensive attention and innovation. The world does not stay still when large scale economics are involved.

Corn ethanol leads us down a progressive path towards improving technologies. Some technologies are more amenable to improvement and among the current set of options corn ethanol is definitely the most promising from a pragmatic point of view. There is no question that corn ethanol will be later dominated by cellulosic or other forms of ethanol or ethanol, like solar and wind, will become a minority of our fuel supply in its category. Even that is a good thing. But corn ethanol is invaluable in getting us started towards a potentially dominating alternative to gasoline.

Myth: Ethanol will give lower mileage
Though a 25% mileage reduction per gallon of ethanol compared to gasoline is the reality today, it can be immaterially small over time as engines are optimized for a flex-fuel world.... The fact is that the 25% mileage penalty is only true if you run a gasoline optimized engine with E85 and no special features to adopt it for ethanol use.

So how far away is cellulosic ethanol? The DOE has a request for proposal as to set up a cellulosic ethanol plant due in August of 2006. The best way to evaluate the timeframe for the technology is to judge how many technologies, in the view of knowledgeable private investors, are ready for large $50+ million investments. We expect the DOE request which calls for a $75 million or so in private investment in every proposal will receive a dozen submissions or more. Atleast half a dozen are expected to be very credible. We at Khosla Ventures know of atleast five serious attempts that are ready for pilot deployment.

Let the technology explosion happen!
Most importantly our choice today should start a progression to increasingly “better” technologies that has far more room to improve technologically on feedstocks, on development process, on ethanol and ethanol like fuels that are compatible with the existing infrastructure.

Western Milling and Khosla Ventures Join Forces to Form Cilion
Cilion to Produce Environmentally-Friendly Corn Ethanol

California's largest grain milling company, and Khosla Ventures, a venture assistance and venture capital firm, today announced the formation of Cilion. Cilion will operate modular, standardized 55 million gallons per year ethanol plants. Using a variety of innovations these plants will be cheaper and greener than standard corn-to-ethanol plants, substantially reducing the need for fossil fuels in ethanol production. Cilion plans to have 8 plant units in production by 2008 for a total of 440 million gallons per year capacity. The first three plants are expected to be in California. The ethanol production, grain handling, logistics and feed expertise of Western Milling combined with the company building and financial expertise of Khosla Ventures will provide Cilion with a unique advantage.

According to Western Milling President Kevin Kruse, "Our technology and years of experience will allow our plants to have an energy balance advantage that is 2X that of gasoline. In addition we expect a greater than 90% reduction in petroleum use. The bottom line is that Cilion will be able to produce environmentally friendlier ethanol in California at a lower cost than ethanol produced in the traditional Midwest corn ethanol plants and delivered to California." Added Kruse, "When fully operational, ethanol produced by Cilion is expected to be price competitive per mile driven with gasoline even if oil prices drop to $40 per barrel, assuming normal gasoline distribution margins."

"Cilion will be able to single-handedly produce all of the ethanol that the Governor has ordered for 2010, based on current consumption," according to Vinod Khosla of Khosla Ventures. "Governor Schwarzenegger wants twenty percent of all ethanol consumed in California to be homegrown, and we are confident that Cilion can achieve that goal in its first three California plants, comprising four 55 million gallons per year units, that will be operational by early 2008."

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