Financiers question corn's day in sun for ethanol

NEW YORK--To hear money people talk about it, the numbers for investing in corn-based ethanol aren't looking as good as they did only a year ago.

Biofuels have been the top recipient of investment in a multi-year clean tech, or green tech, expansion.

But some indicators show that projects around corn-based ethanol may run into speed bumps, even though the long-term prospects for biofuels are positive, according to speakers at the Renewable Energy Finance Forum here on Wednesday.

For one thing, the price of corn is on the rise, as farmers look to capitalize on government incentives that favor domestic fuel production. About a year ago, corn was about 2 dollars a bushel but is now hovering near 4 dollars a bushel.

Ethanol can be made from a variety of plant-based "feedstocks," including grains like corn or sugar cane. Cellulosic ethanol, made from woody substances like wood chips or grasses, appears to be more financially attractive, experts said.

Studies have indicated that cellulosic ethanol creates lower greenhouse gas emissions than corn-based ethanol, which is roughly on par with gasoline.

Cellulosic ethanol is newer technology, and nearly all ethanol production in the U.S. comes from corn. But higher prices for corn mean higher prices for ethanol at the pumps, making it less cost-competitive with gasoline, says Morgan Stanley Managing Director Daniel More, who spoke on a panel on biofuels.

An investment hangover
In addition, there are concerns that the huge build-out in plant capacity will throw off some of the financing assumptions that underpin project finance deals.

The United States has already built almost 6 billion gallons' worth of manufacturing capacity to produce corn-based ethanol, and another 6 billion gallons of capacity are now being constructed. But an over-capacity of ethanol, where the supply exceeds the demand, could have a dampening effect on prices.

A year ago, Andrew de Pass, the head of sustainable developments investments at Citi Alternative Investments, was involved in engineering an investment in Northeast Biofuels, and they drank champagne just before the deal was signed.

"Today we're in hangover mode, and we're a lot more sober about our sector," de Pass said.

As a result, experts here said that some deal "restructurings" will likely occur and the industry will consolidate.

"There will be some issues in biofuels," said Kevin Walsh, managing director of renewable energy at GE Energy Financial Services.

GE Energy Financial Services stayed clear of the biofuels project over the past years because of exposure to corn commodity price fluctuations and potential changes in policy. However, Walsh said that GE is now looking at financing some projects around cellulosic ethanol.

The enthusiasm for biofuels, stemming from government policies aimed at energy independence, has led to a handful of public market offerings in the past year.

But a review of three of them--VeraSun Energy, Aventine Renewable Energy, and US BioEnergy--shows that their stock prices are down from their initial offerings, according to Morgan Stanley's More. Those declines occurred in an upward-moving stock market, he noted.

"The question for all of us is, in the face of a great stock market and great industry dynamics, what is going on?" he said. "The answer is that they are not as profitable as they were when they went public."

The demand for ethanol in the U.S. is strong, driven by a government mandate to replace MTBE as a gasoline additive. That means that ethanol could comprise 10 percent of transportation fuels by the end of the decade, said Michael Eckhart, the president of the American Council of Renewable Energy (ACORE), an industry coalition.

Cellulosic ethanol is anticipated to take up a larger chunk of ethanol production projections over the next 15 years. And government policies are expected to continue to favor biofuels.

But Eckhart said that projections for rapid biofuels uptake could be dampened without the infrastructure to distribute ethanol at the pumps.

"I'm worried we're going to see a real slow-down after 2010 if we don't get the infrastructure in place," Eckhart said.