Investor Vinod Khosla: Advanced biofuels are closer than you think

Start-up Range Fuels on Tuesday will host a groundbreaking ceremony in Soperton, Ga., where the company will build a plant that will make the fuel ethanol from wood chips.

If successful, the company claims it will be the first to build a commercial cellulosic ethanol plant, using a feedstock that's cleaner than corn--the primary source of ethanol in the U.S. today.

Green tech venture capitalist Vinod Khosla is one the investors in Range Fuels and a high-profile advocate of ethanol and other biofuels.

The numbers behind making ethanol from wood waste, rather than corn, are compelling, he says: 75 percent less carbon emissions and 75 percent less water used, compared to existing processes.

And it's cost-competitive with gasoline today. Of course, with oil around $95 per barrel, that's an easier target to hit today than ever.

Vinod Khosla

In an interview, Khosla talked about the importance of making ethanol from the cellulose, or plant fiber, rather than corn and why he thinks the technology will be available before most people expect.

Why is this Range Fuels plant (which is receiving Department of Energy funding) significant?
Khosla: This is the first commercial cellulosic plant. There have been lots of pilots and demos--none of them cost-effective. This should be the first commercial plant that will actually be competitive in the marketplace by the time it's finished. Also, the feedstock is wood chips. That's a very scalable feedstock--you can get a few hundreds of millions of tons of that. In fact, all the paper mills that use this kind of stuff are going out of business in the U.S. and this would replace those jobs being lost and the rural income being lost.

And it's a byproduct of forestry. All the timber operations in the Southeast have lots of the stuff left on the floor as waste. So that's the first target. We could produce twice as much cellulosic ethanol from the wood waste in the Southeast as all corn ethanol produced last year on a yearly basis.

People have been saying that cellulosic ethanol is still many years away. But you're talking about having 20 million gallons a year at the end of next year and 120 million gallons in 2009--faster than what many people expected.
Khosla: Why this is important is because this will change people's assumptions about our sources of energy and whether we can compete with oil. This is the beginning of the change of our assumptions. The rest of the world has been skeptical while the entrepreneurs have been working hard at proving otherwise.

I think in the tech world we see this all the time--nobody believes this can be done until after it's done. Look, nobody believed that long-distance phone calls would be essentially free until they were free. Nobody believed VoIP (voice over Internet Protocol) would work until VoIP actually worked.

The most cost-effective technology today is wood. I hear the same argument all the time--hundreds of billions of dollars (are) invested in (oil and gas) infrastructure. Well, too bad. If it becomes not competitive, then it's not competitive. At the current price of oil, this will compete unsubsidized in the marketplace.

What kind of prices can we expect from this operation?
Khosla: Well today we are not talking about exact prices, but the fact is that with $95 per gallon of oil, it's very easy to be market-competitive with oil from a consumer's point of view.

People are very bullish on biofuels, but one aspect I don't hear addressed often is the transmission of ethanol. Since you can't use the existing pipeline infrastructure, how do you get around that?
Khosla: In Brazil, they're using pipelines (for ethanol). The oil companies like to spread the notion that we can't use pipelines but the great thing about cellulosic is that it's not tied to the Midwest. See, the transportation problem is because all the corn is in the Midwest and the ethanol is being shipped from one location. All the transportation is in the Midwest and all the usage is on the coasts. The fact is cellulosic ethanol can be produced along the coast in the Southeast, Northwest, in the Northeast. So you will not have a transportation issue. At least not anywhere anyway near the same kind of issue (as corn-based ethanol).

Is there any advantage to the thermo-chemical process that Range Fuels is using, versus the enzymatic process that Mascoma (another cellulosic ethanol company Khosla has invested in) is pursuing?
Khosla: Eventually I believe (there will be) multiple processes. If they get to $1.25 per gallon or below (cost of production), you will have essentially unlimited market available to them. Unlimited from a start-up's point of view because that's how you can compete with gasoline. So that's the key. Multiple processes will eventually get there.

So your strategy from an investor's point of view is to bet on multiple technologies--both Mascoma's and Range's processes?
Khosla: Mascoma should be able to reach similar cost points eventually. Like I like to say, not all oil wells produce oil at the same price. Saudi Arabian oil costs $5 or $10 a barrel (to extract). There are oil wells in the North Sea that cost $40 a barrel. And they both find a market because oil prices are $95. All I'm saying is that any process that can produce ethanol below $1.25 a gallon production costs should be able to compete very effectively in the marketplace and even if oil declines dramatically. Then you get into issues like water use and feedstocks.

When you hear about the Southeast United States now, you hear about the drought. How does that play into this plant? Is it a factor or a long-term concern?
Khosla: Well, I think you are going to have a lot more droughts if we don't do something about carbon emissions. The question you should be asking is why do we have those droughts. Are we going to have a lot more droughts if we don't have carbon emissions controls? Almost certainly--that's what the experts say.

My question isn't so much about the science but as a biofuels investor.
Khosla: I don't think biomass feedstock availability is going to be a big issue, if you're looking for my bottom line.

In this case, it can withstand droughts for several years and still be commercially viable?
Khosla: Yeah. Biomass feedstocks like this can grow in lots of different climates. Texas A&M has what they call a freakishly high sorghum which produces 20 feet of growth in the year on very little water...We can also move to where the feedstock is.

The other issue in the news is the glut of ethanol and the downward effect on prices. What's your view on the current situation?
Khosla: My view is that the current situation is a short-term aberration. Just in the last week and a half, prices have gone up 20 cents a gallon. So prices move up and down. Whether you take the low price or the high price in the last year, you should be able to compete as an ethanol provider.

There are a number of cellulosic ethanol plants being funded or on the drawing boards. What's going to determine which ones succeed or don't?
Khosla: The quality of the management team, quality of investors, the ability to do ongoing funding, planning, execution. There's a lot more to start-ups than technology, especially in an area as complicated as biofuels. There are lots of technology start-ups we know from Silicon Valley which have the technology that don't make it.