After I ran the section of the interview with Terry Tamminen on ethanol, venture capitalist Vinod Khosla (whom we interviewed here) contacted me and asked to respond.

Naturally, I said yes. His response is below the fold.

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Terry Tamminen: Right now, obviously, corn ethanol is not a very good bargain — depending on where it’s made. It might make some sense if you’re producing it in Kansas or Iowa and using it there to power farm machines. If you’re putting the corn on a train, you’re consuming lots and lots of fuel and dumping tons of CO2 and particulate matter into the air moving that train out to California. And then using more energy to convert it into ethanol. Now you’re negating a lot of the potential benefits.

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Wrong assumptions. Corn is already being shipped to California, Texas, New Mexico and other places. If that same corn can be used for ethanol production then in fact the balance looks much better. Cilion is going to do this in California, Arizona, New York and other destination states where ethanol is consumed. We would give our eye teeth to get a 20% improvement in vehicle efficiency (1 mpg is estimated to cost hundreds of dollars per vehicle to reduce carbon emissions), but won’t take an easy 20% improvements from corn ethanol (Argonne National Labs data). Why?

As to subsidies, while ethanol subsidies are at $0.51 per gallon, the total dollar amount is probably negative. Corn subsidies have actually gone down far more than total ethanol subsidies in 2006. While totals ethanol subsidies were about $2.5b (mostly collected by the oil companies) in 2006, a number I heard (can somebody help me verify it?) is that corn subsidies declined by $6b in 2006 because of higher corn prices.

And why don’t we ever talk about oil subsidies? The absolutely lowest estimate I have seen is about $0.25 per gallon using only the direct subsidies to oil producers. The conservative estimate of subsidy per gallon of oil including indirect costs is a few dollars per gallon ($4.00 per gallon was been computed) while aggressive estimates are twice that. How is a new fuel to compete?

Having said that, there is no question that corn ethanol can not meet a material part of our gasoline needs (10% or less is a reasonable estimate). It is very likely that solar and wind, as currently used without electricity storage, cannot supply more than 10% of our electric power either, but more on that another time — there are exciting new things to talk about in this domain too. We should measure all renewables with the same yardstick. As to the competitiveness of switch grass, first there is no question in my mind that we should use grass cocktails and not a monoculture. It is fortunate that Prof. Tillman’s research shows this actually produces more yield and we need to increase research in this area.

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I hope President Bush calls for more research in agronomy around energy crops. But Miscanthus is yielding 15 tons per acre now in a wide variety of regions, including the UK. The University of Illinois achieved over 15 tons per acre in Illinois test plantings across a variety of sites using standard miscanthus stock. And who said we cannot get cost effective fuel (when gasoline is $3 per gallon) at 5 tons per acre? Most estimates indicate that at $40 per ton on biomass costs we could produce ethanol at about $1.25 per gallon. For a detailed discussion of how much biomass and cellulosic ethanol we could produce (and consume) and the acres required, please see the Appendix in "Imagining the Future."

$40 per ton biomass is very feasible even at single digit yields in acres per ton of miscanthus or switchgrass (or hopefully diverse grass cocktails) without any significant irrigation or fertilizer. And corn farmers will make more money using these grasses if they can get about $200 per acre. And so far little genetic engineering has been applied to these crops because there hasn’t been much reason to do it. In fact, I have seen private companies in with yields north of 20 dry tons per acre using only traditional plant breeding techniques. I personally don’t have a problem with genetic engineering but we don’t need it to achieve these yields. I suspect 6-8 tons per acre will make cellulosic ethanol competitive even if oil prices decline, because of the much lower level of farm inputs required compared to corn/soy.

TT : So you’re absolutely right. There are companies in California experimenting with switchgrass — at best you can get 5 tons an acre yield. They acknowledge you won’t make ethanol from switchgrass economically feasible until you get to 15-20 tons an acre yield. Despite all our years of genetic engineering, we haven’t been able to figure out how to get those kinds of yields, but they think they will.

That sets aside whether or not any farmer wants a genetically modified crop growing next to his crop, which he wants to sell to Europe or some other country.

DR: Or Northern California.

TT: Yeah, exactly. There are tons of those kinds of problems. Cellulosic is still a challenge because, despite many advancements, we are certainly not there in terms of yield. If you’ve got to send out trucks over 50 miles to get enough cellulosic material to come into your central refining station, you just used up all the energy you otherwise would have saved, dumped all the CO2 into the atmosphere, and so on. We’re just not there yet. We may get there. I would argue that it’s a benefit to go ahead, even with corn ethanol and even with some subsidies. You’re building a marketplace for something that displaces petroleum, and then if smarter people can make it out of cheaper materials — and there’s a lot of investment going on in that area — they’ve got someone to sell it to. They’ve got cars that run on the stuff, they’ve got refiners who are willing to blend it into fuel or even sell it as E85, and so on. You’re building a marketplace, albeit with an imperfect starting product. I’m agnostic about it. I would love to see development go further, but what I take issue with are people who think we could somehow displace any significant amount of our petroleum with biofuels. The best research I can find shows that you’re going to displace 10, 15, 20 percent maybe, if there are a lot of efficiencies in the automotive sector. What do you do with the other 80 percent?

The best research is a matter of judgment. Conventional wisdom always assumes that things will stay as they are. I could be wrong, of course, but hopefully I am unbiased because if I am biased I will lose a lot of money. I so believe that $1.25 or cheaper cellulosic ethanol is less than three years away (though the question of putting plants in place and getting Wall Street to finance debt for such facilities still looms large) that I have invested in a number of companies in this area, Mascoma, Kergy, Celunol, Amyris, Gevo, LS9, Coskata among them. I so believe this is just a matter of time that I am investing in other companies producing ethanol and other transportation fuels from cellulosic materials. In fact, if any expert or guru wants to put their money where their mouth is (as I have done) I will take on any bettors that the costs above will be achieved by at least one company within three years if a 100mgpy plant is built.

Many of them are using very different technology approaches from biochemical to thermochemical conversions and everything in between. There is no question in my mind we can reach these cost targets but it is not clear which technology will be the cheapest or which fuel will win for which application. Gasoline, diesel, jet fuel, home heating oil all have different requirements. It is easy for theoreticians and policy gurus to pontificate about extrapolating historical trends, but have they funded the latest breakthroughs or delved deep into all the technology secrets that private companies will not appropriately divulge? Some of the optimists in the startup world will surely be wrong, but will a dozen companies all fail? Unlikely.

We have seen the same kind of "historical extrapolation" thinking in personal computers, in biotechnology, in telecommunications, in media and the internet before. The experts all claimed less than ten years ago that the internet would never start to replace traditional telecommunications. Ten years from now, using our scientists and technologists powered by the entrepreneurial energy of the Silicon Valley mindset, the energy world will look as different as today’s telecom world is different from 1995. We have found scientists working in breakthroughs in Dartmouth (Mascoma), in pipe fitting shops in Denver (Kergy), in India, in New Zealand, in Brazil, and just about every other corner of the world.

And no discussion of ethanol is complete without addressing the question of energy balance. This is not even a relevant question! (See "Is Ethanol Controversial?"). Electricity has 30% of the fossil energy efficiency of corn ethanol so why do we still use it? Because energy balance is not a relevant issue. Why doesn’t the American Petroleum Institute talk about electricity? The API is on a massive campaign against real alternatives to oil while the oil interests say nice things about renewable energy and go on with business as usual making profits, funding Mideast terrorists, funding misinformation, and spending lots of nice money around hollow PR campaigns around "going green." Why else would the API be interested in food prices? Do they care that much about the world’s poor and hungry? I could be wrong, but I would guess the last Exxon CEO got more of a termination package than all the money they have ever spent helping the poor. Why do they worry about the poor countries when the poor countries are trying to eliminate U.S. farm subsidies and raise prices so their farmers can compete? That is a big reason why the Doha round of trade talks is not working.

DR: I just read that Bush is going to come out with a bold new energy initiative. But you read between the lines and what is it? A massive increase in subsidies to international corn growers. Somehow, at the federal level, energy policy has become synonymous with corn ethanol.

TT: Bush can’t implement those policies. He can say in a State of the Union address, here’s what I’d like to do, but he has to work with this now Democratic and more thoughtful Congress if he wants to get it implemented. I think they’re going to have some ideas of their own about what a more thoughtful energy policy ought to look like. It ain’t going to be the federal energy act of 2005 — with a stroke of a pen he added $6 billion more in subsidies to oil companies and gas companies, exempted them from even more aspects of the Clean Water Act, the Safe Drinking Water Act.

What would I like President Bush to say in the State of the Union? How about targets for ethanol use with price relief valves if prices get too high because of an aggressive RFS (my numbers in the above mentioned paper show 39 billion gallons of ethanol production is possible at reasonable cost by 2017 on 19 million acres and 139 b gallons by 2030 on 49 million acres). Consumers will be protected, price limits will protect livestock producers, and yet we will have a high goal so if any company meets the cost targets for cost effective ethanol they will have a market for their product.

If nobody achieves that goal we will automatically end up with a lower RFS. More importantly, it is a goal that he will get Democratic support for in the House (it is part of Nancy Pelosi’s innovation agenda) and in the Democratic Senate where Senator Reid is very supportive of cellulosic biofuels. Equally importantly, many of the presidential candidates for 2008, from Senator Biden to Obama, from Senator Clinton to Senator McCain, all support such policies in general.

I ask all the experts and gurus to look at the facts, look at the latest developments in our labs, and imagine the future — do not extrapolate the Saudi world using conventional wisdom. Lets stop funding mideast terrorism and the war on terrorism. Lets start funding a war on oil with the same aggressiveness. President Bush please declare a war on oil!