Wired / My big biofuels bet

This article also appears in Wired

The road to energy independence starts in a cornfield in Nebraska. Venture capitalist Vinod Khosla explains why he’s betting on biofuels.

It may surprise you to learn that the most promising solution to our nation’s energy crisis begins in the bowels of a waste trough, under the slotted concrete floor of a giant pen that holds 28,000 Angus, Hereford, and Charolais beef cattle. But for some time now, I’ve been searching for a renewable fuel that could realistically replace the 140 billion gallons of gasoline consumed in the US each year. And now I believe the key to producing this fuel starts with cow manure – because this waste powers a facility that turns corn into ethanol.

I’m standing on a grassy hill in the middle of an 880-acre commercial feedlot just outside Mead, Nebraska, which is a long way from my home turf of clean labs and wood-paneled conference rooms in Silicon Valley. In front of me are four open-air cattle sheds. Each is the width of a giant barn and a full half-mile in length. From up here, they look more like jumbo-jet landing strips than animal pens. Beyond the sheds are several hundred acres of cornfields, from which much of the animals’ feed is harvested.

It may look like a typical, if huge, cattle feedlot – but for the glittering white four-story structure below that resembles the Centre Pompidou in Paris. Indeed, until recently this operation just off Mead’s County Road 10 was not unlike any other finishing ground for Nebraska’s beef cattle: a last stop before the abattoir. But starting in November, Oscar Mayer will no longer be the marquee product here. A company called E3 Biofuels is about to fire up the most energy-efficient corn ethanol facility in the country: a $75 million state-of the-art biorefinery and feedlot capable of producing 25 million gallons of ethanol a year. What’s more, it will run on methane gas produced from cow manure. The super-efficient operation capitalizes on a closed loop of resources available here on the prairie – cattle (fed on corn), manure (from the cows), and corn (fed into the ethanol distiller). The output: a potential gusher of renewable, energy-efficient transportation fuel.

Of course, 25 million gallons of ethanol is a drop in the tanker when it comes to our 140 billion-a-year oil habit. And ethanol itself is a subject of controversy for all sorts of reasons. Many of the criticisms, while true in some small ways, are aggressively promoted by the oil lobby and other interested parties in an effort to forestall change. Most are myths. Challenges certainly exist with ethanol, but none are insurmountable, and – with apologies to Al Gore – the convenient truth is that corn ethanol is a crucial first step toward kicking our oil addiction. I believe we can replace most of our gasoline needs in 25 years with biomass from our farmlands and municipal waste, while creating a huge economic boom cycle and a cheaper, cleaner fuel for consumers.

Which is why this Mead, Nebraska, farm is so exciting to me: The ethanol made here is not only clean but also cheap – this is perhaps the first ethanol plant to achieve both. More important, it is an early demon­stration of the great potential of biohols – liquid fuels derived from biomass for internal combustion engines. The facility is the first data point in what I call the biohol trajectory. (See “March of the Biohols,” page 143.) Like Moore’s law, this trajectory tracks a steady increase in performance, affordability, and, importantly, yield per acre of farmland. A number of biohols appear along this performance curve, among them corn ethanol, cellulosic ethanol, higher-energy-content butanol, and other biomass-derived fuels that are even more energy-rich than butanol. We’ll see fuels with higher energy density and better environmental characteristics, and we’ll develop engines better optimized for biohols. Ethanol and the newer fuels will yield better fuel efficiency as innovations like higher compression-ratio engines make their way into vehicles. In addition, we can count on the emergence of complementary technologies like cheaper hybrid vehicles, better batteries, plug-in hybrids, and more efficient, lighter-weight cars.

But the single most critical variable in the biohol trajectory is the coming rise in the number of gallons of fuel produced per acre. As we migrate from biomass derived from corn to biomass from so-called energy crops like switchgrass and miscanthus, I estimate that biomass yield will reach 20 to 24 tons per acre, a fourfold increase. At the same time, new technologies will enable us to extract more biohols from every ton of biomass, potentially to 110 gallons per ton. The result: We’ll be extracting 2,000 to 2,700 gallons of fuel per acre (as opposed to about 400 gallons with today’s technology). With better fuels and more-efficient engines improving mileage by about 50 percent, we can safely predict a seven- to tenfold gain in miles driven per acre of land over the next 25 years. Given this biohol trajectory, a future of independence from gasoline becomes not only possible but probable. And the trajectory begins with garden-variety corn ethanol.

We learned to formulate corn ethanol way back – it’s nothing more than moonshine. What makes the E3 Biofuels facility so novel isn’t its spectacular equipment but the way the equipment is fueled. The most important structures here happen also to be the least beautiful: a pair of four-story, 4 million-gallon fuel tanks, each filled to the brim with cow manure. Historically, ethanol plants were fired by coal or natural gas. But methane, produced from manure, powers this operation. Not only do no fossil fuels go into the plant, very little pollution comes out. It’s nearly a closed energy loop (some corn has to be bought from other farms).

E3 Biofuels achieves what’s known as a positive energy balance. For every BTU of energy used to run the ethanol plant, five BTUs are produced. A typical corn ethanol plant produces 1.3 to 1.8 BTUs for every BTU of fossil fuel input, including the energy required to grow the corn. (Gasoline has half the efficiency of corn ethanol, producing 0.8 BTUs for every BTU input.)

Here in Mead, almost nothing goes to waste: Components of the corn kernel that aren’t good for ethanol – the protein – are valuable additions to the cattle feed. The biodigestor waste left after methane production from cow manure is processed to produce ammonia fertilizer for the cornfields. The system is also environmentally friendly. Normally, groundwater pollution from cattle feedlots is a serious problem. But the process of producing fertilizer from the cattle manure keeps the phosphates out of the groundwater. Significantly, the energy system also prevents the venting of methane into the atmosphere, which is notable because methane is 23 times worse than carbon dioxide as a greenhouse gas. Another benefit: Even under a blazing mid-August sun, I can barely smell the cattle.

I became familiar with ethanol in 2003, when a business plan for a startup called BCI (now known as Celunol) crossed my desk. I had begun to look into alternative fuel technologies, but I couldn’t get comfortable with the economics of some of the trendy clean-energy technologies like hydrogen fuel cells.

I was impressed with Celunol’s technology for producing cellulosic ethanol (made from the cellulose, or “stalk,” of a plant rather than the sugar or starch “seed”), but I didn’t think the business was commercially viable. Still, I couldn’t bring myself to toss out the plan. It sat on a corner of my desk for nearly 18 months while I read everything I could about petroleum and its alternatives and what it would take to produce a replacement fuel for gasoline from a renewable resource.

In 2004, I began hearing about the ethanol market in Brazil, where the government had been unsuccessfully promoting ethanol cars. Consumers wanted a car that could use the much cheaper ethanol fuel but were reluctant to get locked into using ethanol only. When a car that offered the choice of either gasoline or ethanol as a fuel was introduced in 2003 by Volkswagen, sales took off, far surpassing expectations. Today, more than 70 percent of new cars sold in Brazil are so-called flex-fuel vehicles, which can run on gas or ethanol; three years ago, less than 4 percent of new cars were flex-fuel vehicles.

Brazil’s example made me think that replacing oil in the US was plausible, perhaps even possible. How, I wondered, could the possible be turned into the probable? Naturally, the US market is significantly different from Brazil’s. US consumers use six times as much oil as Brazilians per capita. Brazil gets its ethanol from sugarcane, but the US can’t grow much sugarcane (which has an exceptionally high energy efficiency) in our climates. Still, considering the technological creativity and capital at our disposal, I felt certain that the most powerful country in the world could achieve something a country with an economy one-eighth our size had successfully embarked on.

The business opportunity loomed as large as anything I’d ever seen. The key to turning the possible into the probable – and dislodging the oil companies – would be to convince Wall Street that there were substantial profits to be made. To me, it seemed ethanol and other biohols could eventually replace all our gasoline needs – and they would not need subsidies to outcompete fossil fuels. Just because ethanol gets subsidies doesn’t mean it needs them. Biohols were the only kind of alternative energy that I believed met two essential criteria: They would scale to solve a material problem, and they could economically compete with fossil fuels without subsidies. In 2004, I formed Khosla Ventures. One of our early investments was Celunol.

When it comes to technology, the best way to change the world is not by revolution but by evolutionary steps. Change must follow from step to step, from innovation to innovation, as technology matures, each step justifying its economic viability and attracting investment. So while ethanol may not be ideal, I’m convinced it’s the best first step on the biohol trajectory. Ethanol offers one thing no other oil substitute can: a clear path from where we are to where we hope to be.

There are other scenarios we can imagine – say, wind-driven hydrogen generators powering our cars – but they are just that: blue-sky flights of imagination from academics and dreamers with no notion of reality. Then there are those tunnel-vision skeptics who refuse to believe that there is a trajectory to energy independence. I invite those folks to sit on the sidelines and watch the show or to go work on a better solution. Twenty-five years ago such doubters were dismissive of personal computing, the Internet, and biotechnology.

Ethanol is the first step on the biohol trajectory for three reasons. The first is economic: Ethanol can be produced and sold cheaper than gasoline. Most ethanol facilities can produce their fuel for about $1 a gallon – almost half the production cost of gasoline. And innovative producers like E3 Biofuels claim to make it for 75 cents a gallon. It’s true that American ethanol today benefits from agricultural subsidies for corn farmers. I would like to eliminate ethanol subsidies gradually in conjunction with the removal of tariffs on imported ethanol. For kicks, we might consider removing the substantial direct subsidies to oil, too. Free markets demand level playing fields.

Meanwhile, ethanol at the pump can be relatively cheap. Recently, in Aberdeen, South Dakota, E85 – a blend of 85 percent ethanol and 15 percent gasoline – was selling at gas stations for just $1.95 a gallon. Wal-Mart is now considering selling it. Imagine if every Wal-Mart offered $1.99-a-gallon fuel! The switch to cars and trucks that can run on E85 would be relatively economical, too. There are already 6 million such flex-fuel vehicles on the road in the US. It costs a paltry $35 to make a new car capable of handling both ethanol and gasoline.

The second reason is scientific: New breakthroughs make it eminently feasible to scale up ethanol to national and even global proportions. Today, corn yields about 400 gallons of ethanol per acre of cropland. While corn yields will increase over time thanks to genetic modification (a new variety from Monsanto may yield 750 gallons per acre), corn can get us only so far. The real promise for ethanol lies in cellulose, which can be derived from plants like switchgrass and miscanthus, a tropical grass native to southeast Asia. Cellulosic ethanol technology promises to deliver as much as 2,700 gallons per acre by 2030. This is the key to achieving scale, substantially lower costs, and manageable land-use scenarios. Biotechnology, plant breeding, chemical process technologies, synthetic biology, energy crop engineering, systems biology, computational modeling, and new fuel chemistries will all offer tools, approaches, and possibilities for improvement. Failure to use them will be a failure of imagination.

The third reason is pragmatic: Ethanol is already here – and in use! We know how to produce it, we know how to distribute it, and we already have cars that can use it. So why reinvent the wheel? Today in the US, there are 925 stations that dispense E85. Expanding that number to just 20,000 would be sufficient to make E85 broadly available – an investment I estimate at much less than a billion dollars. Just the subsidy decrease I have proposed would more than pay for this infrastructure. The sooner E85 corn ethanol primes the alternative-energy pump, the sooner we can progress to the next steps on the biohol trajectory. Several entrepreneurs are already working on cheaper, more energy-efficient biofuels that will ultimately replace corn ethanol. Mascoma, one of my investments, is developing new cellulosic ethanol technology. Richard Branson’s Virgin Group is engineering an ethanol-like fuel robust enough for jet engines. Greenfuel Technologies is harnessing algae farming for ethanol and biodiesel production. Human genome pioneer J. Craig Venter is busy developing a synthetic chromosome that may be able to produce ethanol. Another Khosla Ventures company called LS9 is applying synthetic biology to produce a new biofuel.

All of these fuels will be derived from biomass, share similar manufacturing and distribution processes, and power improved internal combustion engines, so all of them will benefit from the trailblazing, market acceptance, and established infrastructure of corn ethanol.

There is a problem, however. There are folks who don’t want us to have cheaper alternatives, at least not quickly. With the oil companies and their nearly unlimited financial and political resources fighting the development of new fuels, and in the absence of any sort of national Manhattan Project for energy, a new Silicon Valley of energy development has yet to get off the ground.

The oil interests fought the increased mileage requirements for new cars and trucks. They lobbied Congress for tax breaks and environmental waivers. Oil companies have received direct subsidies that add up to more than $120 billion, according to the General Accounting Office, and substantially more in indirect subsidies. When the EPA decided that the lead in gasoline was a serious health hazard and pushed for its removal, the oil companies spent millions fighting the change.

Today they are fighting for waiver from MBTE pollution liability and avoiding responsibility for carcinogenic benzene in our air. When municipalities in California decided to purchase cleaner natural gas buses, the diesel industry sued to block the switch. At every turn in the history of our oil dependence, the oil companies have spent their considerable fortune to make sure that we as a nation remained dependent on oil. They did this in large part by lobbying Congress, by providing congressmembers with large amounts of campaign cash, and by trying to suppress cleaner, cheaper alternatives to oil. I hope they realize soon that alternative energy is a major business opportunity for them.

In November 2005, at the invitation of a number of environmentalists, economists, and the National Resources Defense Council, I agreed to support California ballot measure 87, which will be put to voters in the November 7 statewide election. The measure proposes to charge oil companies a fee on oil they extract from California state lands. (Oil companies pay such a fee in every other major petroleum-producing state. They are fighting hard not to pay their fair share in California.) The proceeds – estimated at $4 billion by 2017 – will principally go toward reduction of petroleum use and to promote research in alternative energy technologies at universities.

Critics of Prop 87 like to point out that Khosla Ventures stands to benefit financially if the measure passes. I have committed to donate all of my profits from any company that receives money from this initiative just so we can focus the campaign on the real issues.

More than a million Californians signed the petitions to put Proposition 87 – the Clean Energy Initiative – on the California ballot. If enacted, it’s estimated that the measure will reduce the state’s dependence on oil by 25 percent over the next 10 years. But the money put into alternative energy research will benefit not only California but the whole nation. Besides providing a role model, California’s reduced oil demand will decrease gas prices nationwide. The technologies and companies that emerge will change the US and the world, making clean technology economical everywhere. Prop 87 will not raise gas prices as the oil companies would have you believe. Market forces ensure that world oil prices, not production costs in California, determine gas prices. Besides, the California attorney general has confirmed that Prop 87 makes it illegal for oil companies to raise gas prices or pass the fee on to consumers. The US Supreme Court has already ruled that states can prohibit oil companies from passing drilling fees on to consumers. But oil company dollars in a massive advertising campaign will try to scare consumers into believing otherwise.

The oil companies are hiding behind the moniker Californians Against Higher Taxes, a group funded almost completely by oil companies and that has so far taken in more than $30 million to campaign against the measure. It’s going to fight Prop 87 tooth and nail. Prop 87 is clearly the David in the fight against Goliath. We have no illusions about what we’re up against. We have 138,000 troops in Iraq, gas is $2.85 a gallon, and 90 percent of Californians live in places that don’t meet federal air quality requirements. And global oil production can’t keep up with rising demand from countries like India and China.

By forcing the oil companies to finally pay their fair share, Proposition 87 will help launch the next Silicon Valley phenomenon, the Googles and Yahoos of clean technology. These new energy companies will go on to create jobs, wealth, and economic growth everywhere. And they will help change the planet’s destiny.

In the corner of an unmarked warehouse tucked away in an industrial neighborhood north of Denver, a new company called Kergy has what is, to my knowledge, the first anaerobic thermal conversion machine (which explains why Khosla Ventures is a seed investor). It’s a 6- by 4-foot contraption that stands about 8 feet high. It looks vaguely like a souped-up potbellied stove. But it runs cleanly enough to operate indoors.

Kergy’s machine is special because it makes cellulosic ethanol through anaerobic thermal conversion rather than through fermentation or acid hydrolysis. It does not need organisms or enzymes to do its work. Biomass is heated in an oxygen-free environment to produce carbon monoxide and hydrogen. Once that happens, “the world is your oyster,” says Bud Klepper, the engineer who invented this device. The carbon monoxide and hydrogen are then reconstituted into various alcohols – like ethanol. Better still, fermentation and acid hydrol­ysis can take days to occur, but thermal conversion breaks down organic matter and converts it to ethanol in minutes.

And here’s the really exciting part: Because all organic matter contains carbon, Klepper can make ethanol out of cellulose or any form of organic matter. This means the usual suspects such as corn, switchgrass, sugarcane, and miscanthus but also any waste product such as wood chips, paper pulp, cow manure, and even human waste. Municipal sewage has been tested already, as has hog manure. “We could double the ethanol output of the Mead facility,” Klepper says. It’s a big leap forward on the biohol trajectory, and it is right in front of us.

And cost is a big advantage. “Our ethanol from biomass should be competitive in costs with corn ethanol,” says Kergy CEO Mitch Mandich, who gave up several CEO opportunities at large public companies to run Kergy. The technology is exciting enough that Arie Geertsema – director of the University of Kentucky’s Center for Applied Energy Research and formerly managing director of the corporate R&D Division of Sasol, the most experienced gasification com­pany in the world – was excited enough by the tech­nology to give up his position and join Kergy.

Mandich and his team are right to be enthusiastic. Ethanol – and soon cellulosic ethanol and its successors – offers not only a cleaner, cheaper alternative to gasoline but one that’s made in America. The environment can no longer sustain fossil-fuel emissions, and the US economy and foreign policy would be far better off without our dependence on foreign oil.

We don’t need far-off technologies like hydrogen fuel cells to achieve a future that is more environmentally and economically secure. And we don’t have to pay more for cleaner transportation energy. We have the fuel in ethanol, and we have the technology to produce it, the distribution systems to move it, the pumps to dispense it, and the cars to run on it – all in place and ready to go today. The doorway to a future with fewer economic and environmental risks is before us. All we need do is step through it.