Emerging energy star

Wall Street wakes up to find ethanol shedding Midwest roots and gaining hold as alternative fuel


Microsoft Chairman Bill Gates recently invested millions in it. Morgan Stanley is a huge player. And scores of venture capitalists are starting to take a look as well.

We're talking corn, not cyberspace.

Once the domain of farmer-funded cooperatives in Midwest backwaters, grain-based ethanol has become a rock star of energy investments as Wall Street money chases new projects from California to Maryland, where at least two efforts to build production plants are gaining momentum.

"Wall Street has woken up and seen what farmers have created and are saying, `Hey, we want a piece of this, too,'" said Bob Dinneen, president of the Renewable Fuels Association, a Washington-based trade group.

The alternative fuels gold rush is being driven by continued instability in the Mideast, rising gas prices and a presidential appeal to reduce the nation's addiction to oil.

In the minds of big investors, the changing energy landscape makes ethanol close to a sure thing. The industry's growth trajectory is all but written into the Energy Policy Act of 2005, which requires the U.S. to use 7.5 billion gallons of renewable fuels annually by 2012, or nearly double the amount of ethanol produced today. The fuel additive is primarily distilled from corn and blended with gasoline to boost its octane and reduce tailpipe emissions. The fuel is found in about 30 percent of the gasoline sold in the U.S.

Ethanol proponents say the days when the industry squeaked by on government subsidies are over. "All of those past struggles are more or less gone," said Boris Maslov, a Vienna, Va.-based entrepreneur who is working on a plan to build an ethanol plant at Sparrows Point in Baltimore County. "Even the least energy-efficient ethanol plant in Minnesota is making money."

Maslov, a principal partner in Ecron Corp., a startup firm pushing alternative fuels, is symbolic of ethanol's growing appeal to nontraditional players outside the Corn Belt.

To fund his project, Maslov plans to enlist a Virginia-based investment bank to help raise as much as $120 million in development money from Wall Street and beyond. Though still in the planning stages, he hopes to attract enough investors to build a string of additional plants in the Mid-Atlantic, from Virginia to Pennsylvania.

Following a more traditional farmer-led model is a group that has been trying to build a barley-fed ethanol plant in Maryland - possibly on the Eastern Shore - for almost five years. The effort has been plagued by cost concerns and logistics, but the group says it is closer than ever. After years of tweaking, proponents say they have identified a business model that will make money and could be ready to move forward later this year.

"We have to show them that East Coast ethanol can be as profitable as Midwest ethanol," said Lynne Hoot, executive director of the Maryland Grain Producers Association. "I think we can do it."

Growing industry

If they or others are successful, Maryland could soon join California, Colorado, Ohio, New Mexico, Texas, New York and other states that are seeking to expand the ethanol industry beyond its Midwest roots. In the past year, 43 ethanol refineries opened, began construction or expanded nationwide, and dozens more have been proposed, according to the Renewable Fuels Association.

Currently, Maryland consumes a tiny fraction of the roughly 4 billion gallons of ethanol produced nationwide. One reason is that the Baltimore/Washington corridor gets most of its fuel by pipeline. Ethanol can't be moved by pipeline because it separates from gas during transport, causing a layering effect that would cause engine problems, experts said. That means it has to be shipped separately to the East Coast and then blended at fuel terminals, which is less economical.

But that could quickly change as the fuel industry phases out use of methyl tertiary butyl ether, a competing fuel additive historically favored by the oil industry and commonly blended with Maryland fuels.

MTBE has been added to gasoline to make it burn more cleanly and reduce emissions since the late 1970s. But in recent years it has been linked to groundwater pollution, leading many states to ban its use in favor of ethanol. A similar ban has been considered in Maryland, where MTBE - a suspected carcinogen - has turned up in drinking water in Harford County and other parts of the state.

"MTBE is hemorrhaging in the marketplace, and as it comes out, ethanol is filling that void," Dinneen, the RFA president, said.

Ethanol profits have soared along with the decline of MTBE and the rising price of gas. Not long after last fall's Gulf Coast hurricanes drove gas prices higher, Cascade Investment, an investment firm owned by Bill Gates, agreed in November to purchase an $84 million stake in Fresno, Calif.-based Pacific Ethanol Inc. The company plans to build up to five ethanol plants on the West Coast.

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