INTERVIEW-Venture capitalist Khosla sees no ethanol bubble Wed 9 Aug 2006 5:23 PM ET
By Timothy Gardner
NEW YORK, Aug 9 (Reuters) - Concerns that a burst in U.S. ethanol investments will lead to a price-crashing surplus of the fuel are unfounded because its full potential has yet to be realized, according to one billionaire betting big on its success.
Vinod Khosla, who co-founded Sun Microsystems and was an early Internet investor, is funding ethanol start-ups such as Los Angeles-based Altra and Massachusetts companies Celunol Corp. and Mascoma Corp. at levels between $100,000 to tens of millions of dollars.
Several analysts have labeled the U.S. rush to fund ethanol plants a bubble that could be popped in a few years by oversupply in fuel markets.
But Khosla expects demand for the fuel to grow as advances in technology make it cheaper and propel its role as a mainstream fuel from its current use in the United States as mostly a gasoline additive in clean air gasoline.
"I see a predictable technology path...that causes this evolution to become a revolution in fuel," venture capitalist Khosla told Reuters in an interview.
Ethanol is already becoming a mainstream fuel in Brazil. Just a few years after car companies started making flex-fuel vehicles for the South American country which run on either gasoline or ethanol, gasoline there now averages 20 percent ethanol content.
His company Khosla Ventures is part of a bigger trend. North American venture capitalist funds sank $513 million into renewable energy in the first quarter of 2006, up 53 percent from the same quarter last year, according to Cleantech Venture Network, an industry monitor.
CRISES
Ethanol can help ease major fuel risks, some of which have helped sting consumers with record prices, according to Khosla, a Republican.
He said petroleum dependence has led to "a climate crisis, a (fuel) security crisis, and a terrorism crisis."
He conceded that ethanol, mainly made from corn in the United States, could slightly raise the cost of food crops as more grain is diverted to make fuel.
But any food price rise would ease as the industry begins to make the fuel from woody bits of non-food crops such as poplar and switchgrass, he added.
Currently no commercial plants make cellulosic ethanol, but the technological race to make such fuel will soon bear fruit, much as small Internet companies became huge quickly, he said.
Khosla estimated between 10 and 50 investors and small companies with distinct approaches to cellulosic ethanol are willing to invest $60 or $70 million to build plants to make the new fuel.
"That many distinct and independent investors can't be wrong," he said.
In addition, production costs of feedstocks will drop as advances in fertilizers and agricultural techniques allow farmers to squeeze more and more fuel out of the field, he said.
"Today people probably assume you can get 500 gallons an acre," he said. "My belief is 3,000 gallons per acre is well within reach, and we can go higher."
Like any wise investor, Khosla hedges his bets.
He also invests in companies trying to make better batteries for hybrid cars. "We're off by a factor of 20 or 30 of the cost of hybrid batteries," he said adding that such cars running on ethanol could dramatically reduce heat-trapping carbon dioxide emissions.
And while building an adequate number of ethanol pumps at gasoline stations will be expensive, it would be far cheaper than building a fleet of nuclear plants or seeding vast fields of wind farms in the U.S. West to make supplies of hydrogen, a a possible alternative fuel.
