If next-generation biofuels are to play a key role in America’s energy future, a number of challenges must be overcome, foremost of which are reducing costs, according to an article in USDA’s June publication of Amber Waves. High production and initial construction costs for untested technologies and processes on a large-scale increase investment risk and affect the willingness of investors to underwrite projects.

Capital investment costs for cellulosic ethanol plants are estimated at three to four times those for first-generation biofuel plants. These are costs incurred in the purchase of land, buildings, construction and equipment and represent the total cost to bring a project to a commercially operable status.

According to 2004 estimates of the U.S. Department of Energy (DOE) Energy Information Administration, capital investment costs for biomass-to-liquid facilities ranged from $650 million to $900 million for a 100-million-gallon-capacity plant, compared with $130 million to $230 million for a similar-sized corn ethanol plant. Other more recent studies estimate capital investment costs of $320 million to $340 million for cellulosic ethanol plants, suggesting that these costs could be trending downward despite significant increases since 2003 in material and energy costs.

In 2007, USDA estimated cellulosic ethanol production costs at $2.65/gallon, compared with $1.65 for corn-based ethanol. Capital and conversion costs are expected to decline as companies increase production and have greater access to low-cost biomass.

According to a 2008 report by the Biomass Research and Development Board, farmers would need to receive $40-60/dry ton to produce sufficient feedstocks for 12 billion to 20 billion gallons of cellulosic ethanol from ag biomass – ag residues and energy crops. These prices are consistent with the $40-60/ton that Poet plans to pay suppliers of corn cobs for delivery at its commercial cellulosic ethanol plant in Emmetsburg, IA, when it opens in 2011.

For farmers to shift to production of dedicated energy crops such as switchgrass, however, farm prices would need to compete with the lowest-value crops such as hay, whose price has exceeded $100/ton since 2007. The new Biomass Corp Assistance Program in the Food, Conservation, and Energy Act of 2008 will help to boost farmer incentives and lower feedstock costs for biorefineries, USDA reports. This program provides up to $45/dry ton to producers of eligible biomass. The assistance is directed at the establishment and production of new feedstocks for biofuels. The subsidy significantly increases incentives to produce, harvest, collect and deliver bulky low-value biomass products to biorefineries and other conversion facilities. This, in turn, will help lower feedstock costs and facilitate timely availability of supply to biorefineries.