The $1 a gallon tax credit for biodiesel expired with the New Year, but there's a good chance that it will return as a retroactive credit in whatever energy bill gets passed.

The $1 tax credit, passed in 2004, helped biodiesel get off the ground. (The $1 applied to virgin oil--biodiesel from old oil got a smaller credit.). The credit, though, didn't completely insulate the industry from supply and demand. Rising feedstock prices and then declining diesel prices have meant financial headaches for many refiners in the past few years. The Energy Information Administration has already said that the U.S. won't likely hit its "100 million gallons by 2022" mandate until 2030. Many ethanol refiners had to sell off or close facilities in 2008 and 2009.

Will it be back? Probably. A form of the credit is in the House energy bill, senators like Max Baucus have promised to champion biodiesel in 2010 and alternative fuels tend to enjoy a strong level of support among investors, politicians and the public. Ask a stranger about algae fuel: they probably have an opinion. Plus, many of the refineries are in red states, so bipartisan support will exist. Republican Senator Charles Grassley has said he wants to bring it back. It can be made retroactive too.

But in the meantime, expect to see layoffs, says the Houston Chronicle.

The Department of Energy said Friday it would give $564 million in stimulus funding to 19 projects aimed at turning biomass into fuels, chemicals and power.

The grants are hoped to help the federal government meet its aggressive deadline to get 36 billion gallons of biofuel production up and running by 2022 – a goal government and industry analysts have said will be hard to reach (see Feds Propose Controversial Biofuel Mandate, Offer $800M to Boost Production and U.S. Won't Meet Its Own Biofuel Mandate).

The 19 winning projects span 15 states, and include both giants like Archer Daniels Midland and Honeywell's UOP and startups such as ZeaChem, Amyris, Solazyme and Algenol.

The projects are aimed at using non-food feedstocks such as wood chips, grasses, algae and municipal waste to make biofuel. A federal mandate calls for 100 million gallons of cellulosic ethanol to be made by next year, but it appears increasingly likely that this target will not be met (see Consumers to Pick Up Tab for Off-Target Cellulosic Ethanol Industry).

The grants aren't all for biofuel production – some are aimed at the production of biochemicals or generating power from biomass, though most of those are linked to biofuel production.

While most of the projects haven't received DOE funds yet, one has – BlueFire Ethanol, which will get an additional $81.1 million to help along its plans to build a 19 million gallon-per-year plant making ethanol from biomass and waste in Fulton, Miss. BlueFire had received $40 million to build a plant in California, but moved the project to Mississippi in October (see BlueFire Ethanol to Build $130M Plant in Mecca).

Also on Friday, the U.S. Department of Agriculture said it would give San Diego, Calif.-based algae biofuel startup Sapphire Energy a $54.5 million loan guarantee from the 2008 Farm Bill's Biorefinery Assistance Program to build a demonstration plant in New Mexico. Sapphire also received $50 million in DOE grants (see Green Light post).

Some selected DOE grant winners include:

• Algenol Biofuels will get $25 million to make ethanol from algae at a 100,000 gallon-per-year demonstration plant in Freeport, Texas (see Green Light post).
• American Process Inc., of Alpena, Mich., will get $17.9 million to build a plant to make 890,000 gallons of ethanol and 690,000 gallons of potassium acetate from processed wood.
• Amyris Biotechnologies, of Emeryville, Calif. will get $25 million to help build a pilot plant to use its genetically altered yeast to turn sugar from fermented sweet sorghum into hydrocarbons closely resembling diesel fuel, as well as lubricants, polymers and other petrochemicals (see Amyris Pledges $82M to Go Commercial in Brazil).
• Archer Daniels Midland, of Decatur, Ill. will get $24.8 million for a facility to use acid to break down biomass to convert to ethanol or ethyl acrylate.
• Clearfuels Technology, of Commerce City, Colo. will get $23 million for a plant to make woody biomass into diesel and jet fuel using processes from the company and partner Rentech (see Rentech Plans Wood Waste-to-Biofuel, Electricity Plant).
• Enerkem will get $50 million to build a plant in Pontotoc, Miss. to convert municipal wastes into syngas for conversion to biofuels (see Green Light post).
• Logos Technologies will get $20.4 million for a Visalia, Calif. plant to convert switchgrass and woody biomass into ethanol (see DARPA Gives Logos $19.6M for Bio Jet Fuel).
• Solazyme will get $21.8 million for a Riverside, Penn. plant to produce algae oil to convert to oil-based fuel (see Green Light post).
• UOP, a Honeywell company, will get $25 million to develop a Kapolei, Hawaii plant in partnership with Ensyn to turn a variety of crops and feedstocks into fuels (see Biofuel Roundup: Fuel From Algae, Biomass, Waste).
• Zeachem will get $25 million to build a wood-to-ethanol plant in Boardman, Ore. (see Zeachem Moves Into Plastics, Breaks Ground on Prototype Plant).

Mascoma, which wants to develop microbes that can convert woody biomass into ethanol, has signed a pretty important deal with Chevron Technology Ventures.

Under the deal, Chevron will supply feedstocks to Mascoma, and then Mascoma's microbes will convert the material into ethanol and lignin, the tough material that protects plants. Chevron will then evaluate the results.

To survive and thrive, biofuel startups will invariably have to partner with the major fuel companies. Chevron already has an R&D alliance with Solazyme, which makes algal biodiesel. Shell has deals with 70 or so different alternative fuel companies, according to sources. Mascoma recently underwent some management changes. CEO Bruce Jamerson became chairman and also chairman of Frontier Renewable Resources, which is trying to raise money to build a plant in Michigan based around Mascoma's microbes. Mascoma is currently looking for a CEO.

The lignin angle is interesting. Ligning keeps microbes from gobbling up plants. It is why we have coal: the lignin outlasted the microbes and the cellulosic material fossilized into coal over millions of years. It's a high-energy material. Some ethanol companies plan to burn lignin to run their own plants. Others transform it thermochemically and add the byproducts back into the ethanol mix.

Mascoma is trying to engineer microbes that can handle two stages of the ethanol process: breaking up wood chips and grasses into lignin, hemicellulose and cellulose and then turning the cellulose into ethanol. The company is not there yet but it is making process, Jamerson told us recently.

Designer Energy is focused on one thing: degradation.

Of cellulosic material, that is. The company, which grew out of university labs in Israel, has come up with biological mechanisms to break down cellulosic plant matter and convert it into sugar. The sugar will then get sold to fuel companies.

"Sugar is the new oil," said Tali Somekh, a partner at Musea Ventures, which invested in the company. "The bottleneck of the ethanol industry is the production of sugar."

The company reflects the growing horizontal-ization of the greentech market. Until now, companies have largely been forced to, or chosen to do, everything themselves. Many solar cell manufacturers also make their own panels. Electric car makers sometimes produce their own batteries or other components. Biofuel makers don't concentrate on fuel or distribution: They also often have to raise their own crops. In essence, these companies have to be farmers, biologists, chemists and petroleum distributors at the same time. Not easy.

That will begin to change as companies get forced to specialize. Algae iconoclast Solazyme (which grows algae by feeding it sugar) has said it will buy sugar in the open market rather than raise it itself. Somekh isn't saying a lot now, but more about the company could come out in the future. The firm works with a number of scientists in Israel and in the U.S. It also put money into solar thermal maker HelioFocus.

Microbes, Somekh added, are great sugar producers, in part, because they don't have legs. To defend themselves, animals can run. To get food, predators can kill things. Plants and microbes by contrast secrete really obnoxious chemicals. One of the classics is Trichoderma, the soil microbe from the Philippines that can eat through the canvas in tents.

Rentech, which makes biofuel from a modified version of the Fischer-Tropsch process, has signed a deal with eight airlines to provide their ground utility trucks at Los Angeles International Airport with 1.5 gallons of fuel annually. That's enough to handle all of the the needs of ground service trucks, according to Rentech.

The deal will go through in 2012, when Rentech's plant will be complete.

The deal marks another step in the slow, but steady, slog toward biofuels, and it makes sense. Unlike cars, utility trucks at an airport never stray far from home. Thus, a centralized biodiesel pump can serve them. It also allows the city to tout its green credentials and help U.S. businesses with local operations.

Will the trucks emit tailpipe fumes? Yes, but since the carbon originally came from terrestrial sources instead of underground, it's relatively carbon neutral. In a carbon trading world, that's another plus.

Rentech's fuel is made with biomass. Fischer-Tropsch was originally conceived in 1920 to convert coal to liquid fuel. The coal process has always been expensive and dirty, which explains why only the Third Reich and embargo-addled Apartheid South Africa were the only two nations to heavily rely on it. In F-T, the feedstock is heated to high temperatures, converted to a synthetic gas and ultimately turned into a liquid. A couple of other new age ethanol companies like Range Fuels are exploiting thermochemical processes, but biological remediation (i.e., having super microbes chew up plant matter into fuels) appears to be more popular with startup investors and entrepreneurs.

The good news: Oil doesn't have to rise that much more for cellulosic ethanol to become economically viable.

The bad news: You people in the labs have a lot of work ahead of you.

Sandia National Labs will soon release a report on cellulosic ethanol and what sort of barriers need to be knocked down so that cellulosic can become at least a 75 billion gallon a year business, according to the Wall Street Journal's Environmental Capital blog. The study states that cellulosic can't become competitive with oil unless oil stays above $90 a barrel.

While that sounds high, it isn't stratospheric. Oil is at $70 now and many economists predict a persistent rise in price as economies improve in China, India and the U.S. (The U.S. consumed 137.8 billion gallons of petroleum in 2008 and overall demand for petroleum and substitutes will likely increase.) 75 billion gallons of cellulosic could cut petroleum-associated emissions by 25 percent.

To get there, however, will require scientific breakthroughs. "Producers have to get better at squeezing more juice out of the same amount of biomass, and they have to make sure they’ll have all those plants available in the first place," Keith Johnson of the WSJ wrote. And, of course, most cellulosic ethanol companies are still in the press release n' prototype stage.

The full report should be an interesting read.

Codexis, one of the many companies that hope to harness the magic of biology to produce fuel, wants to do carbon capture too.

Alan Shaw, CEO, says that the company has an enzyme that could be implanted into smokestacks to reduce airborne carbon dioxide, according to Reuters. Most likely (i.e., my best guess), the enzyme would bind it to another substance to transform it into something that wouldn't pollute the atmosphere or that could be easily sequestered, perhaps a solid. The alternative would be to break it into carbon monoxide. Not so choice.

General Electric is a shareholder.

Other companies are also working on the mineralization of carbon dioxide. Skyonic in Texas has a system that turns carbon dioxide into sodium bicarbonate, or baking soda, while Carbon Sciences turns it into calcium carbonate. Both companies have to add minerals into the process, but they reactions also take energy. Potentially, and ideally, a biological-inspired catalyst would reduce the amount of energy required in a reaction.

The controversial green cement company Calera is working on a similar problem: taking carbon dioxide and turning it into carbonates. Calera, however, has denied it has a biological angle.

This is not an easy chemistry experiment. Whoever cracks it could earn billions. In any event, Codexis is a good company to watch, if even just for the amusement value. Shaw likes to speak his mind.

"Oil and gas and diesel are the fuels of today and the internal combustion engine is the transportation of choice today," he said at the Western Energy Summit at the end of July. "The internal combustion engine will stay, although the fuel will change... The electric car for me is a bit of a dream."