Cellulosic ethanol is turning out to be an underachiever so far.

The 2008 Energy Independence and Security Act set a goal of producing 100 million gallons of cellulosic ethanol in the U.S. by 2010 and 250 million gallons by 2011, but a survey conducted by David Woodburn of ThinkEquity strongly indicates that the industry is likely to miss its mark.

Woodburn expects only 28.5 million gallons of cellulosic ethanol to be produced in the U.S. in 2010, leaving a 71.5 million gallon gap.

"Congress put this 100 million figure out there and I'm not sure they had any idea about the capacity in the industry," he said.

The shortfall, however, will hit fuel retailers and ultimately consumers. Why? As part of the bill, the Federal government mandates that retailers cover shortfalls by buying credits from the Environmental Protection Agency. Retailers essentially are required to fill a certain percentage of their fuel demand with cellulosic ethanol. If they can't find the ethanol, they pay a credit equal to the difference between the wholesale price of gas and $3 to the government. The wholesale price of gas is close to $1 now. Thus, if it were 2010, retailers would be paying $2 for every gallon of cellulosic ethanol they couldn't find.

"[The government] will sell 71 million gallons worth of credits," Woodburn said. "The shortfall provides a revenue source for government grants. ... That's the way it is supposed to work."

In 2011, a bevy of new manufacturing plants could allow the industry to produce 247.6 million gallons, close to the 2011 goal of 250 million gallons. Abengoa, for instance, is expected to open a 25 million gallon plant on its own. The report outlines the manufacturing plant plans of 20 companies.

But that's if everything runs according to plan in a best case scenario, which may not be likely. Many companies have delayed plants already and capital is tough to find. Historically, declining gas prices have also tended to depress enthusiasm for ethanol investing.  

The cellulosic industry as a whole is still largely in the prototype phase, Woodburn's report notes. The report estimates that the cellulosic industry as a whole will only have 6.3 million gallons worth of manufacturing capacity by the end of this year, and the estimate includes a 3 million gallon plant being planned by garbage-to-ethanol startup Blue Fire Ethanol. Blue Fire had hoped to open start construction on the plant this year, but a spokeswoman said this morning that's it is not built yet (see BlueFire to Break Ground and BlueFire to Build $130M Plant in Mecca).

The first "large" cellulosic ethanol plant will likely be opened in 2010 when Range Fuels opens a 10 million gallon a year plant.

The standards eventually mandate that 16 billion gallons of cellulosic ethanol get made in 2022.