[pagebreak:Coskata Begins Building Demonstration Plant] Coskata has begun producing small amounts of ethanol at a pilot plant at its offices in Warrenville, Ill., and has started building its 40,000-gallon-per-year demonstration plant, Chief Marketing Officer Wes Bolsen told Greentech Media this week.

The Khosla Ventures-backed startup made a splash in January when it announced a partnership with General Motors and claimed it could make ethanol for less than $1 per gallon (see With GM Deal in Hand, Coskata Promises $1 Ethanol).

GM had originally hoped the pilot plant, which is only "producing at a liters and gallons kind of scale," would be completed before the startup came out of stealth mode in January, Richard Tobey, vice president of research and development and engineering, said at the time.

While the plant opened a few weeks late, it has been operating for a couple of months, Bolsen said. The plant has helped increase the efficiency of Coskata’s technology, and its organisms can produce ethanol twice as efficiently as they could in January, he said.

The bugs can produce 100 times as much ethanol from a dry ton of material as they could in 2006, when the team began working with them, he said, adding that the efficiency levels are six to nine months ahead of schedule.

The next step is the demonstration plant, which Coskata expects to open at the end of this year or the beginning of next year (see Coskata Bucks Tradition).

The company is expected to announce the location of the plant, as well as its partners, later this month, and Bolsen said Coskata plans to begin producing ethanol from nonfood sources at the plant next year.

The company previously said it would deliver fuel to GM from the 40,000-gallon-per-year facility in the fourth quarter of this year.

"There’s no real hurry," Bolsen said.

Aside from GM, which will use Coskata’s fuel to test vehicles at its Milford Proving Grounds, Coskata might use some of the cellulosic ethanol from its demonstration plant to help advance the auto-racing industry, Bolsen said.

The IndyCar Series and Formula One already use ethanol and the American La Mans Series began using cellulosic ethanol this year (see Racing Toward Green).

Bolsen’s goal is to win over NASCAR. "NASCAR hasn’t done this yet, and if Coskata could provide some [cellulosic ethanol] for free off this [demonstration plant], that would be a fantastic win for us," he said.

Meanwhile, Coskata also is working to close partnerships for its first commercial plants.

The company expects to break ground on its first plant, which will have the capacity to make between 50 million and 100 million gallons of ethanol annually, this year and to have the plant up and running in late 2010. Coskata in February announced a partnership with ICM, a Colwich, Kan.-based ethanol plant design, engineering and support firm, to design and construct its first commercial plant (see More Cellulosic Ethanol Will Soon Be For Sale. But Who’s Buying?).

But it is still pinning down the specifics -- the "who, what feedstock and how many gallons," Bolsen said.

[pagebreak:Coskata Pilot: Continued]

Five or six potential customers are vying for the first plant, he said, including waste-management companies, pulp and paper companies, sugar producers that would like to make ethanol from the sugarcane bagasse and companies with industrial waste gases, such as covered landfills.

Corn producers also might be an option, particularly those who already have permits for a corn-based ethanol plant, but have decided not to build it, he said.

"You’re still in the middle of a corn field," he said. "If you’re not going to put a corn plant there, why wouldn’t you site a Coskata plant there to make use of the [agricultural] waste?"

In selecting its partner for the first plant, Coskata is looking for a company that wants to build multiple plants and has the cash to do it, Bolsen said.

"We’re not interested in people, from plant one, that are looking to build one facility," he said. "We want to start with someone who wants to produce billions of gallons of fuel and who has billions of dollars in the bank, or on their balance sheet. For the first facility, Coskata is probably going to be partnering with folks that have the money to bankroll it in a big way."

Coskata does plan to build, own and operate some of its facilities, but also wants to partner with companies that will use its technology and pay per-gallon royalties, Bolsen said. CEO Bill Roe had said in January that the first commercial plants would probably be built through such partnerships.

The model is interesting because the upfront cost of building a facility is high, and because biofuels companies have found it more difficult to raise capital for plants in a time when prices for today’s starch-based feedstocks, like corn and soy, have outpaced those for ethanol and biodiesel.

According to CNET, the $1-per-gallon figure doesn’t include the cost of the capital to build the facilities, taxes, retail mark-ups or other expenses, bringing the real price to around $1.50 per gallon.

Rick Kment, a biofuels analyst with DTN Research, remains skeptical about what the real price will be.

"First of all, [$1 per gallon] is not their total cost, and also, they really have no clue what the long-term feedstock cost is going to be for their operation once they start building plants and there’s more demand for whatever feedstock they’re looking for," he said.

Bolsen said Coskata’s economic model has accounted for prices of up to $40 per dry ton, more than many of its competitors are counting on, and added that the company has the flexibility to switch feedstocks if the prices grow.

"We will switch input materials at $50 to $60 a dry ton," he said. "If we’re using poplar wood and it [gets expensive], we will move our plants to use willow or corn stalks or whatever. What are you going to do if your economics are based around one feedstock?"

Of course, it might be more difficult than it sounds to switch feedstocks, because the plants will be located near the materials they planned to convert into ethanol.

But the flexibility gives Coskata more options, Bolsen said, and the company also will try to find places with multiple feedstocks. For example, it could have a plant set up for 70 percent municipal waste and 30 percent wood chips that can vary its blend depending on whether the waste or wood chips is cheaper.