It doesn't look like the ethanol industry is going to get relief from its pain any time soon, according to a panel of investors at the Dow Jones Alternative Energy Innovations conference in Redwood City, Calif., earlier this week.

The industry has seen margins shrink and stock prices fall, and companies such as VeraSun have pulled back on plans to increase their ethanol production (see Ethanol Margins Suffer).

One cause of the problem lies in the hands of those driving ethanol's growth, said Peter Hebert, managing partner at Lux Capital Management.

When it comes to corn-based ethanol in the United Sates, "government and corporate support are being largely dictated by congressmen and senators from Iowa versus true scientists," he said. Iowa is one of the largest produces of ethanol in the country.

Ethanol doesn't make sense in many cases and fails to address numerous problems that the fuel is supposed to help solve, he said.

Among the biggest hopes for U.S.-produced ethanol is its ability to curb the country's dependence on foreign oil. President George W. Bush has supported such efforts, calling for 35 billion gallons of renewable and alternative fuels by 2017.

Hebert agrees that homegrown fuel makes sense. "But we truly believe there are better technological solutions out there," he said.

Anup Jacob, a partner at Virgin Green Fund, said until the market develops further, the ethanol industry can expect the volatile spikes to continue.

"Ethanol margins are being crushed … to about 10 cents," Jacob said. "And payback periods have gone from two years to about four to five years."

Things could get worse, Jacob said.

"I think that we will see a lot of re-trades below the pricing cost over the next little bit here," he said.

But there is a silver lining. The infrastructure that has been built around ethanol can be used for other purposes in the future, said Karl Handelsman, a managing director for CMEA Ventures.

Just because investors can't make money in ethanol, it doesn't mean they can't make money in other biofuels and next-generation ethanol technology, Jacob said.

Jacob is particularly interested in butanol, another alcohol-based fuel produced by a naturally occurring microbe during a sugar-fermentation process.

Virgin Green Fund has invested in biobutanol developer Gevo.

Cellulosic ethanol -- ethanol made from nonfood biomass like switchgrass, wood chips and corn cobs -- also has received significant financing this year (see Are Biofuels Pushing VCs Into A New Role?).

Advocates say cellulosic technology could significantly boost the amount of ethanol that can be made without competing with crops for food, but companies developing cellulosic ethanol haven't been able to produce it at large volumes or affordable prices.

Jacob doesn't see the appeal of financing those plants, but did say he's interested in investments to develop proteins that break down cellulose. Those proteins could play a key role in making cellulosic ethanol.

After that, Jacob thinks his firm will be done with biofuels. "There is too much to be invested in other spaces right now," he said, such as solar, wind and water.