Zeachem, a cellulosic ethanol company that says it can get more fuel out of plant matter than its competitors, has just raised $34 million in a second round of funding to see if its formula will work on a grand scale.

Investors in the second round included Mohr Davidow Ventures and Firelake Capital but also Valero, the large oil refiner, and PrairieGold Venture Partners, a VC firm that specializes in alternative fuel.  Valero also recently invested in algae fuel start-up Solix.

"We're seeing a migration with the chemical and refining guys. They see that [cellulosic ethanol] is going to be part of the energy solution," said Jim Imbler, Zeachem's CEO. "For people working on thin margins on a lot of barrels, it makes a lot of sense."

The company, which was founded by execs from the petrochemical industry and biologists from Coors, takes a somewhat novel approach to turning cellulosic plant matter into liquid fuel that combines both thermochemical and biological techniques.

The process, Imbler says, realistically could let Zeachem get 135 gallons of fuel for every bone dry ton (BDT) of plant matter. Theoretically, you could get to 160 gallons, but the additional expense would eviscerate the gains.

Competing processes, such as turning plant matter into synthetic gases, or having genetically enhanced bacteria do the job focused on one approach or the other only yields 90 to 115 gallons. High capital costs and delays have already put the cellulosic ethanol industry behind schedule. Congressional mandates to get 100 gallons into circulation in the U.S. next year will likely be missed. Instead, only around 28.5 million gallons will get pumped out.

So far, Zeachem has only demonstrated that it can produce fuel at those levels in lab bench tests and computerized simulations. It will next build a 1.5 million gallon-a-year facility to unwind unforeseen kinks and operational issues that crop up in actual production. That should be complete by the middle of next year.

If all goes well, a 25 to 50 million gallon-a-year facility will follow. Zeachem, by the way, isn't the only ethanol maker taking a combination approach. Coskata, which is working with GM, also mixes biology and industrial chemistry.

How does it work? After separating plant matter into cellulose, hemicellulose, and lignin, Zeachem employs a microbe to convert cellulose and hemicellulose – which can account for 61 percent of the material in wood – into acetic acid, the signature ingredient of vinegar, rather than alcohol. The conversion into acetic acid does not give off carbon dioxide, leaving more carbon in the fuel.

Meanwhile, the company cooks the lignin to extract hydrogen. The hydrogen is subsequently combined with the acetic acid to produce ethanol. Two-thirds of the energy in the ethanol comes from the acetic acid, while one-third comes from the added hydrogen, said Imbler, which is similar to the ratio of initial molecules from the wood. In a sense, the company is blowing apart wood and reforming it as an alcohol.

"And we have no new bugs and no new equipment," he said. In other words, genetically modified plants aren't needed and the company uses conventional chemical processing equipment.

The company's process is optimized for making fuel out of hybrid poplars, but Zeachem continues to experiment with eucalyptus and other plants. Although hybrid poplars might prove to be the best trees for fuel, expect to see a variety in the future. Tree companies and ethanol refiners don't want to become dependent on a monoculture that could be wiped out or seriously damaged by an unknown pest.

"The forest of the future is going to be more of a mosaic," he said.

Expect to see fairly substantial improvements in forest yields as well. To date, tree producers have bred trees to produce wood for structures or furniture, i.e. hard, durable wood. That's the opposite in some ways of what you want for ethanol. Tree producers have only just begun to think of liquid fuel as a primary market. The breeding for these qualities thus is just beginning. Some early breeders are already reporting 20 BDT per acre. Many of these types of trees could be grown on marginal land.

Even if you knock it down to 15 BDT, the company could possibly support a 100 million gallon a year plant with 50,000 acres.

Zeachem will likely not aim at the general transportation market. Like some other ethanol providers, it will aim at big customers with trucking and transportation depots that buy fuel directly.