New York (Platts)--24Sep2009/759 pm EDT/2359 GMT

As the public comment period ends Friday for landmark US renewable fuel targets, production expectations by the Environmental Protection Agency for at least one category, cellulosic biofuel, are being questioned.

The revised US Renewable Fuel Standard (RFS2), released in May, mandates the use of 100 million gal/year of cellulosic biofuels starting in2010, followed by 250 million gal/year in 2011. The mandate rises to 16billion gal/year in 2022.

However, ThinkEquity analyst David Woodburn said Thursday he does not think cellulosic production in 2010 will meet mandated levels. While the EPA has said it anticipates cellulosic biofuel production of100 million in 2010, Woodburn said he expects production capacity next year at only about 39 million gallons. Low plant utilization rates mean actual output could be "less than half" that level, he said.

Project financing remains an issue, Woodburn said. "Pretty much anybody that's got solid plans...project financing is the thing that is holding them up," including government loans and approvals, he said.

While EPA may adjust its cellulosic production forecast, said Woodburn,the agency will probably not adjust the actual RFS2 mandate since it can meet production shortfalls with a credit system. That credit system is yet to be created, he added.

Ethanol lobbyists, for their part, say investment funds could be stimulated if EPA decides to raise the acceptable ethanol-gasoline blend for conventional vehicles to 15% ethanol from the current 10%.

FOUR COMPANIES

Production from four companies-- Cello Energy, Range Fuels, Fulcrum Bioenergy and Southeast Renewable Fuels -- account for more than 90% of the EPA's 100 million gallon estimate of cellulosic biofuel production in 2010.

Cello Energy, an Alabama company with a 20 million gal/year plant in that state, was expected by EPA to account for more than 70 million of the total production next year, after it built another three plants.

When first announcing its RFS2 proposal, EPA called Cello an "exception" to a cellulosic biofuel industry that was "essentially in its infancy."

Woodburn, however, disagreed with EPA's high hopes for Cello, saying it would be a "questionable" move by the agency to include more than "a small amount,"or less than 5 million gallons, of Cello production in its 2010 forecast until Cello had proven production and had actually built its plants.

An EPA spokeswoman Thursday declined comment on Cello.

During a trial this summer over a contract dispute with investors,evidence was submitted that showed production from Cello's cellulosic diesel plant did not contain any bio-based carbon. The company had claimed it could turn cellulosic material, used tires and plastics into fuel, according to court documents.

"Technically [Cello] does have a plant down there," said Woodburn Thursday. He said Cello head Jack Boykin had told him after the June trial that Cello had so far produced roughly 5,000 gallons of synthetic diesel using wood chips and hay.

Calls to Boykin and a Cello attorney this week were not returned.

TIMELINE DELAYED

Woodburn said Southeast Renewable Fuels' sweet sorghum-to-ethanol process should not be included in EPA's cellulosic production tally because the bagasse -- the fibrous residue remaining after stalks are crushed -- will be used for power generation rather than liquid fuel.

Southeast CEO Don Markley agreed in an interview Thursday, calling his process an "advanced" biorefinery. Either way, the timeline for Southeast's 20 million gal/yr plant has been pushed back due to delays with financing, he said.

RFS2 lists an "end of 2010" start for initial Southeast production of 5 million gallons, but Markley said it is now not expected until the last quarter of 2011, with full capacity hit in early 2012.

Range and Fulcrum officials could not be reached for comment. -

-Beth Evans, beth_evans@platts.com