Emerging energy star

Microsoft Chairman Bill Gates recently invested millions in it. Morgan Stanley is a huge player. And scores of venture capitalists are starting to take a look as well.

We're talking corn, not cyberspace.


Once the domain of farmer-funded cooperatives in Midwest backwaters, grain-based ethanol has become a rock star of energy investments as Wall Street money chases new projects from California to Maryland, where at least two efforts to build production plants are gaining momentum.

"Wall Street has woken up and seen what farmers have created and are saying, 'Hey, we want a piece of this, too,'" said Bob Dinneen, president of the Renewable Fuels Association, a Washington-based trade group.


The alternative fuels gold rush is being driven by continued instability in the Mideast, rising gas prices and a presidential appeal to reduce the nation's addiction to oil.

In the minds of big investors, the changing energy landscape makes ethanol close to a sure thing. The industry's growth trajectory is all but written into the Energy Policy Act of 2005, which requires the U.S. to use 7.5 billion gallons of renewable fuels annually by 2012, or nearly double the amount of ethanol produced today. The fuel additive is primarily distilled from corn and blended with gasoline to boost its octane and reduce tailpipe emissions. The fuel is found in about 30 percent of the gasoline sold in the U.S.

Ethanol proponents say the days when the industry squeaked by on government subsidies are over. "All of those past struggles are more or less gone," said Boris Maslov, a Vienna, Va.-based entrepreneur who is working on a plan to build an ethanol plant at Sparrows Point in Baltimore County. "Even the least energy-efficient ethanol plant in Minnesota is making money."

Maslov, a principal partner in Ecron Corp., a startup firm pushing alternative fuels, is symbolic of ethanol's growing appeal to nontraditional players outside the Corn Belt.

To fund his project, Maslov plans to enlist a Virginia-based investment bank to help raise as much as $120 million in development money from Wall Street and beyond. Though still in the planning stages, he hopes to attract enough investors to build a string of additional plants in the Mid-Atlantic, from Virginia to Pennsylvania.

Following a more traditional farmer-led model is a group that has been trying to build a barley-fed ethanol plant in Maryland - possibly on the Eastern Shore - for almost five years. The effort has been plagued by cost concerns and logistics, but the group says it is closer than ever. After years of tweaking, proponents say they have identified a business model that will make money and could be ready to move forward later this year.

"We have to show them that East Coast ethanol can be as profitable as Midwest ethanol," said Lynne Hoot, executive director of the Maryland Grain Producers Association. "I think we can do it."

Growing industry


If they or others are successful, Maryland could soon join California, Colorado, Ohio, New Mexico, Texas, New York and other states that are seeking to expand the ethanol industry beyond its Midwest roots. In the past year, 43 ethanol refineries opened, began construction or expanded nationwide, and dozens more have been proposed, according to the Renewable Fuels Association.

Currently, Maryland consumes a tiny fraction of the roughly 4 billion gallons of ethanol produced nationwide. One reason is that the Baltimore/Washington corridor gets most of its fuel by pipeline. Ethanol can't be moved by pipeline because it separates from gas during transport, causing a layering effect that would cause engine problems, experts said. That means it has to be shipped separately to the East Coast and then blended at fuel terminals, which is less economical.

But that could quickly change as the fuel industry phases out use of methyl tertiary butyl ether, a competing fuel additive historically favored by the oil industry and commonly blended with Maryland fuels.

MTBE has been added to gasoline to make it burn more cleanly and reduce emissions since the late 1970s. But in recent years it has been linked to groundwater pollution, leading many states to ban its use in favor of ethanol. A similar ban has been considered in Maryland, where MTBE - a suspected carcinogen - has turned up in drinking water in Harford County and other parts of the state.

"MTBE is hemorrhaging in the marketplace, and as it comes out, ethanol is filling that void," Dinneen, the RFA president, said.

Ethanol profits have soared along with the decline of MTBE and the rising price of gas. Not long after last fall's Gulf Coast hurricanes drove gas prices higher, Cascade Investment, an investment firm owned by Bill Gates, agreed in November to purchase an $84 million stake in Fresno, Calif.-based Pacific Ethanol Inc. The company plans to build up to five ethanol plants on the West Coast.


Also in expansion mode is Aventine Renewable Energy Holdings, a Pekin, Ill., ethanol producer that is majority owned by a spinoff of Wall Street firm Morgan Stanley Capital Partners. The company has broken ground on an ethanol plant designed to produce about 56 million gallons a year to complement a 100-million-gallon wet mill it already operates.

'A lot of credibility'

"I think having that type of interest [from Wall Street firms] brings a lot of credibility to the ethanol industry," said Roger Bushue, vice president of business resources for Aventine. "You're having some savvy folks, business people, who see the potential of the industry and understand the business side of things," he said.

An unknown in the ethanol industry, Maslov is drawing on his business savvy to draw attention to Ecron's plans to build a 100-million-gallon plant in Maryland. A Moscow native and electrical engineer by training, he was at the forefront of Russia's budding entrepreneurial movement after the breakup of the former Soviet Union.

In the late 1980s, he formed a computer repair company that he says eventually employed about 40. Later, he went to work as a fundraiser and business developer for a pair of Moscow nonprofits. One was the Culture Initiative, a Moscow foundation financed by billionaire philanthropist George Soros, and the other a foreign policy group launched by Eduard A. Shevardnadze, the former Soviet foreign minister.

Maslov said he traveled extensively working for Shevardnadze in the early 1990s, but eventually settled in America, where he and partners from his home country launched a series of businesses. They included an investment consulting firm that advised U.S. and Russian firms seeking to invest overseas, and a company that developed high-tech electric motors for bicycles and scooters. The latter attracted more than $50 million in capital from Washington-area investor Allen Andersson, who transformed the business into WaveCrest Laboratories. The company moved to Detroit and is adapting its electric motors for a variety of uses, including cars, scooters and mass transit.


Maslov is starting from scratch in the ethanol business, which has left some Maryland officials cautious about his prospects for getting a plant built. For starters, he plans to make the fuel additive from corn, which will have to be shipped from out of state because most of Maryland's grain is used by the poultry industry concentrated on the Eastern Shore. Transportation costs will make the plant more expensive to operate than its Midwest counterparts.

But Maslov and his partners have been meeting with industry experts and reaching out to a design firm that will create plans for the Maryland plant once financing is in place. And he is negotiating to lease a parcel on Sparrows Point. If successful, he may have to contend with homeowners in surrounding communities, who have recently voiced opposition to a proposed liquefied natural gas facility at Sparrows Point.

State and Baltimore County economic development officials have offered advice about regulations and permits, but Ecron remains a long way from submitting a formal application to build. Even then, obtaining the necessary state and county permits could take more than a year, state officials said.

"One clearly is drawn to the alternative fuels discussion these days, so from that standpoint, the department is interested," said Robert L. Hannon, an assistant secretary for the Maryland Department of Business and Economic Development.

Few funding worries

Maslov says he has few worries about whether investors will put up the millions of dollars needed to fund the project and a string of others. "The attitude of investment companies and big firms is definitely for ethanol," he said.


Washington-area venture capital analysts agree that ethanol is creating a certain amount of buzz. "It's not a large sector like biotech or telecommunications, but as a sort of sub-sector, there is a lot of interest in alternative energy and things along those lines," said Mark Esposito, part of PricewaterhouseCoopers' venture capital support division in Virginia.

Julia Spicer, executive director of the Mid-Atlantic Venture Association, described it as an "evolving" niche sector that venture firms are just starting to investigate in areas outside of the West and Midwest.

"Energy generally is clearly becoming a very hot topic, as it probably should be," she said.