By Vidhan Rana

Until a few years ago, ethanol, biofuel or bio-diesel were the words that came to mind when one talked about the alternative energy industry. Today, however, solar and wind seem to be the buzzwords. While the number of new wind farms and photovoltaic cell manufacturing plants has increased over the last few years, new biofuel plants have dwindled. However, the biofuels industry is poised for a comeback.

While new bio-fuels project announcements peaked in 2006 at 201 projects, they totaled a mere 66 in 2008. The chart below shows the number of new project and expansion announcements in the United States between 2003 and 2008 in the biofuel industry. In total, there were 604 bio-fuel related projects in the United States in those six years. Approximate net investment stood at around $50 billion, or $84 million per project.

The above chart does not mean that the biofuel industry is in a decline. Opening a new bio-fuel plant can be an expensive business. With the economic downturn and the lack of credit both hitting producers around the same time, new projects were hard to undertake. There was also some overcapacity in the market due to the high volume of activity in 2006 and 2007. In addition, low gasoline prices meant that some forms of biofuel could not compete with gasoline economically. The situation became so dire that a number of major ethanol producers filed for bankruptcy in 2008 and 2009.

However, the Energy Information Administration, a part of the US Department of Energy, expects biofuel demand to increase over the next 10 years. In fact, the Department of Energy projection shows the demand for oil-based fuel (gasoline, diesel and jet-fuel) declining over the next 10 years. The chart below shows the demand pattern of oil since 1970 (numbers after 2008 are projections).

As the economy comes out of the current recession, demand for biofuels is expected to go up again. New government regulation to increase fuel standards and the Obama Administration’s push for energy efficiency will also boost the demand for biofuels. Last year 7% of the gasoline Americans pumped into their tanks came from plant-based fuel. According the to the Energy Information Administration, that number is likely to double over the next decade as mandates for more biofuels are implemented.

Another trend that is likely to impact the biofuel market is the mandates that say that all fuels cannot be made from corn, the most popular raw material for ethanol. Governments all around the world are concerned that if too much corn is used for ethanol production it may increase the prices of corn-based food products. As a result, companies are increasingly looking to convert municipal and industrial waste, wood pallets and a number of different materials into biofuels. Whittaker Associates identified over 50 up-and-coming start-ups that are banking on the projected increased demand for biofuels and are making major investments in the industry.

As demand for biofuels rises, new plants will be built and existing plants will be expanded.