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A new factory that hopes to break oil鈥檚 stranglehold over America鈥檚 transportation sector has just opened its doors in Iowa.

The $275 million factory will churn out ethanol 鈥� a renewable fuel that can be blended directly with gasoline and used normally in cars and trucks. However, this factory won鈥檛 produce traditional ethanol, which is made from corn. Instead, it will use farm waste from left over corn stalks, husks, corncobs, and leaves.

Dubbed聽Project Liberty, the new cellulosic ethanol factory in Iowa promises a 鈥渘ew era鈥� for renewable fuels. It is the second commercial-scale cellulosic ethanol plant to be constructed in the United States, after the聽Indian River BioEnergy Center聽in Florida, which produces 8 million gallons of cellulosic ethanol annually from yard and municipal waste.

Project Liberty will up the ante, producing an estimated 25 million gallons of ethanol each year. Backed by a聽$100 million investment聽from the U.S. Department of Energy, the project was spearheaded by a partnership between the American firm POET, and Dutch biotech company DSM. It will source its feedstock from Iowa farmers within a 40-mile radius of the plant.

This is a major step forward for renewable fuels. The much-maligned corn-based ethanol competes with food supplies, contributes to a rise in food prices, uses up farm land, and in the end, the greenhouse gas benefit is trivial, if not nonexistent. 聽

The big question is what this plant will mean for the cellulosic ethanol industry going forward.

Cellulosic ethanol has struggled for years to economically produce usable fuel, disappointing projections about cost and scalability. The U.S. has a renewable fuels standard in place, which calls for 16 billion gallons of cellulosic ethanol to be blended in to the nation鈥檚 fuel supply by 2022, a target that will be all but impossible to meet.

Part of the reason is that the technology needed isn鈥檛 easy. Breaking down cellulose is tough work, as Purdue University鈥檚 Wallace Tyner explained to聽Fortune: 鈥淭he technologies didn鈥檛 advance as fast as people thought or hoped they would. Cellulosic feedstocks are really recalcitrant. It is really difficult to break out the cellulose and hemicellulose from the lignant,鈥� he said. Corn ethanol can be produced 60 cents to $1.67 per gallon cheaper than its cellulosic counterpart. As a result, the entire renewable fuels mandate is being met by the corn variety.

But the industry is gaining momentum. Dupont expects to open a facility in Iowa by the end of the year that would produce聽30 million gallons per year. Abengoa Bioenergia plans to open a biomass power plant and ethanol production facility in Kansas聽this month. Just like the other plants, the Abengoa facility will not only use farm waste to produce 25 million gallons per year of cellulosic ethanol, it will also use similar waste products to generate 22 megawatts of renewable electricity.

And the Project Liberty site hopes to be a test case that can be replicated worldwide. If it proves itself to be an attractive source of renewable fuel, the technology can be licensed and copied elsewhere.

It is still early days for cellulosic ethanol, but the enormous volumes of corn ethanol in the mix have already riled up the oil industry. Representatives from energy interests are in a聽heated battle聽in Washington over the Renewable Fuels Standard, with each side hoping to persuade Congress and the Environmental Protection Agency. Each year, the EPA sets the blending requirements, which dictates how much ethanol must be blended in to the fuel supply.

The oil industry wants weaker requirements for blending in ethanol. The American Petroleum Institute says that using more ethanol could cause聽damage聽to millions of cars that are not equipped to handle higher concentrations. It also says there isn鈥檛 enough infrastructure and fueling stations.

The ethanol industry, obviously, disagrees and wants a firm mandate. They聽criticize聽the oil industry for fear mongering, and accuse them of purposefully opting not to invest in the requisite infrastructure.

EPA is expected to announce a standard in the coming weeks. Whatever the outcome, cellulosic ethanol will be just a sideshow. But if Project Liberty is successful, that could one day change in a big way.

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