It’s a bold vision: Replace billions of gallons of gasoline not with ethanol from corn or other food crops but with biofuels made from plants, such as prairie grass in Tennessee pastures or algae percolating in Florida. Such a move would slash dependence on oil, create thousands of jobs, and reduce emissions that contribute to global warming. In the U.S., the idea has powerful political support. Congress has decreed that the country must be using 21 billion gallons of “advanced” biofuels a year by 2022. Washington is backing that goal with tax breaks, loan guarantees, and scores of millions of dollars in grants, with more support expected in upcoming energy bills. These inducements and the vast potential market have stimulated investments of more than $3 billion and spawned a new industry.

More than 200 companies, from 12-person startups to oil giants, are developing next-generation biofuels using a bewildering array of technologies. Pilot and demonstration plants are operating or are under construction from Florida to California. “We can have it all: more fuel, more food, and fewer carbon emissions,” says John B. Howe, vice-president of Verenium (VRNM), a Cambridge (Mass.) company that makes ethanol from sugarcane waste at a demonstration plant in Jennings, La.

Yet behind the very real innovations and investments, the brash claims and the breathless headlines, lies an inconvenient truth. Replacing petroleum with biofuels is a tough business. Even as the industry develops, many of the companies-probably most-will not survive. “We’ve seen a venture capital-led bubble,” says Alan Shaw, CEO of Codexis, a Redwood City (Calif.) manufacturer of enzymes used to make drugs, chemicals, and biofuels. “I cannot see how the small companies can build a business and still get a return to their original investors. The numbers just don’t add up.” 

Click here for the rest of this article.