SCOTLAND, S.D. - Cellulosic ethanol, the next big hope for a biofuels industry hampered during the past year by volatile commodity price swings and shrinking profit margins, is continuing its slow march toward commercialization.

Poet LLC, the nation's top ethanol producer, has opened the spigots on an $8 million pilot-scale biorefinery at its Scotland, S.D., research center that will produce 20,000 gallons of fuel each year from the corn cobs and fiber normally left behind in fields.

Poet's demo plant is a precursor to a larger $200 million commercial-scale biorefinery scheduled to open in Emmetsburg, Iowa, in 2011.

The privately held firm is one of several backed by hundreds of millions of dollars in U.S. Department of Energy grants aimed at jump-starting the evolution to fuels made from such non-corn feedstocks as switchgrass, wheat straw and wood chips.

Poet has been making ethanol from corn for more than 20 years, but Chief Executive Jeff Broin said that adding cobs into the mix will increase the ethanol yield of each corn bushel by 11 percent and the per-acre yield by 27 percent.

Production growth in both areas will help the U.S. reach an aggressive renewable fuels standard that will require 36 billion gallons of biofuels to be blended into gasoline by 2022, Broin said.

"There's tremendous potential in both grain-based and cellulosic ethanol to significantly reduce our country's dependence on energy," he said.

Nearly all of the ethanol produced domestically comes from corn, and 2008 was a tough year for the industry. VeraSun Energy Corp., the nation's No. 2 producer, filed for Chapter 11 bankruptcy protection after tightening credit markets erased its lifeline to weather the swings in corn and fuel prices. And shares of Aventine Renewable Energy Holdings Inc., Pacific Ethanol Inc. and BioFuel Energy Corp. all lost about 95 percent of their value during the year.

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