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In many ways, commercial-scale cellulosic ethanol production still seems a long way off. It’s still marked by high costs and low efficiencies. But these limitations haven’t dissuaded prominent investors from taking the plunge, with VCs like Khosla Ventures pouring over $400 million into startups like Verenium, Mascoma, Range Fuels and Coskata in recent months.

Even the Department of Energy (DoE) has gotten into the game, granting a $12.3 million contract yesterday to Danish chemicals company Novozymes, whose U.S. headquarters are in Franklinton, N.C., to make enzymes for cellulosic ethanol. Novozymes said it would match the two and a half year grant with $12.3 million of its own cash, raising the total investment on the project to $25 million.

The company, which is embarking on the largest R&D project in its history, will develop enzymes to turn the inedible parts of corn, such as the leaves and stalk, into cellulosic ethanol. The project, called DECREASE (Development of a Commercial-Ready Enzyme Application System for Ethanol), seeks to improve the efficiency of its most advanced enzyme system by two-fold. The DoE hopes to make it cost competitive with gasoline by 2012.

Novozymes received an $18 million award from the DoE in 2001 to develop better enzymes and to improve its biofuel production processes.

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