Biofuel company Mascoma said today it has the financing and the customer needed to build a biorefinery in Michigan to make ethanol from wood.

The company said that oil refiner Valero Energy will invest up to $50 million in equity needed for the project, which is expected to start construction later this year.

Click on the photo to see inside Mascoma&39's Lebanon, N.H., laboratory which is developing the cellulosic ethanol process.

The entire project is expected to cost $350 million which will be funded by a Department of Energy loan, the state of Michigan, Valero, and other investors, a company representative said. With the Energy Department loan guarantee, Mascoma's subsidiary in Michigan, Frontier Renewable Resources, expects to raise debt for the project as well.

The Kinross, Mich., plant anticipates using locally harvested pulpwood, the wood used for making pulp for paper, and convert it into ethanol at a rate of 40 million gallons per year.

Valero has also agreed to use the ethanol in its refining. Up to 10 percent of the fuel from gas pumps includes ethanol, now made from corn.

If the plant goes ahead as planned, it will be a significant step forward for the cellulosic ethanol industry which has fallen short of expectations. Ethanol made from agriculture and forestry residue is considered more environmentally sound than using corn as a feedstock.

The 2007 energy law called for 5 million gallons of cellulosic ethanol last year but less than 1 million gallons were produced, according to a recent analysis from ClimateWire.

Cellulosic ethanol companies had promised to have commercial-scale plants operating by now, but were beset by technical and financial problems. Mascoma, which has been running a pilot plant in Rome, N.Y., has been working on securing the funds to finance the Michigan biorefinery for over a year.

Mascoma has a technology that uses genetically engineered microorganisms to break down the cellulose in plants and produce ethanol, a streamlined process designed to lower the cost of production.

The Michigan plant proposal has come under fire by some groups, including the Sierra Club, which have legally challenged the air permit provided to the plant, according to an AP report.