Guilt-free ethanol: Pearson fuels.

Guilt-Free Ethanol: Pearson Fuels, which owns an alternative energy station in City Heights and a handful of ethanol pumps at service stations around the state, is partnering with Cupertino-based AE Biofuels to sell ethanol made from grass and agricultural waste products. Financial terms of the deal were not disclosed.

Most ethanol today comes from corn and sugar cane, which critics say drives up food costs. However, this ethanol is made from waste products called cellulosic.

"Everyone has been talking about cellulosic for years, but none has been out there," said Pearson Fuels General Manager Mike Lewis, who adds that AE Biofuels will provide up to 100,000 gallons of cellulosic ethanol--a quarter of his annual ethanol sales--as it ramps up production in the next year at its Montana facility and other plants it's outfitting for cellulosic production.

Pearson Fuels opened the first E-85 fuel station in California six years ago. E-85 refers to a mixture of 85 percent ethanol and 15 percent gasoline. It can be used in new flex-fuel cars, which can run on either gasoline or ethanol.

Ethanol is used as a gasoline additive because it burns cleaner. It generates fewer greenhouse gases than gasoline and reduces U.S. dependence on foreign oil.

E-85, which is 20 percent less efficient than unleaded gasoline--an unleaded gas tank requires eight gallons for drivers to go the same distance as 10 gallons of ethanol--costs $2.29 a gallon, on par with today's price of unleaded. In July, when gasoline cost more than $4 a gallon, ethanol was a relative bargain at $3.50, says Lewis.

He says if gasoline prices start rising again to a differential of 50 to 75 cents higher than ethanol, he'll sell 400,000 gallons of E-85 next year.

"(Demand) varies wildly with the price of gasoline," he said. "Our volume is about a fifth what it was less than a year ago."

Yet E-85 is the only alternative fuel commercially viable at the moment, he says, pointing to the 50 flex-fuel car models available in 2009, compared with one natural gas model and no hydrogen models.

Pearson Fuels, which will have a dozen E-85 pumps open by July, accounts for about half of the E-85 supply available to the public, Lewis says.

Send technology news to Ned Randolph at [e-mail].