POET, which currently produces 1.5 billion gallons a year of ethanol from corn, said its one-year old pilot plant has reduced the cost of making ethanol from corn cobs from $4.13 a gallon to $2.35 a gallon by cutting capital costs and using an improved "cocktail" of enzymes.

Moreover the company said that it can use a byproduct called lignin as fuel and that it would provide all the energy needed for the cellulosic plant as well as 80 percent of the energy that would be needed by a conventional corn-based distillery making twice the amount of ethanol.

"Two years ago I would have told you this was a long shot," said POET chief executive Jeff Broin. "Now I'll tell you that we will produce cellulosic ethanol commercially in two years."

POET launched the cellulosic ethanol pilot plant one year ago in Scotland, South Dakota and Broin said that the plant had figured out how to cut capital costs by 40 percent, cut the amount of energy used in pre-treatment stages and lowered enzyme costs.

He said that farm equipment manufacturers were already designing, and in two cases selling, equipment needed to collect the corn cobs from farmers' fields.

For farmers, the advance could mean extra income. Broin said that an acre of corn field could produce 480 gallons a year of corn-based ethanol and 55 gallons more from processing cobs, leaves and husks.

While a large step forward for POET, the advance would still not assure the United States of enough motor fuel supplies or meet the congressional mandate that refiners use 16 billion gallons a year of cellulosic ethanol by 2025. Broin estimated that the nation currently could produce 5 billion gallons a year of cellulosic ethanol from corn cobs -- about 3 percent of current motor fuel consumption -- and perhaps 10 billion gallons eventually.

Other companies are doing research on how to make cellulosic ethanol from other raw materials such as wood chips and switch grass.

Broin also pressed the Environmental Protection Agency to relax rules limiting the amount of ethanol that can go into regular gasoline. That limit now stands at 10 percent though ethanol makers have applied for an increase to 15 percent. Broin said that EPA must issue a decision by Dec. 1.

"It's critical to move the blend wall for cellulosic ethanol to become a reality," he said.

Oil companies can sell a separate product for vehicles with 85 percent ethanol, known as E85, but that requires special equipment at gasoline stations and E85 pumps are still rare. In addition, many automobiles are not designed to use large amounts of ethanol, which can damage certain parts. Many vehicles, however, are designed to use either E85 or regular gasoline.