Commercial quantities of cellulosic ethanol are finally at hand. No, really this time! The U.S. Environmental Protection Agency originally mandated that 1 billion ethanol-equivalent gallons of cellulosic biofuel be produced in 2013 before dialing back expectations to just 6 million gallons, then a paltry 0.81 million gallons. That's quite the gut-check, but don't be fooled into thinking cellulosic ethanol doesn't represent a sizable opportunity. By the end of 2014 three major facilities in the United States with a combined annual capacity of 80 million gallons will have started operations.

That may sound like a drop in the bucket of the fuels market -- and it is -- but the facilities will become strategically important proving grounds for each technology and company or collaboration. Once the processes are proven over the next 12-24 months there will be many opportunities to license technology or expand capacity -- creating a potential boon for investors. So what are the best stocks to buy in cellulosic ethanol now?

DuPont (NYSE:DD)

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At 30 million gallons per year, DuPont has built the largest of the three domestic cellulosic ethanol facilities coming online this year, besting the 25 million gallon facilities of POET-DSM (Project Liberty) and Abengoa and Dyadic International. That doesn't make the company's efforts any more important from a commercial application standpoint, but it is the only company traded on a major exchange. DuPont's facility supports farmers within a 30-mile radius covering 815,000 acres of farmland, and yields an additional 150 gallons of ethanol from a single acre of corn.

What's in it for investors? DuPont, already a leader in industrial biotech, has the opportunity to cement a leadership position in cellulosic ethanol. The company could license its technology to existing first-generation ethanol producers or partner with companies that have access to raw agricultural wastes, enzymes, or existing facilities available for retrofits. Cellulosic ethanol will certainly become a major focus for the company's overall growth strategy through the end of the decade.

Royal Dutch Shell (NYSE:RDS-A)

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Don't forget about Brazil -- Royal Dutch Shell certainly hasn't. Raizen, a joint venture with agricultural leader Cosan and one of the top five companies in the country by revenue, has committed to building eight commercial scale cellulosic ethanol facilities in Brazil by 2024. The first is slated for completion at the end of this year and will boast an annual capacity of 40 million gallons. It also has help from Novozymes, one of the world's leading enzyme (needed to breakdown cellulose into cellulosic sugars for microbes) companies, which will collaborate with Raizen on future facilities as well.

What's in it for investors? Well, the ability to leverage its market-leading logistics and raw material machine makes the ambitious target of eight commercial-scale facilities very attainable if the economics prove worthwhile. It may be a little more difficult for Royal Dutch Shell shareholders to feel the benefits of cellulosic ethanol when fossil fuels are drowning them out in financial statements, but the company could build a respectable additional revenue stream from cellulosic technology.

Valero Energy (NYSE:VLO)

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The first traditional refiner to enter production of ethanol was, you guessed it, Valero. The company owns and operates 11 first-generation ethanol facilities -- all of which were acquired. So, if Valero isn't developing novel technologies in-house, what makes it among the best stocks to buy in cellulosic ethanol?

Investors should remember that the company hasn't shied away from a presence in renewable fuels (it also produces next-generation renewable diesel) and renewable energy (...and a wind farm), even when it required significant upfront investment. More importantly, as a refiner and manufacturer of gasoline, Valero will be required to blend an increasing amount of cellulosic ethanol into its products as domestic production ramps up. The last time that happened it built a portfolio of production facilities to slash blending costs and turn subsidies into a revenue stream.

Investors should know that there is a push, both in early stage funding and technology development, to replace ethanol fuel with drop-in renewable fuels. However, there is a robust global demand for ethanol as a gasoline blendstock that will enable a similarly robust cellulosic ethanol industry. Not to mention that the business and technology strategies for cellulosic ethanol is widely applicable to the biological production of various other renewable fuels and chemicals.

I foresee a future where cellulosic ethanol takes the place of first-generation corn ethanol, since there isn't room for both. Whatever happens, these pioneering companies -- and those looking to jump into the industry once technology platforms have been proven -- offer investors a shortlist of the best stocks to buy.

Maxx Chatsko has no position in any stocks mentioned. Check out his personal portfolioCAPS pageprevious writing for The Motley Fool, or his work with SynBioBeta to keep up with developments in the synthetic biology field.

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