UPDATE 2-US ethanol production to rise as EPA sets share

* U.S. law requires larger ethanol use in 2011

* Ethanol must be at least 8.01 pct of gasoline market

* US goal is 36 billion gallons of biofuels by 2022
(Adds more ethanol helps farmers, cuts U.S. oil imports)

By Tom Doggett and Charles Abbott

WASHINGTON, Nov 29 (Reuters) - Ethanol sales in the United
States are expected to rise to 13.95 billion gallons (54.27
billion liters) in 2011 from 12.95 billion gallons this year,
the Environmental Protection Agency said on Monday.

The agency, in its annual setting of the renewable fuel
standard, said ethanol and other renewable fuels must account
for at least 8.01 percent of the motor fuels sold in 2011 at
U.S. service stations to comply with a federal mandate.

In July, the EPA proposed a target of 7.95 percent for
2011. However, because gasoline and diesel sales are not
expected to be as strong next year as the EPA had estimated,
renewable fuels will have to account for a bigger share.

The EPA sets the renewable fuel standard every year as
required by Congress, based on gasoline and diesel demand
projections from the U.S. Energy Department.

Congress requires U.S. annual ethanol production to
gradually increase to 36 billion gallons by 2022. Lawmakers
pushed for more ethanol to stretch available U.S. gasoline
supplies and reduce petroleum imports.

More ethanol use, which in the U.S. is made mostly from
corn, will benefit farmers. Nearly 40 percent of the U.S. corn
crop is used to make ethanol. It will also benefit ethanol
producers by soaking up surplus supplies.

Ethanol consumption could be even higher than forecast next
year if EPA clears the way for gasoline blended with up to 15
percent ethanol to be used in older vehicles. The current limit
is 10 percent.

The agency is expected to make that decision in January.

Next year's renewable fuel standard will include 12.6
billion gallons of ethanol made from corn and the remaining
1.35 billion gallons will consist of biodiesel, advanced
biofuels and cellulosic ethanol.

EPA agency slashed the amount of cellulosic ethanol, which
is made from switchgrass and other agricultural waste, that
must be produced next year.

The EPA said five plants were likely to produce 6.6 million
gallons of fuel from cellulose in 2011, far less than the
original target of 250 million gallons. EPA said its target
still was large enough to encourage higher cellulosic output.

"By reducing the standard for cellulosic biofuels, EPA is
accurately reflecting the difficulties cellulosic biofuel
technologies have encountered in obtaining the capital needed
to fully commercialize," the Renewable Fuels Association trade
group said in a statement.

However, the trade group said EPA needed to keep cellulosic
targets ambitious enough to attract investment in the
technologies that will make commercial cellulosic ethanol
production possible in large volumes.

Four companies -- DuPont Danisco DCO.CO, Fiberight, KL
Energy Corp (KLEG.PK: Quote) and Range Fuels -- are expected to
produce alcohols and KiOR aims to produce some cellulosic
diesel fuel in 2011.

Fiberight would be the largest producer at 2.8 million
gallons from a plant in Blairstown, Iowa, whose feedstocks
include waste cellulose from a paper recycling plant.

The largest U.S. ethanol makers, using corn as a feedstock,
are privately owned POET, Archer Daniels Midland (ADM.N: Quote) and
Valero Energy Corp (VLO.N: Quote).
(Additional reporting by Ayesha Rascoe; Editing by Lisa
Shumaker)