A plan has been put forth to strategically thin northern California forests to reduce fire danger and improve forest health. The resulting biomass residue, instead of being open burned, can be converted into ethanol that can be used as a fuel oxygenate or an octane enhancer. Economic potential for a biomass-to-ethanol facility using this softwood biomass was evaluated for two cases: stand-alone and co-located. The colocated case refers to a specific site with an existing biomass power facility near Martell, California. A two-stage dilute acid hydrolysis process is used for the production of ethanol from softwoods, and the residual lignin is used to generate steam and electricity. For a plant processing 800 dry tonnes per day of feedstock, the co-located case is an economically attractive concept. Total estimated capital investment is approximately $70 million for the co-located plant, and the resulting internal rate of return (IRR) is about 24% using 25% equity financing. A sensitivity analysis showed that ethanol selling price and fixed capital investment have a substantial effect on the IRR. It can be concluded that such a biomass-to-ethanol plant seems to be an appealing proposition for California, if ethanol replaces methyl tert-butyl ether, which is slated for a phaseout.