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Abstract Background Developing economically viable pathways to produce renewable energy has become an important research theme in recent years. Lignocellulosic biomass is a promising feedstock that can be converted into second-generation biofuels and bioproducts. Global warming has adversely affected climate change causing many environmental changes that have impacted earth surface temperature and rainfall patterns. Recent research has shown that environmental growth conditions altered the composition of drought-stressed switchgrass and directly influenced the extent of biomass conversion to fuels by completely inhibiting yeast growth during fermentation. Our goal in this project was to find a way to overcome the microbial inhibition and characterize specific compounds that led to this inhibition. Additionally, we also determined if these microbial inhibitors were plant-generated compounds, by-products of the pretreatment process, or a combination of both. Results Switchgrass harvested in drought (2012) and non-drought (2010) years were pretreated using Ammonia Fiber Expansion (AFEX). Untreated and AFEX processed samples were then extracted using solvents (i.e., water, ethanol, and ethyl acetate) to selectively remove potential inhibitory compounds and determine whether pretreatment affects the inhibition. High solids loading enzymatic hydrolysis was performed on all samples, followed by fermentation using engineered Saccharomyces cerevisiae. Fermentation rate, cell growth, sugar consumption, and ethanol production were used to evaluate fermentation performance. We found that water extraction of drought-year switchgrass before AFEX pretreatment reduced the inhibition of yeast fermentation. The extracts were analyzed using liquid chromatography–mass spectrometry (LC–MS) to detect compounds enriched in the extracted fractions. Saponins, a class of plant-generated triterpene or steroidal glycosides, were found to be significantly more abundant in the water extracts from drought-year (inhibitory) switchgrass. The inhibitory nature of the saponins in switchgrass hydrolysate was validated by spiking commercially available saponin standard (protodioscin) in non-inhibitory switchgrass hydrolysate harvested in normal year. Conclusions Adding a water extraction step prior to AFEX-pretreatment of drought-stressed switchgrass effectively overcame inhibition of yeast growth during bioethanol production. Saponins appear to be generated by the plant as a response to drought as they were significantly more abundant in the drought-stressed switchgrass water extracts and may contribute toward yeast inhibition in drought-stressed switchgrass hydrolysates.