Algae Biofuels Offer Enormous Promise, Face Tough Production and Cost Challenges to Scale

Jose Michael

The 2008 Algae Biomass Summit (23-24 October), organized by the Algal Biomass Organization, drew more than 600 algae producers, scientists, engineers, investors and policy-makers from more than a dozen countries to Seattle to pitch, listen and network on emerging algae-based solutions to global energy, environmental, and economic issues.

Amid the tremendous enthusiasm was a recognition that the field, while extremely promising, also faces difficult technical and economic challenges if it is to scale to be a significant component of a global energy solution. Algae have the potential to help keep humanity from going over the cliff, said Dr. Mario Tredici, Professor of Microbiology, University of Florence, Italy, in his opening talk at the conference, “but there is a necessity to identify the limitations of the technology and establish its true potential.”

The first main limitation, said Dr. Tredici, is the low actual photosynthetic efficiency (PE) (which he suggested to be around a high of 5% currently—about the same as C4 terrestrial plants) and volumetric productivities of algae in mass cultures.

The second limitation is not acknowledging that there are limitations. Algae do not make miracles...they obey the laws of thermodynamics.

—Mario Tredici

Among the subsequent sessions on topics such as research directions, open algae ponds, photobioreactor design, strain optimization, harvesting, and lipid extraction technologies, the conference placed a panel of three venture capitalists—two who have taken positions in algae companies, one who has not—and a keynote from Vinod Khosla, who also has yet to take a position in an algae company.

Khosla has invested in a number of cellulosic ethanol companies (Mascoma, Range, Coskata, Lanza) and companies making other advanced biofuels (Amyris, LS9, Gevo and KiOR).

Khosla said that his venture group had looked at “maybe 100” different plans on algae over the last few years, and had passed on all the opportunities. However, he said, he continues to believe in the potential, and was convinced algae will work, “but it will be a different, out of the box approach. I am convinced somebody here will break the code.

One of his main messages was that the successful algae company(ies) will not be competing against other people in the algae companies; rather, everyone is competing in the fuel business. Khosla outlined his five rules for investing in a company, and explained why he had yet to select an algae company.

  1. Attack manageable but material problems. Building algae refineries is manageable and material, Khosla said. We have enough land and sunlight. (Hydrogen, he added by way of example, is not manageable from this perspective.)

  2. Is it a technology that achieves unsubsidized competitiveness? Khosla said that they only invest in things that within 5-7 years can obtain unsubsidized market competitiveness. Based on a reference baseline of $50/barrel of oil, algae fails that test, he said. (Despite the upswing in oil prices that has since deflated, Khosla said they have kept their reference price at $50 for two years.)

  3. The technology has to scale.

  4. There must be manageable startup costs and short innovation cycles.

  5. There must be declining costs.

There is not enough money in the world to subsidize any energy technology and have it be the dominant technology...The issue [with algae] is that we don’t believe that the current set of technologies can achieve unsubsidized market competitiveness.

—Vinod Khosla

The venture panel comprised Josh Green, Partner, Mohr Davidow Ventures, who moderated; Robert Nelsen, Co-founder and Managing Director, Arch Venture Partners; and Jim Long, Venture Partner, Gabriel Ventures.

Green, who has yet to invest in algae, said he was “agnostic” about the potential. Nelsen has a stake in algae company Sapphire Energy, which has raised more than $100 million (earlier post). Long has algae company Aurora Biofuels as a portfolio company.

Nelsen said that he thought there will be many winners in the algae space—some making fuels, some providing technology to people making fuels. A successful algae company, Nelsen said, will have something that can’t be easily integrated out by a large competitor.

From a fuel perspective, it’s cost and scale. The idea that people will pay more for cute fuels just doesn’t work. [The algal fuel] will have to compete on a dollars per gallon basis. There are government interventions—either direct subsidy or indirect [e.g. a carbon cap] that effects the equation. Since we don’t know that, we assume no subsidy and no carbon tax at all. We have to be able to exist in a world that doesn’t provide anything.

...Sapphire is going for scale. We’re talking 1 million [barrels] per day, 5 million targets. we don’t want to be in this business unless can fundamentally impact the transportation fuel mix in the world. It’s a grand goal...but that is a different business plan from someone who wants to make a lot of biodiesel.Robert Nelsen

Long and Nelsen both agreed that eventually genetic engineering will likely be part of a successful company’s approach.

If it [the company’s solution] is just process engineering, and there is not some element of biology in strain selection...then little companies will lose. Big companies are really good at process engineering.

—Robert Nelsen

(Along those lines, Cellana, the joint venture between Shell and HR Biopetroleum, and Eni each presented their work in the algal area at the conference.)

Long noted that it is getting late to begin a startup in the algae arena for fist-generation algal fuels, and that the bar for differentiation for such a latecomer has been raised as well. All agreed that the current financial environment has created additional strains—that will likely last for several years—on the nascent industry.

It comes down to building value. What’s the single most important thing you can do in next 12 months to have breakthrough, file a key patent, that’s what you do first. Raise money to lower the risk in your project to increase your value, so you can go out and raise some more. You’ve got to size the money to the market opportunity as well as to the key milestone you need to reach, to focus on the one or two key things, to focus on as little money as you can to get to those. That will make the most interesting investment.

—Jim Long
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