Summary:

Aurora Biofuels announced Monday that it has changed its name to Aurora Algae, in hopes of finding commercial markets today in turning algae into nutrients and protein products. It’s not exactly a vote of confidence for the idea of turning algae into biofuel.

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Aurora Biofuels announced Monday that it has changed its name to Aurora Algae, in hopes of finding commercial markets today in turning algae into nutrients and protein products. It’s not exactly a vote of confidence for the short-term plans of algae-based biofuel startups to bring a cost-competitive replacement for fossil fuels to market.

The move — first reported via anonymous sources by Greentech Media last month —makes sense, given the startup’s strengths. Alameda, Calif.-based Aurora’s main technological advantage lies in the work they’ve done to selectively breed strains of algae. Those strains are higher in omega-3 fatty acids than most, and can also out-grow typical strains by a factor of two to one in pilot ponds in Florida and Mexico, CEO Gregg Bafalis tells me. Otherwise, the company is using technologies that have been around for decades: open raceway ponds, well-known algae harvesting crushing techniques, conversion into omega-3 EPA for pharmaceuticals and high-protein feed for fish farms and other purposes.

But while Aurora had first hoped to take its better-growing algae straight to biofuels, it’s decided that the technology for doing so is “really at least several years out,” Bafalis told me. Monday’s shift has been presaged by big changes in the company, with CFO Joe Geesmand and CEO and former Shell veteran Robert Walsh leaving in February, and the company raising $15 million and appointing new CFO Scott McDonald in March. Bafalis, a veteran of both the traditional energy industry and biofuel startup Green Earth Fuels, joined the company in June.

“I’m familiar with biofuels and living off of government subsidies,” he said. “When I joined this company I was concerned with building a business on fundamentals that could stand on their own.” The company hopes to have its first demo facility in Australia, which will use CO2 from natural gas and fertilizer plants to grow algae in eight 1-acre ponds, operating by year’s end, and plans to get to commercial scale by the first quarter of 2013, Bafalis said. While the company does hope to see biofuel made from its algae in the future, that’s off the table for current commercialization plans, Balfalis said.

It’s a hard fact that no algae biofuel company can claim cost-competitive production to date. The key challenges lie in cost-effective ways to harvest the algae from water, and convert it into fats for conversion to fuel, without using more energy at higher cost than you’d yield from the final fuel product.

Other algae startups have targeted markets outside fuel to get started. Solazyme, which has technology for growing algae in the dark by feeding it sugar, has been working to adapt its algae oils for consumer products giant Unilever to replace palm oil, and last week said it had received an undisclosed investment from the consumer products giant. The insight isn’t limited to algae-based biofuels. Khosla Ventures-backed LS9 has a deal to produce industrial chemicals for Procter and Gamble, even as it has continued to claim breakthroughs in turning cellulosic materials into fuels.

These smaller markets could help biofuel companies in their challenge to compete with the fossil fuel industry on its own terms. Not only must biofuels compete with their fossil fuel equivalents, they also have to be able to scale production to the billions of gallons. Without that kind of scalability, most algae biofuel companies are just “playing” with their investors money, according to Craig Venter, whose Synthetic Genomics is in a $600 million algae biofuel research program with ExxonMobil.

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