The players

One of the companies that’s the farthest along is Solazyme, a South San Francisco-based company that went public in the spring of 2011. Solazyme was one of the first firms to focus on the alternative chemicals and personal care markets, developing a small but steady revenue stream as it braced itself for the difficulty of churning out its algae oil at a scale and cost that can compete with oil for transportation.

But Solazyme is now at the brink of ramping up its algae oil for fuel, too. This week the company said that its Brazilian joint venture with food processing giant Bunge — called Solazyme Bunge Produtos Renováveis — has received approval for a $120 million loan from the Brazilian Development Bank to build out its first commercial-scale algae fuel factory in Brazil. The factory is already under construction (it started in the summer of 2012) next to Bunge’s sugarcane mill in São Paulo (it uses sugar for a feedstock). Solazyme hopes it will be ready to go by the fourth quarter of 2013. Initially it will produce 100,000 metric tons per year, but eventually by 2016 it’s supposed to make 300,000 metric tons annually.

Solazyme also plans to reach commercial scale of its algae fuel in the U.S. soon, using a factory in Clinton, Iowa owned by agriculture giant ADM. That plant is supposed to make 20,000 metric tons of algae oil per year in early 2014, and eventually 100,000 metric tons per year. It also has its own smaller scale development factory in Peoria, Illinois.

Sapphire Energy is another company that is looking to cross through the so-called Valley of Death from low volume production to commercial scale that can one day compete with oil. The company has a 2,200-acre algae growing farm in Columbus, New Mexico, which has 70 ponds, each the size of a football field, as well as a refinery on site. The New Mexico refinery reportedly started producing oil in low volumes last summer and by 2014 is supposed to be able to make 1.5 million gallons of algae crude per year, and 10,000 barrels a day by 2018.

Sapphire and Solazyme are attacking the algae oil industry with different approaches. Solazyme grows its algae in closed fermentation tanks, while Sapphire is growing it in the open air on large plots of land. Open air ponds could theoretically be cheaper, but they face the problem of making sure they don’t get contaminated and disturbed by outside elements.

Another company working on algae fuel is Synthetic Genomics, which is the brainchild of genomics guru Craig Venter. Venter beat the U.S. government at being the first to sequence the human genome, and also led his team in recent years to be the first to make the world’s first synthetic bacterial cell, called the first artificial life form by many. The researchers built a synthetic chromosome and inserted it into a living bacterial cell, where it took over the cell and became an entirely new life form.

Synthetic Genomics was able to score a massive, potentially $600 million, development deal with Exxon. Last spring, Synthetic Genomics bought a 81 acre site in the Imperial Valley, near the Salton Sea, and it plans to scale up and test its algae strains there with 42 open ponds.

The costs

Scaling up all these new factories and farms take a colossal amount of money. But they’re needed because the algae oil needs to be produced at a huge scale to get it cheap enough to compete with oil.

The costs no doubt take a toll on these pioneers. Solazyme’s net losses are growing, and the company lost $58.52 million for the nine months ended September 2012, up from a $38.32 million net loss for the same time the year prior. The company will not likely be profitable for years, and it’s helping fund its production deal with ADM with equity. This week Solazyme said that it intends to sell $100 million worth of notes to help it build its projects.

Sapphire Energy raised at least $300 million from venture capitalists and investors like Cascade Investment, which is owned by Bill Gates. Good thing Sapphire got that money in the bank, because few venture capitalists these days are willing to put in hundreds of millions of dollars into such infrastructure for clean power projects. Sapphire also got $50 million in stimulus funding and a $54.4 million federal loan guarantee.

Synthetic Genomics has its potentially $600 million development deal with Exxon, though I’m not sure the status of that currently. Venter has said that biofuels made from algae that will be able to scale, and compete with oil, will have to be synthesized and will not come from nature. The Exxon deal was originally to research naturally occurring algae cells only (not synthetic ones), but Venter hopes Exxon will come around to funding the research based on synthetic algae cells.

Who knows if algae fuel will ever get there — if Venter is right, it’ll have to be a completey new type of synthetic super microbe that delivers algae oil as efficiently as possible. But 2013 is a year in which these three algae fuel players look to scale, and will spend a lot of money to get there.

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The first phase of the farm now has algae ponds and processing equipment spread across about 100 acres about 1/8 of a mile — that includes sizes of 1.1-acre pond and a 2.2-acre pond. Eventually the entire farm is supposed to spread across 300 acres and make 1.5 million gallons of the algae biofuel per year. Five-year-old Sapphire says it’s already harvested 21 million gallons of algae through the farm and the facility is supposed to be done and producing 100 barrels of algae biofuel a day by the end of 2014.

This first portion of the farm took a year to build, used 634 full time construction workers, and required $85 million from Sapphire, backed by a USDA loan guarantee, as well as a $50 million grant from the Department of Energy.

The rest of the farm will require a lot more money. Sapphire is raising another $144 million from investors, including agriculture company Monsanto. Sapphire has already raised $300 million from investors including Bill Gates’ investment firm Cascade Investment as well as the public funds.

Sapphire has had a relationship with Monsanto for at least a year. Monsanto wants access to Sapphire’s genetic research technology to use it for its own agricultural development. Using Sapphire’s genetic technology, Monsanto says it can isolate traits in algae (like high yields and stress traits) that could be used to tweak its other crops. Monsanto’s CTO Robb Fraley said in a release last year that algae is an “excellent discovery tool,” for agricultural genetic research.

Because the New Mexico farm is outside, and exposed to the environment, in a couple months Sapphire will move into using a variety of algae that will respond and perform as well during the winter months. In contrast other companies like Solazyme use closed tanks to grow algae so the algae is not effected by the environment.

Solazyme has also recently been moving aggressively into the biofuel market, after making specialty chemicals, personal care products and food for years.

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Elevance has been planning on pursuing a potentially $100 million IPO, and first filed its S-1 back in September of 2011. Since then, though, a variety of clean energy companies have delayed or ditched their IPO plans. In just this quarter, three clean energy IPOs — from Luca Technologies, BrightSource Energy, and Enerkem — were withdrawn.

Biofuel companies have struggled this year, too. Amyris announced recently that it will shutter or scale down production at two of its three facilities.

Still, biochemical and biofuel companies that have developed valuable intellectual property seem to be able to keep raising money and making deals. Algae oil maker Solazyme has finally moved into biofuels in a big way, and algae fuel maker Sapphire Energy recently announced it is raising another $144 million.

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That might sound impressive, but it’s a far cry from the company’s previous projections. Back in 2009, Sapphire was hoping its algae farm would be able to produce 1 million gallons of green crude per year by 2011, followed by 100 million gallons per year by 2018, and 1 billion gallons per year by 2025. When Sapphire made those projections, the sheer volume was so much more than any of their competitors were putting out there, that I asked if Sapphire was going to be “the gorilla of algae fuel?“

Well, turns out, nope, at least not yet, but they are still out in front of — or on par with — much of the rest of the algae fuel industry. The algae fuel sector is just taking a really long time to scale and reach anywhere close to being economic with gas and diesel. As Synthetic Genomics and genetics guru founder Craig Venter said at an event in 2010: The real bugaboo for everyone in the algae fuel industry is reaching the scale at which the oil companies currently operate to be competitive.

Venter and Synthetic Genomics opened its own algae test lab in conjunction with oil giant Exxon in San Diego in the Summer of 2010. But more recent reports say that that project has stalled a bit as Venter wants to work on synthetic algae cells (yep, one’s they full design and create in a lab) and Exxon’s deal is reportedly for naturally occurring algae. Venter now says he doesn’t even think that algae fuel that can replace oil will come from nature.

Oil scale

In 2010, Pike Research predicted that by 2020, the algae biofuel industry would only likely be able to produce about 61 million gallons per year globally and Pike estimated that the world wouldn’t see its first commercial algae plant with capacity of at least 1 million gallons per year until 2014 at the earliest (more likely 2016).

Contrast that 1 million gallons per year — which Sapphire’s Zenk notes is “a commercial demonstration plant, and on the energy scale is small” — with the amount of fuel that the U.S. alone consumes every year: nearly 138 billion gallons of gasoline in 2009 were consumed in the U.S. according to the U.S. Energy Information Administration.

Not all the algae companies have been trying to tackle the fuel space head on. Some companies like Solazyme have decided to focus first on personal care products and green chemicals, before tackling the fuel industry. Nine year old Solazyme went public last year and before that raised at least $125 million from investors including Chevron’s VC arm, Morgan Stanley, Richard Branson, food and personal product giant Unilever.

If it’s taking so long, why even bother? Well, algae is one of the most promising fuel stocks partly because it can produce 2-20 times more oil per acre than other energy crops, and it can live in freshwater, seawater and wastewater. In theory, it’s a perfect fit for a biofuel.

Sapphire’s Zenk says that the company was delayed a bit while it was finalizing a loan guarantee from the USDA, which it secured at the end of 2011. Sapphire broke ground on its New Mexico farm last June.

Images courtesy of Sapphire, and Synthetic Genomics.

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Sapphire says with this latest round it has raised more than $300 million in private and public funds. The new capital will go towards building out a commercial algae energy demonstration plant — the Green Crude Farm — in Luna County, New Mexico.

Founded in 2007, Sapphire has had a relationship with Monsanto for at least a year. Monsanto wants access to Sapphire’s genetic research technology to use it for its own agricultural development. Using Sapphire’s genetic technology, Monsanto can isolate traits in algae (like high yields and stress traits) that could be used to tweak its other crops. Monsanto’s CTO Robb Fraley said in a release last year that algae is an “excellent discovery tool,” for agricultural genetic research.

The deal between Monsanto and Sapphire is also another example of how corporate investors, particularly in the biofuel sector, will be crucial to helping startups scale and reach commercialization. Other biofuel companies are connecting with big oil, and Codexis has linked up with Shell, and Synthetic Genomics with Exxon.

Sapphire Energy is one of a dozen algae fuel companies that has ambitious plans, but has yet to reach large scale commercial production. Algae company Solazyme was one of a few companies that went public in recent years but has focused first on using its algae for personal care and food products instead of fuel.

Sapphire has stated more aggressive plans than most. Sapphire previously has said that it planned to ramp up its production to 1 million gallons of algae-based diesel and jet fuel per year by 2011, 100 million gallons per year by 2018, and 1 billion gallons per year by 2025. Update: Sapphire now has revised its projects to say that this farm in New Mexico will be able to produce 1.5 million gallons of green crude by 2014.

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Kartik Chandran, a professor of earth and environmental engineering, is working on a process to produce biodiesel and methane from fecal sludge. Methane can be used to generate electricity and heat (read about Landfill Methane Outreach Program by the U.S. Environmental Protection Agency).

Chandran wants to develop the technology to give people in poor countries a less expensive and energy-intensive way to process human wastes and to minimize wastewater contamination of local rivers and lakes.

Energy cost has been going up for wastewater treatment plant operators, according to an EPA report issued last September. Government mandates to reduce environmental contamination often require newer and more expensive equipment that also uses more electricity, the report said.

The professor and his research team want to use the technology to build a refinery in Accra, Ghana. Chandran is an advisor for the Ghana team at the Engineers Without Borders’ Columbia University chapter. Engineers Without Borders is a nonprofit that matches engineers and engineering students with community projects worldwide.

The Gates Foundation is known for financing public health and anti-poverty research and deployment projects. Bill Gates also is a big supporter of renewable energy and has used his tech celebrity status to advocate for more government funding for clean energy research. He has invested in nuclear startup TerraPower and algae-to-fuel company Sapphire Energy.

The idea to produce energy from human wastes isn’t new and has been explored by other companies and academic researchers around the world.

Photo courtesy of U.K.’s Foreign and Commonwealth Office via Flickr

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Founded in 2007, Sapphire Energy uses synthetic biology to make a green crude out of algae that can be turned into gas, diesel or jet fuel. Monsanto wants access to Sapphire’s genetic research technology to use it for its own agricultural development. Using Sapphire’s genetic technology, Monsanto can isolate traits in algae (like high yields and stress traits) that could be used to tweak other crops. Monsanto’s CTO Robb Fraley said in a release that algae is an “excellent discovery tool,” for agricultural genetic research.

Monsanto didn’t disclose the size of the equity investment.

Sapphire Energy is one of a dozen algae fuel companies that has ambitious plans, but has yet to reach commercial production. In the release, the companies say the partnership could help “accelerate Sapphire’s road to commercializing algae as a renewable energy crop.”

Sapphire previously had plans to ramp up its production to 1 million gallons of algae-based diesel and jet fuel per year by 2011, 100 million gallons per year by 2018, and 1 billion gallons per year by 2025. Yep, those are some big claims. Sapphire has raised more than $100 million from the likes of Bill Gates’ investment firm Cascade Investment, as well as ARCH Venture Partners, Wellcome Trust and Venrock.

Jet fuel might be the most willing market to accept algae fuel right now. Sapphire Energy has tested its fuel with two commercial airlines: Continental and JAL.

The deal between Monsanto and Sapphire is also another example of how corporate investors, particularly in the biofuel sector, will be crucial to helping startups scale and reach commercialization. Other biofuel companies are connecting with big oil, and Codexis has linked up with Shell, and Synthetic Genomics with Exxon.

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The bill, which now heads to the Senate, modifies the Internal Revenue Code to give algae fuel companies the same incentives enjoyed by cellulosic biofuel makers, who use non-food crops and agricultural wastes to produce transportation fuels. The bill also allows algae fuel producers to take a 50 percent bonus depreciation deduction on their production plants.

Algae is rich in oil, but growing it and squeezing the oil out of these organisms has shown to be difficult and expensive. The concept isn’t new, but it has received a lot more government support in recent years because of a national agenda to find alternatives to fossil fuels. Some algae fuel developers won a share of the more than $600 million in biofuel project funding announced last December.

The strong government backing has helped to make algae companies attractive to venture capital firms and high-profile individual investors, including Richard Branson of the Virgin business empire, who recently put money into startup Solazyme. And Bill Gates invested in San Diego-based Sapphire Energy via his Cascade Investment. Sapphire has won not only a $50 million grant from the energy department but also a $54.5 million in loan guarantees from the agriculture department to build a demonstration project in New Mexico.

Given the difficult path to mass production, some companies have sought market opportunities outside transportation fuel to get more near-term revenues. Aurora Biofuels recently changed its name to Aurora Algae to help it market the omega-3 fatty acids from algae for pharmaceuticals and high-protein feed for fish farms and other customers. Solazyme also is marketing its algae oil as ingredients for food and cosmetics and has lined up food and personal care product giant Unilever as an investor and customer.

If this federal tax breaks come through, perhaps they will be able to help algae makers get over the economic hump, and transition from selling beauty products to selling fuel.

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Image courtesy of Synthetic Genomics.

Solazyme’s funding news comes on the heels of Exxon and Synthetic Genomics — geneticist guru Craig Venter’s algae fuel company — officially opening up their algae test facility at Synthetic Genomic’s HQ in La Jolla, Calif. Exxon and Synthetic Genomics have a $600 million development deal to use genetic engineering to develop productive strains of algae that can be turned into biofuels.

Another well-funded algae fuel company is Sapphire Energy, which has raised more than $100 million from the likes of Bill Gates’ investment firm Cascade Investment, as well as ARCH Venture Partners, Wellcome Trust and Venrock. Sapphire says it will make 1 million gallons of algae-based diesel and jet fuel per year by 2011 and 100 million gallons per year by 2018.

Solazyme, based in South San Francisco, engineers efficient algal strains, grows its designer algae in fermentation tanks without sunlight by feeding it sugar, and uses existing industrial equipment to extract the oil. The company is looking to commercialize its technology in the 2012-2013 time frame, with a production cost target at $60 to $80 per barrel, Solazyme CEO Jonathan Wolfson told me last year in an interview at their labs.

In the announcement today, Wolfson emphasized that the company is on a “rapid path to commercialization,” and this funding is supposed to help the company get there. The issue for all of the algae fuel players is that it requires so much capital to build a commercial scale algae plant, on the scale of “over $100 million,” Wolfson told me last year. And like with Synthetic Genomic’s deal with Exxon, Solazyme will likely commercialize its technology with an oil partner (as a strategic investor Chevron would be a safe bet).

If these algae fuel companies aren’t able to reach commercialization, as Craig Venter put it once: they;re “just playing” and “wasting investors’ money.” Basically, the algae companies need to be able to reach the scale at which the oil companies currently operate to be competitive. There are a lot of skeptics who think algae fuel won’t be able to reach that scale economically.

At the end of the day, the overall carbon emissions reductions we could get by swapping out gasoline for algae fuels totally depends on the algae fuel production process. Algae absorbs CO2 as it grows, and this CO2 can come from, say, power plant emissions, thus providing a productive way of recycling the carbon emissions. But when algae fuel is burned in an engine, guess what? The carbon dioxide is released. If an efficient process is worked out, the process could be carbon-neutral, but it will entirely depend on how efficient the production process is.

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In other words the algae companies need to be able to reach the scale at which the oil companies currently operate to be competitive. “That’s the real bugaboo for everybody,” said Venter. To address that hurdle, last July Synthetic Genomics announced that it was partnering with ExxonMobil on a $600 million algae biofuels program.

Synthetic Genomics is different than many of the algae fuel companies out there — Venter estimated there are 200 or so — because Synthetic Genomics is looking to use its synthetic genetic processes to tweak algae and other microorganisms to create synthetic super bugs that can crank out as much fuel as possible. Such genetically-altered bugs could consume CO2 and create synthetic hydro-carbons that could be a fuel replacement.

Venter said the synthetic genomic process could one day fundamentally change not just fuel and transportation, but food supply, medicine, and clean water. Venter and his crew at the J. Craig Venter Institute have already created a completely synthetic bacterial genome, which they claimed back in 2008 was the largest man-made DNA structure ever. Now Venter and the researchers are “extremely close” to activating the synthetic bacteria chromosome in a new cell which would make “the first synthetic species,” and will be their “proof of concept,” as Venter put it at the conference. That’s some crazy stuff.

In the algae fuel world Venter said he didn’t think the process had much competition. But there are other startups working on synthetic biology including Amyris Biotechnologies, and LS9.

Biofuel firms are well aware of their “scaling issue” and, like Synthetic Genomics, are turning to the big oil and gas giants for partnerships. The CEO of algae fuel startup Solazyme, Jonathan Wolfson, told me last year that “We will likely commercialize our technology with a big oil partner. It’s delusional to think that companies with that amount of scale and trillions of dollars of infrastructure won’t play a key role.” Solazyme has a development deal with oil giant Chevron. Amyris has formed a joint venture called Crystalsev, in conjunction with Santelisa Vale, Brazil’s second-largest sugar grower, and the jv aims to produce 200 million gallons of fuel a year by 2011 at several of its existing ethanol plants at a price of less than $2 a gallon.

Algae fuel player Sapphire Energy has said that it is ramping up its production estimates to 1 million gallons of algae-based diesel and jet fuel per year by 2011, 100 million gallons per year by 2018, and 1 billion gallons per year by 2025.

Image courtesy of NREL.