Algae Plans Bloom

Algae-growing cleantech firms are enjoying a burst of attention, triggered by Solazyme’s successful initial public offering (IPO) of stock in May. The firm, which raised $227 million from investors, first turned heads in 2008 when it brought a car running on algae-based biodiesel to the Sundance Film Festival. But it’s not fuel that fueled the IPO. Instead, investors and analysts were sold on skin cream and other products made from “tailored oils.”

Solazyme is not the only algae firm to shift its near-term focus away from the fuel market. For companies such as Cellana, Algenol, and Sapphire Energy looking to profit from the fast-growing green goo, the number of possible target markets and products has grown like a giant algal bloom. Algae will likely appear in personal care, animal feed, nutrition, and chemical products before reaching the gas station.

Experts agree that nonfuel markets can be profitable for Solazyme and other algae firms, but they warn that investors will be impatient to access the multi-billion-dollar fuel market. That may set the industry up for failure, because it will be many years—if ever—before algae can be cost-competitive with petroleum.

“It’s very clear there are many challenges. They are real and are often preventing or slowing these companies from reaching the oil or fuel markets,” observes Andrew Soare, a clean technology analyst with Lux Research. “Now that they are scaling up and seeing that the algae grows too fast or too slow, that it takes too much land or water, or that it’s harder than expected to get big investments, they have to turn to other markets.”

Solazyme’s technology sets it apart from other algae firms, Soare contends. “Because it is using algae to ferment sugars in a dark tank, the company doesn’t need massive infrastructure for massive growth.” Lux classifies Solazyme with fermentation biology companies—ones that don’t use algae—and expects it to be the first algae producer to reach commercial scale.

Now that the firm is public, investors can mull over its production costs and plans for rolling out products. According to Solazyme’s S-1 filing with the Securities & Exchange Commission, its lead algae strain for fuels and chemicals could make a crude oil for under $3.44 per gal at commercial scale using sugarcane feedstock.

In the near term, according to Goldman Sachs equities analyst Mark Wienkes, it is the strength of Solazyme’s partnerships for products other than fuels that makes the firm a buy. “We view credible strategic partnerships as a key progress indicator, particularly for companies like Solazyme that plan to scale up through bolt-on additions at existing mills,” he wrote in a report to investors.

Solazyme has inked a joint venture with grain miller Roquette for algal flour and other nutritional products and has a joint development agreement with Bunge to produce chemicals in Brazil. It also has two agreements with likely customers: Unilever for soap and cleaning product ingredients and Dow Chemical for microalgae-based oils used in dielectric insulating fluids.

Right now, Solazyme is booking revenue from sales of skin care products containing what it calls alguronic acid. Its Algenist brand antiaging moisturizer sells for $90 for a tiny 2-oz jar. But the high-end personal care market is relatively small and requires expensive marketing.

Over the next three to five years, Wienkes says, Solazyme will reach profitability by selling tailored oleochemicals—similar to those derived today from palm kernel or linseed oils. He estimates the potential market size to be $7 billion a year for food-related products and $36 billion a year for industrial markets currently served by oleochemicals and petrochemicals.

Hawaii-based Cellana also wants to extract fuel from algae someday, but first the company is developing a product from whole algae: feed for animals, including farm-raised fish. “It’s a very exciting opportunity; fish eat algae in the open ocean as the main source of protein in the wild,” says Martin Sabarsky, the firm’s chief executive officer. The company is conducting fish feeding trials with a $5.5 million grant from the Departments of Energy and Agriculture.

Like Solazyme, Cellana is also pursuing nutraceuticals and personal care ingredients, in its case by deconstructing its native strains of algae and selling off every piece. The company cultures its selected strains in photobioreactors and then puts them in open ponds, where they multiply and are harvested in two to five days. In addition to oil, Sabarsky points out, algae contain between 20 and 50% sugars and high-quality proteins. “We want to generate value from each element of the biomass.”

The full plan, Sabarsky says, is to produce fuels, feeds, and higher value specialty lipids in a biorefinery. “As long as you can economically produce products at a smaller scale and make it modular, then you can scale it larger when there is more capital available,” he explains. “Think of it like a wind farm. You don’t build just one huge windmill.”

Some algae companies still see fuel as their main target market. Algenol is unusual among algae firms in that its algae generate ethanol rather than oil. The company’s hybrid strains grow in flexible plastic photobioreactors, where they live in seawater treated with nutrients and dine on piped-in CO₂. The ethanol they excrete evaporates into the headspace of the reactor along with water and is collected. The mixture is distilled to pure ethanol.

But even with this straightforward production model, there is room for diversification into higher margin products. “Algenol has decided that it is going to embark on a green chemistry program, and it will have specific targeted molecules—not more than three or four,” explains CEO Paul Woods, who notes that Algenol has a partnership with Dow. “We have made a fundamental decision with our partners bankrolling green chemistry, but we’re still unanimously decided that ethanol will be our main product.”

Woods says the chemicals program will go beyond the two-carbon chemicals that can be made directly from ethanol. For example, he reports that his firm has genetically modified algae that can excrete propylene.

Bypassing oil, Lux’s Soare points out, Algenol’s technology circumvents two costly production steps. “Getting from the algae-water mixture to dewatered algae is a rather expensive part of the process. When combined with extracting the oil, that makes for two expensive steps right next to each other.”

Algal oil firm Sapphire Energy also asserts that fuel is its main product. Sapphire is working on wet extraction techniques to bring down the costs of what it calls green crude oil. The firm uses synthetic biology to create high-production strains of algae and then grows them in open ponds. Its business model is to sell the oil to refiners that would make the end products. “Everything we are doing is aimed to being competitive at fuel prices without subsidy,” insists Cynthia J. Warner, the company’s president.

“But that doesn’t mean we can’t make high-margin products,” she quickly adds. “Early on we will not be flooding any fuel markets.” Refiners are currently facing a shortage of high-quality sweet crude. Using Sapphire’s renewable crude would let them fully utilize their capacity to make high-value “middle” streams such as jet fuel and building blocks for chemicals and plastics, according to Warner.

The quality of Sapphire’s crude makes it ideal for airline diesel and the military. “They are a direct market for us,” Warner says. Soare agrees that such customers could be a good fit, at least temporarily. “Jet fuel is a much different market than other transport fuels. It has centralized buyers willing to pay more and who would work through joint development agreements.” Still, algae firms need to get to cost parity with petroleum to survive in the market long term, he says.

Warner agrees. “This is really important because we don’t want to aim off the target. It could be a trap—you can paint yourself into a corner if you are reliant on those high margins.”

Another nonfuel business opportunity is recycling waste CO₂. Industrial gas firm Linde has teamed with Algenol and Sapphire on processes for CO₂ delivery. And Cellana is already working with Hawaiian Electric and Maui Electric to pipe in emis sions.

The diverse directions algae firms are taking to commercialization should not be seen as a sign that algal fuels are an iffy proposition, Algenol’s Woods argues. “From a layperson’s point of view it looks massively disorganized, but it isn’t. Specific companies have aligned with different companies which have different needs.” For example, Algenol’s years-long partnership with Dow has naturally guided it toward making building-block chemicals.

One possible outcome of exploring interim markets is that algae firms won’t move beyond them to reach the scale and low cost necessary to sell meaningful amounts of fuel. “I think the companies themselves are okay with staying in the higher value nonfuel market if they are making a profit on those products,” Soare suggests. However, most firms have investors who flocked to algae because of the opportunities in fuel, and they still want to be in that market. “There is no one answer,” Soare says, “but algae companies will feel some conflict among those forces.”