With liquid fuel accounting for approximately two-thirds of global energy demand and question marks surrounding the short-term viability of many electric vehicles, biofuels look set to provide important alternatives to incumbent sources of fuel for several decades.
Established feedstocks, however,exhibit very limited potential to meet such huge demand, with some studies estimating that devoting the entirety of the world’s entire arable land to their growth would yield less than 50 per cent of fuel required.
At the same time, overall demand for biofuels continues to increase globally in the wake of energy security concerns, rising fuel costs and environmental catastrophes such as the recent oil spill in the Gulf of Mexico.
Microalgal technologies, due to their potentially superior photosynthetic yields (between threeand eight per cent compared to around 0.5 per cent for first generation feedstocks), are increasingly regarded by many as of critical importance in both meeting consumer demand and capturing investor attention.
As Mary Rosenthal, chief executive of the Algal Biomass Association (ABO), says, ‘Algae has the highest oil content of any biological creature, and has the ability to produce oil on a scale higher than other biofuel feedstocks. First and second generation biofuel feedstocks, which are traditionally terrestrial-based crops, generally yield around 60-100 gallons per acre per year. We estimate that algae will be able to produce between 1,500 and 8,000 gallons per acre per year, once we get to full-scale commercialisation. Third-party analysts have projected that by 2022, the industry could produce six billion gallons of algae-based biofuels in the US alone. The industry therefore offers very compelling opportunities for investors.’
With year-round growth and harvesting cycles of between one and ten days, compared to once or twice per year for first generation feedstocks, algae has the potential to reduce much of the uncertainty associated with current biofuel production.
‘The algae space appeals to many people as it is a perfectly vertically-integrated feedstock for fuel production,’ says Peter van den Dorpel, CEO at Netherlands-based technology developer AlgaeLink. ‘Once you have selected the right location, you can control the production and also quality specifications entirely, just like with a chemical plant.
This is unlike first generation feedstock, where price and supply are volatile and global inconsistencies exist.’ The secondary benefits of algae are similarly compelling.
As algae production facilities can be sited on marginal land, they do not remove valuable agricultural land from food production.
Moreover, many algae species can survive in saline water, remediate wastewater and recycle carbon emissions from industrial installations. Algae can also produce a range of fuels, such as ethanol, biodiesel, aviation fuel and hydrogen, with the latter pointing to opportunities within the industrial desalination industry.
Applications also transcend the cleantech space to include opportunities in biotech, while the high protein and carbohydrate content of many species make them suited to producing animal feedstock. Importantly, demand and growth prospects across all sectors look extremely promising.
A recent report by SBI Energy predicted that the algal biofuel industry will see an annual growth rate of 43 per cent until 2015, when it estimates total market value will be more than $1.6bn.
The potential of algae has not escaped the attentions of investors, with both public and private sources flooding the industry over the past ten years. According to the ABO, the US government alone has invested a total of $800m into algae research, most notably through $180m provided by the US Department of Energy in 2009.
Similarly, the ABO estimates that the private sector has invested $2bn into the algae industry to date. Despite the quantities of capital flowing into the algae industry as a whole, the development of biofuel applications lags somewhat behind those in other spaces.
‘While this market is potentially as big as those of fuel oil and biochemical products combined, I think it is still regarded as an emerging field by many investors, although some have dedicated experts and can distinguish between the different players, which has led to some large investments,’ says Van den Dorpel.
A handful of significant venture investments have been taking place in recent years, with companies such as LiveFuels, Solazyme and GreenFuel Technologies. In August 2010, Solazyme raised $52m in Series D funding, and the sector has also seen some investments come full-cycle with both PetroAlgae and AlgaeTec recently announcing IPOs.
Investor experiences, however, have not always been universally positive. As Nellya Litae, head of business development at Israeli biotechnology company TransAlgae, observes. ‘In the last few years, there have been a lot of major developments in this space. However, there have been a lot of promises made that were not realistic. As a result, a lot of investors are very sceptical about algae.’
Regardless of the potential of algal technologies, this scepticism is not without justification, with some companies still tending to over-promise what they can deliver, based solely on initial laboratory results. As Van den Dorpel says, ‘Within the industry, some companies are attractive from an investment point of view, but most are not.
Many companies are still struggling with yields – their process technically works, but the numbers don’t add up, and so investing in feasible projects is not possible in a lot of cases. So investors should be very open-minded, but very critical when screening proposals.’
On the technology side, there are clearly some challenges left to overcome, but the multi-sector relevance of algae technology may offer the key to speedy commercialisation.
Success in producing algal biofuels will be at least partially dependent upon on the abilities of companies to develop and then leverage expertise within more established algae applications, such as nutraceuticals. Investors must, therefore, assess prospective investments relative to the algae space as a whole, not just that of algal biofuels.
Past experience proves that investors must avoid being seduced by the sheer potential of the sector, and search for opportunities in companies truly capable of developing into industry leaders. These companies are more likely to focus both on the development of the fuel production process, but will also work to address any existing shortcomings within the feedstock itself.
Until you domesticate a crop, you cannot grow it at scale, so I think that any algae companies not investing in some way in transgenics will really struggle to develop a cost-effective process,’ Litae says.
Opportunities could therefore present themselves within different fuel production, with the manufacture of hydrogen likely to become increasingly valuable as the prevalence of carbon trading increases.
In recent years, the fuel industry looks to be evolving from a consolidation of oil companies to a decentralised, fragmented market. This decentralisation has seen the number of algae-based biofuel start-ups more than triple between 2005 and 2009, according to a recent report published by SBI Energy.
This was part of an overall increase in the number of companies active in this area from fewer than ten before 2000 to more than 60 today. However, the structure of this still immature sub-sector still presents barriers for investors.
‘Most of the companies in the algae industry are private and like to keep their IP close to their chest,’ says Rosenthal at the ABO. ‘Consequently, there is some misinformation in the marketplace, so many assessments of the industry are using data that is as much as 15 years old.’ This leads to obvious confusion and distortions regarding where the industry is as a whole and how near it may be to commercialisation, as well as in assessing where specific investment opportunities stand in relation to this.
The myriad of processes and technologiescurrently under development, while potentially beneficial in the long-term, also makes selecting winners difficult.
‘To enable the industry to reach its full potential, we need ensure the availability of clear and accurate information in the marketplace, relating to aspects such as life-cycle assessments and technologies that have been developing. It’s also crucial that our industry achieve regulatory and financial parity with other biofuel feedstocks. Supportive government policy will create a level playing-field for algae-based biofuels – something we haven’t had up to this point,’ adds Rosenthal.
Private equity investment, government contracts and strategic partnerships, such as that of ExxonMobil and Synthetic Genomics, also look set to be key. Despite the obvious challenges, there is a growing sense of confidence within the industry, and Rosenthal continues to be resolute in her outlook. ‘Our industry is on the cusp of commercialisation. What we need now is to go from pilot production to commercialisation. Thus the investment and time required to get to full commercialisation is the major barrier to development. As investors, policy-makers and end users look more closely at the benefits of algae-based fuels, we’re confident this is a barrier that can be overcome,’she predicts.
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