What’s (not) happening with Algae Biofuels

Next generation algae biofuel is a fuel derived from growing synthetic (genetically modified) algae and decomposing it to extract oils that can be used to substitute conventional petroleum. It is (was?) envisioned principally as a fuel for vehicles and aircraft and therefore as a possible replacement for gasoline/kerosene.

Before we go any further, any discussion on the viability of algae biofuels needs to be framed along these points:

  • Can biofuels from algae compete on price with fossil-derived petroleum?
  • Is it carbon neutral, emitting only CO2that it absorbs first during growth?
  • Can it scale?
  • Does algae biofuel yield substantial energy relative to the energy inputs involved in its production? (Energy Return on Energy Invested)

Basically, you’re asking yourself: is it better than what’s already out there?
The answer is: Nope, at least for now.

The Value Proposition of Algae Biofuels

Potentially the most promising of biofuel technologies, algae set themselves apart from all other biofuel feedstocks, for the following reasons:

  • Algae do not compete with farmland & water: Algae have been shown to thrive in polluted or salt water, deserts and other inhospitable places, bypassing the age old (and legitimate) problem which has plagued the development of conventional biofuels.
                                     Optimum land for growing biofuel sustainably

    ATAG
    Source: ATAG

    Circle sizes are estimates of potential locations for new generation biofuel feedstock production.

  • They do not have an impact on food prices: Since conventional biofuels like corn and sugar are also used as food for us, and farmers can get better prices for their corn and sugar if they sell them to biofuel refiners, leading to volatile food prices. Hartmut Michel, Nobel Prize winner, explains, that when you have “energy plants” competing with food plants, we are all worse off.
  • They feed off CO2: According to Jansson, Wullschleger, Kalluri, & Tuskan, human activities are responsible for an annual emission of 9 gigatons of carbon (33 gigatons of CO2). Whilst terrestrial and oceanic systems manage to absorb 3 and 2 gigatons respectively, leaving the remaining 4 gigatons in the atmosphere making algae ideal for carbon capture from sources like power plants.
  • Fast Oil Production Rate: One of the biggest advantages of algae for oil production is the speed at which they can grow. Some studies estimated that algae produce up to 15 times more oil per square kilometer than others pointed to algae strains that produced biomass very rapidly, with some species doubling in as few as 6 h, and many exhibiting two doublings per day.

So the promise of algae oil is tantalizing: it’s like the silver bullet.

In a nutshell: scientists were meant to identify a strain of algae to be genetically modified to produce lipids (oils) very quickly while feeding on carbon dioxide from the atmosphere. The lipids would be harvested and converted into usable oil while they ducked carbon from the atmosphere. And all this was meant to be economical and scalable.

  🔥 From 2003-2012: The Hype Was On🔥

Turning pond scum into a petroleum-like fuel is both laborious and expensive, yet the end goal was very alluring. As Eric Wesoff ironically puts it, “dozens of companies managed to extract hundreds of millions in cash from VCs in hopes of ultimately extracting fuel oil from algae”.

Researchers and algae oil companies were making huge claims about the promise of algae-based biofuels; the U.S. Department of Energy caught on early and was also making big bets through its bioenergy technologies office; industry advocates claimed that commercial algae fuels were scalable in the near-term and investors jumped the gun.

In 2006, there were a meager handful of specialized companies devoted to commercializing algae biofuel. By 2008 there are over 200, most of which had been active for less than a year. While most of these were angel investor or venture capital backed, there were also some bigwigs that took a stab at developing algae biofuels, such as Shell, Johnson Mathey, General Atomic, Boeing, Honeywell, DuPont, BP, and others.

However, in spite of optimistic investors and bold promises, a few hard truths began to transpire.  It became clear that whilst the technology was indeed “promising”, scaling it in a time frame relevant to our needs at an economic price was not within reach, anytime soon.

Cracks began to show in investment patterns as Exxon Mobil decided to invest $600 million into a joint venture with Craig Venter’s Synthetic Genomics for research into algal fuels, which they quickly scaled back to $300m and then to $100m. Another star player, Sapphire Energy, an algae biofuel start-up, which raised over $100 million in venture capital, including from Bill Gates’ investment firm Cascade Investment, has pivoted away from algae fuel and is now producing omega-3 oils and animal feedstock, while the famous startup GreenFuel, which grew out of Harvard and MIT research, went bust blowing through $70 million.

In the meantime, the surviving algae oil companies have shifted their core business and “branched out” to produce more economically sustainable co-products, like supplements, algae cosmetic oil, pigments and animal feedstocks and products for the pharmaceutical and chemical industry. Here is a list of algae oil companies that have been forced to move away from algae oil.

 So what went wrong?

I think that many stakeholders were blindsided by the great potential of the technology. To date, no company has been able to grow algae at the large enough scale required to produce meaningful quantities of a fuel, affordably. While there are many hurdles, I identified these two main reasons:

  • The basic science behind its cultivation:
    • The first part of the life cycle of the algae turned out to be burdened by obstacles.  As companies developing these algae have attempted to scale up, problems emerged which they could not have anticipated, including the emergence of competitor algae, predators such as microscopic animals that ate the algae, the occurrence of algae diseases in the form of bacteria and fungi and temperature fluctuations, which could kill the algae.
    • Whilst algae can grow quickly, the can do so only in the presence of sufficient nutrients. Algae can obtain carbon, their primary nutrient from atmospheric carbon dioxide, but the amounts present are insufficient to promote the rapid growth that was observed under lab conditions. That requires something more than 10% CO2 concentration in the atmosphere and in fact some of the earliest attempts to grow algae as a fuel source were predicated upon the development of pervasive industrial carbon dioxide capture.

  • Energy Return on Energy Invested:
    Researchers who looked at life-cycle analysis and the EROI/EROEI found algae biofuels would not have a positive energy balance, in other words, you’d have to put more energy in cultivating, harvesting, refining and transporting the algae biofuel than you would get out of it once it’s burned.

    c458bd8454b21bcc39f8255059793d11aabdc4f7
    EROI is a straightforward and simple concept to get your head around, and it is defined as the energy contained in one unit of fuel divided by the total nonrenewable energy required to produce one unit of fuel. It’s a way of getting a handle on how energy-efficient your energy production is.

    The breakeven point is 1. When the EROI is 1 there is no return on the energy invested, and the entire investment has been wasted. When the EROI ratio is higher, it also signals that the energy from that source is easy to get and cheap. Conversely, when the number is small, the energy from that source is difficult to get and expensive.

    Now, I will be the first to admit that there is no consensus on the methodology used to calculate either Life Cycle Analysis or EROI, making calculations on it is somewhat abstract. In part, it depends on what one counts as an “input”, and neither energy companies nor biofuel producers report detailed information on their energy consumption, resulting in researchers generating assumptions in order to calculate them.  To calculate the energy input, researchers have to make an estimate based on the dollars spent on various processes and goods, which means that two reports calculating EROI will likely yield different results, because of the different variables used.

    In spite of this ambiguity, The National Academy of Sciences (Chapter 8 NAS 2012) concludes: “An energy return on investment (EROI) of less than 1 is definitely unsustainable. An algal biofuel production system would have to have or at least show progress toward EROI within the range of EROI required for the sustainable production of any fuel (Pimentel and Patzek, 2005). Algal biofuels would have to return more energy in use than was required in their production to be a sustainable source of transportation. Microalgal fuels use high-value energy inputs such as electricity and natural gas. If these high-quality energy sources are downgraded in the production of algal fuels, it is certainly a sustainability concern that can only be truly understood through careful life-cycle analysis. EROI of 1, the breakeven point, is insufficient to be considered sustainable. However, the exact threshold for sustainability is not well defined. Hall (2011) proposed that EROI greater than 3 is needed for any fuels to be considered a sustainable source. EROI can be estimated with an LCA that tracks energy and material flow”.

    Here is a look at the available literature on Algae EROI:

    EROIbio.PNG
    Source: Quantitative Uncertainty Analysis of Life Cycle Assessment for Algal
    Biofuel Production, 2012

The studies that gave algae biofuel a positive EROI depended on co-products (something produced along with a main product which carries equal importance as main product, for the pharmaceutical, animal feed, and chemical industry) to tip the balance from a negative energy return to a positive.  But the Department of Energy pointed out “if biofuel production is considered to be the primary goal, the generation of other co-products must be correspondingly low since their generation will inevitably compete for carbon, reductant, and energy from photosynthesis…and coal-fired power plant carbon dioxide”.

So far, nobody has been able to make fuel from algae for a cost anywhere close to cheap, let alone competitive. Companies are trying to overcome these problems, but we will not be seeing companies selling large amounts of algae biofuels anytime soon.

tl:dr -> Cool idea, but due to unreliable cultivation methods, large nutrient requirements (of carbon, nitrogen, and phosphorus), low EROI, high capital costs, and competition from below $50 petroleum, the technology isn’t close to being ready.


 

Reading up on the EROI was very interesting so you might be keen on it too. Check out the following sources:

Peakoil.com,. (2014). EROEI as a Measure of Biofuel Effectiveness

Epa.gov. (2010). Renewable Fuel Standards Program Regulatory Impact Analysis Office of Transportation and Air Quality: The United States Environmental Protection Agency.

Inman, M. (2014). Behind the Numbers on Energy Return on Investment.

 

 

 

 

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Clean tech companies! Venture Capital is not for you

Innovation and tech breakthroughs are key drivers of the renewable energy (RE) and clean tech sectors, and in this regard, venture capital (VC) has a powerful grip on the imagination. Indeed, some of the biggest names in tech, like Amazon, Google and Uber are around today thanks to VCs. This has led many to wonder, where are the big, ubiquitous clean tech start-ups that made it big?

Except it’s not as simple as that, collective imagination romanticizes VC, but it is important to separate the myth from the reality and understand that the RE sector is categorically different from IT and tech, and that VC does not lend itself well to the clean tech.

A bit of backstory first: Boom and Bust cycles

In 2005, VC investment in clean tech was in the hundreds of millions. The following year, it increased to $1.75b, according to the National Venture Capital Association. By 2008, investment had skyrocketed to $4.1b (see figure 1). And the US government followed the trend, eager to continue to develop the meteoric rise of promising innovative technologies through a mix of loans, subsidies, and tax breaks. They directed $44.5b into the sector between 2009 and 2011. In other words, the clean tech sector was in full throttle and VCs thought it was ripe for disruption.

venture-capital-boom-and-bust
Gaddy, Sivaran & O’Sullivan, MIT Working Paper, 2016

But then, due to a confluence of unfavourable events, including:

  1. Fluctuating silicon prices: According to a GTM Research report, high purity silicon (polysilicon), the principal material for solar panels played only a minor role in this price collapse, as over 80% of polysilicon is sold via long-term contracts, and the pricing on these contracts moved little for most of 2011. However, the oversupply in the polysilicon market shifted the spot price of silicon down from $80 per kilogram in late March 2011 to under $30 per kilogram in December, which resulted in a 60% price drop. This lower spot price gave silicon customers the leverage to renegotiate contract pricing downward, and this resulted in much lower realized silicon average selling prices (ASPs) moving forward;
  2. Newly cheapened natural gas (shale boom): Since gas has got so cheap, there was no longer a financial incentive to go with renewables. Technical breakthroughs in natural gas extraction from shale, namely fracking—have opened up reserves so massive that the US has surpassed Russia as the world’s largest natural gas supplier. Because 24% of electricity comes from power plants that run on natural gas, that has kept downward pressure on cost to just 10 cents per kilowatt-hour, and producing significantly less than half the CO2 pollution of coal at that. This new environment made investors divert capital from RE into natural gas;
  3. The 2008 financial crisis: A large proportion of the gains VC firms had made between 2003 and 2007 disappeared, and the sudden and unexpected lack of capital, coupled with the difficulty of taking smaller companies public, hit renewable startups particularly badly. Venture investments in clean tech fell from $4.1 billion in 2008 to $2.5 billion in 2009, which made it difficult to raise money to achieve manufacturing scale;
  4. China’s high paced production of solar infrastructure: Globally increasing demand for solar infrastructure combined with a domestic push on solar manufacturing had propelled China to the top position in terms of PV manufacturing countries. Indeed, since 2004, China’s meteoric production on all fronts of the solar manufacturing value chain, beginning with polysilicon feedstock, to wafers, to cells and modules. By 2008, the ascent of solar industry became so formidable that Chinese firms started reaping economies of scale in the production of purified silicon. By then, China had become the largest PV manufacturer in the world, with 98% of its product shipped overseas.

The clean-tech bubble had burst and the euphoric VC investments came to a swift close. Moreover, shares of public clean tech firms traded at steep discounts to the market peak in 2008, and almost all of the 150 renewable energy start-ups founded in Silicon Valley over the past decade had shut down or were on their last legs. The fallout sent ripples through to every niche in the clean-tech sector: wind, biofuels, electric vehicles, fuel cells and especially solar.

The most prominent casualty of this financial carnage was Solyndra, a start-up designing and manufacturing cylindrical solar tubes, which had received $500 million in federal loan guarantees but after the price of polysilicon crashed they were forced to file for bankruptcy. 

The Venture Capital Model: How it works

In a nutshell, VC funds are usually structured as 10-year “partnerships”, where external investors (the limited partners, or LPs) provide capital to the VC fund (run by the experienced general partners, or GPs) to make investments on their behalf.  The Model is summed up nicely below.

how-vc-works
Zider, Harvard Business Review, 1998

VC investment usually goes like this:

  1. Part 1: A fund will tend to invest in a portfolio of 10-20 start-ups over the first 5 years and harvest the returns in the remaining 5 years.
  1. Part 2: Ideally, sizable returns begin to materialize when a portfolio company is acquired by another firm or when it issues shares on a public market through an initial public offering (IPO)—these events are known as “exits.”

VC funds also tend to invest at several stages of a company’s development, starting with early “seed” rounds, typically $1 million or less, continuing through the next rounds (known as “A”, “B”, “C” rounds). The objective of the VC is to exit and get your returns, but if a company cannot exit within three to five years of raising a major funding round, the VC is likely to write off the investment.

Bear in mind that VCs have contractual investment structures that limit their scope. Take a company that doubles its revenues every year for 20 years, and expands from thousands in revenue to billions, a VC would most likely not touch it, because a VC could not wait 20 years because their funds are could be structured with a requirement to earn returns every 10 years. VC are extremely impatient.

The point of VC is, in theory, to invest in the balance sheet and infrastructure of a company until it reaches sufficient size and credibility so that it can be acquired by a competitor or so that the institutional public-equity markets can step in and provide liquidity. The venture capitalist is, essentially, buying a cut of someone’s idea, nurturing it for a short period of time so that it becomes profitable, the with the help of an investment bank, exiting.  As long as venture capitalists can exit the company, before the company’s’ value ceases rising, they can reap huge returns at a relatively low risk. Indeed, really good VCs operate in “secure” niche environments, where they know the industry inside out, and where traditional low-cost financing is unavailable.

What is a VC’s target investment?

Now, I know, you can point to Tesla, or Boston-Power Inc, a lithium ion battery provider or Sunnova Energy Corp, a provider of residential solar systems, that both raised $250m from VCs, and I agree, there are also many success stories.

In 2014, according to the National Venture Capital Association, the sector as a whole raked in $2b, which is a 41% increase relative to 2013, but it is a 30% decrease compare to 2012. The absolute number of clean tech deals is also up, suggesting that VC are being much more judicious with their investments.

Classically, sectors such as IT and software are ideal recipients of VC. According to Ghosh and Nanda from Harvard, (for more info, check out Ghosh & Nanda,  Venture Capital Investment in the Clean Energy Sector. Harvard Business School Working Paper. doi:10.2139/ssrn.1669445), this is mainly due to:

1. Lower levels of capital intensity are highly desirable for VC investors. As you can see in the figure below, the “sweet spot” for VC is typified by high technology risk, but low capital intensity, where a syndicate (a group) of two or three banks can completely fund a start-up through to its IPO.  The ability to reduce risk capital and quickly access infrastructure capital is a key differentiator between the IT sector and  RE start-up. RE technologies are usually large-scale systems with sizeable physical footprints. They are costly to not only to build but also to operate and maintain. Making a company on the supply side of the energy business requires a serious investment on the industrial side that the VC firms didn’t fully reckon with.

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Ghosh & Nanda, Harvard, 2010

2. IT companies have appropriately shorter sales cycles meaning that their products are commercialized promptly, ultimately meaning that VC can exit faster. The textbook example here is Google, that had an IPO 5 years after it received its first round of VC funding and having raised roughly $40m (!) in VC. As many VCs found out the hard way, energy companies don’t operate on those timelines. Consider this analysis by Matthew Nordan, a venture capitalist who specializes in energy and environmental tech. Of all the energy startups that received their first VC funds between 1995 and 2007, only 1.8% gained what he calls the end goal of a VC, meaning an initial public offering on a major exchange.

3. Whilst IT companies face incumbents with high-cost structures, clean energy companies face incumbents like ENI, Shell, and Exxon, who actually have lower cost structures owing to the fact they are giant, well-financed, often more than a century old and established, propped up by diversified investments.  And, yes, of course, the average IT company requires infrastructure investment, but it is on a whole other level relative to RE infrastructure, which requires an entire host of investments ranging from diffusors, chillers, arrays and transmission lines,  all of which must be manufactured, shipped and installed. It boils down to the fact that an RE company cannot scale and grow as quickly as an IT comply, delaying a potential exit for the VC.

None of this is to say that VC does not have value for RE, it does! VC are often the only private money willing to take the risk of investing in cutting-edge companies, but that’s their niche.  Remember that the venture capital niche exists because of the structure and environment of capital markets. Someone with an idea or a new technology often has no other source of financing to turn to. Banks will only finance a new company to the extent to which are hard assets against which to secure the debt, and renewable energy companies and clean tech actually do have hard assets.

tl:dr Renewable energy companies have capital requirements, growth profiles and competitive environments that do not make them ideal candidates for VCs.


Cover photo by Max Mudie/Alamy