When it comes to navigating the advanced biofuels’ winding pathway to commercialization, no company is faring better than Solazyme.  Whether delivering biojet fuel for commercial flights or producing hundreds of thousands of gallons of advanced fuels to help the U.S. Navy launch its Green Strike Force in 2016, Solazyme has been on a marketing tear.

The company has also unveiled a steady stream of partnerships, with companies such as Unilever and Chevron, in the last few years, securing its place among the companies to watch in biofuels.  Earlier this month, the company made a splash at the Advanced Biofuels Leadership Conference in Washington, D.C., where it announced a new joint venture with Bunge Global Innovation, a subsidiary of agribusiness giant Bunge.  The partnership will build, own, and operate a commercial-scale renewable tailored oils production facility in sugarcane-rich Brazil.

But caught in the backwash of the attention and hype surrounding Solazyme is a more troubling development: the skewing of expectations around algae commercialization.

Not quite an algae company – “traditional” algae companies rely on CO2, sunlight, and water as inputs – Solazyme uses an algae platform that relies on cheap sugars, which it feeds to microalgae in closed steel fermentation tanks.  The sugar-dependent algae platform coupled with the company’s genesis in the traditional algae space no doubt contributes to its characterization as an algae company.

More accurately, it sits alongside a slew of promising companies chasing cheap sugars, including venture-backed startups like Amyris, LS9, and Codexis.  All of these companies have proven adroit at straddling the chemicals and fuel markets.  As discussed in Pike Research’s Biofuels Markets and Technologies report, these companies stand out in the advanced biofuels industry, rebranding their companies around the production of “renewable” or “tailored” oils.  More importantly, they are on a very different commercialization trajectory than the algae-to-fuels industry.

Like any good Shakespeare character worth his salt, Solazyme has expertly used appearance versus reality to its advantage, aligning itself with algae when the industry is hot, and distancing itself when it’s not.  Meanwhile, the long-term impact of the “Solazyme Effect” on the algae industry remains unclear.  On one hand, the company’s recent success has provided important cover for a young algae industry still clawing its way towards commercial viability in the harsh, post-Solyndra landscape; on the other, the Solazyme Effect may be feeding unrealistic expectations about algae’s near-term potential.  If the Solazyme star flames out, the algae industry could suffer collateral damage, further delaying development timelines.

Green Crude Outlook

With or without Solazyme, though, things are starting to heat up for green crude.  Promising companies like Sapphire Energy and Origin Oil are making headway.  As with any new technology, the real test for the algae industry will be managing expectations while marching towards commercial viability.

At the end of the day, what algae has going for it is (potential) scale and infrastructure.  As a biofuels platform capable of producing fuels that can be dropped-into existing pipelines and engines – ground, aviation, or otherwise – the road to commercialization is less onerous from a marketing standpoint than it has been for ethanol or first-gen biodiesel.  And as a renewable energy platform, algae could very well be one of the killer apps that enhances our existing energy infrastructure by cleaning up wastewater or soaking up CO2 exhaust from industrial facilities.

But all this will take time and money.  As Katie Fehrenbacher rightly notes in a recent article at GigaOM, it’s a long, long (long) road for algae fuel.  Pike Research’s Algae-Based Biofuels report projects that biofuels production from algae will rise to just 61 million gallons by 2020, partly owing to early production being soaked up by low-volume, high-value markets like biochemicals and nutraceuticals.  Although we profiled Solazyme in the report, the company’s production forecasts did not factor into our global projections.

For those looking for relief at the pump in the near-term, don’t hold your breath as we don’t see much change in these projections, especially given the growing emphasis on production for non-fuel markets in the near-term.  Nevertheless, algae’s long-term prospects continue to shine.

As I wrote last month, global biofuels production is nearing 2 million barrels per day – an impressive number that ranks biofuels ahead of Libya among oil producing nations – but most of this consists of conventional biofuels derived from corn starch and sugarcane.  While these fuels may meet ground transportation needs, they lack the performance characteristics required by jet engines.

For end-users such as commercial airlines and the U.S. Navy, demand is focused squarely on advanced drop-in biofuels, which are fungible with existing petroleum infrastructure and derived from non-food feedstocks. Led by industry stakeholders such as Boeing, Airbus, and Embraer, industry consortia involving airlines, nonprofits, government agencies, and trade groups have set a course to ramp up the use of advanced biofuels over the next decade.  With the long shadow of rising oil prices and EU’s Emissions Trading System looming, for these players, market share and profitability are at stake.  The U.S. Navy, which is focused more on security, has been at the vanguard in driving biofuels innovation and has set its sights on deploying the “Great Green Fleet” in 2016, composed of vessels and ships powered by advanced biofuels.

While advanced biofuels may skirt the image problems of conventional biofuels  – a dubious connection to rising food prices and land use change – they have so far proven incapable of meeting end-user demand.  The bruising road to commercialization has raised difficult questions about which pathways commercial airlines and the Navy should pursue.  Eschewing conventional biofuels, and lacking a sufficient fuel supply from advanced pathways, these customers are caught between a rock and a hard place.

Enter alcohol-to-jet, or ATJ, which has gained traction as an alternative advanced biofuels pathway for meeting demand from aviation and military customers.  By fermenting agricultural residues and woody biomass in an advanced process similar to conventional ethanol production, ATJ (along with its precursor, isobutanol) is emerging as an appealing pathway for advanced biofuels and biojet commercialization.

For ATJ to be viable, however, it all comes down to cost.  As Jim Lane of Biofuels Digest notes, costs are only estimates at this point; price parity is a threshold that has yet to be realized.  While ATJ holds significant promise, a number of competing pathways also show commercialization potential.

Advanced biofuels derived from oilseeds and algae, which fall within ASTM’s Bio-SPK jet fuel spec, are the only aviation biofuels pathway certified for commercial use today.  While companies like Solazyme have delivered some gallons meeting ASTM’s Bio-SPK jet fuel spec, this is a far cry from the scale of supply needed to offset petroleum dependence in a significant way.  Long-term, there are serious doubts as to whether oilseeds can supply demand at a cost competitive to petroleum-based jet fuel.

Scale is one advantage ATJ has over other pathways.  Unlike camelina and jatropha – key feedstocks used in producing Bio-SPK fuels that depend on farmer’s willingness to plant the crop in the first place – agricultural residues and woody biomass are already available in abundance throughout the world.  Companies like Virent, Gevo, and ZeaChem are targeting these feedstocks, with commercialization slated for mid-decade.

Regulatory hurdles must still be overcome.  ASTM is currently testing ATJ with certification expected sometime in the next few years.  Without this certification, these fuels have no pathway to commercialization.

Ultimately, ATJ is expected to play a key role in the aviation biofuels mix.  There is no silver bullet, but ATJ should provide part of the advanced biofuels silver buckshot mix.

While aviation biofuels have become a hot topic in the advanced biofuels industry, old-fashioned emissions regulations and escalating diesel costs are making marine shipping’s dependence on bunker fuel seem outdated.  If aviation is the hare, than marine shipping may very well be the tortoise that could emerge the winner in integrating renewable fuels in this decade.

Aside from enjoying an easier path to broader market integration, marine shipping is faced with one very large incentive driving demand for alternative fuels: MARPOL.  Originally signed in 1973, MARPOL (short for “marine pollution”) is an international convention creating a verifiable, enforceable regime to prevent pollution discharges from ships.  It has been one of the key drivers of sustainability in the marine shipping industry.

Among other things, MARPOL sets limits on nitrogen oxide (NOx) and sulphur dioxide (Sox) emissions from ship exhausts as well as particulate matter, and prohibits deliberate emissions of ozone depleting substances.  Emission Control Areas (ECA) – coastal areas, regulated by national governments, have more stringent requirements.  In 2011, the International Maritime Organization (IMO), the UN agency that regulates the shipping agency, adopted mandatory measures to reduce emissions of greenhouse gases (GHGs) from international shipping, including new requirements on energy efficiency for ships.

Shippers’ Options

According to industry representatives speaking at World Biofuels Markets held in Rotterdam, Netherlands in March, the new regulations dictate that by 2015, vessels must reduce their sulphur footprint in certain ECAs, including North America.  The impact of these restrictions will be to spur the adoption of biofuels such as lignin, algae, and biomethane based fuels, as shipping lines will not be able to route vessels away from key markets to avoid regulation.

Shipping lines have three options: 1) manage fuel use by switching among options to burn the “right” fuel in the “right” place; 2) incorporate scrubbers to clean SOx and NOx from the exhaust; or 3) switch to alternative fuels such as biofuels and liquefied natural gas (LNG).

To the first and last points, biodiesel is an especially good candidate for replacing shipping fuel since it is biodegradable, non-toxic, and essentially free of sulphur and aromatics.  It can also be dropped into the existing fuel supply chain with little or no need for engine modification and its biodegradability reduces the risk of marine pollution in case of spills.

Two key developments demonstrate that a shift is already underway:

• Maersk Line, one of the world’s largest shipping companies, is testing algae-based biofuels in anticipation of 10 percent of the world’s shipping fleets utilizing biofuels by 2030.
• Solazyme currently has a contract to supply 450,000 gallons of algal biofuels for U.S. Navy testing ahead of its plan to deploy its “Great Green Fleet” by 2016.

As discussed in Pike Research’s upcoming biogas industry report, biomethane – upgraded biogas that can be mixed with natural gas – is also attracting interest in the maritime industry and driving investment in liquefied natural gas (LNG) infrastructure at ports.

As I noted in a recent post, with access to concentrated demand centers and no viable alternative to liquid fuels, the aviation industry is gaining traction as a potential near term “win” for biofuels.

Even so, targeting biofuels and bioLNG in maritime shipping could prove to be a much easier path for biofuel and biogas producers.  While supplanting fossil fuel dependence for commercial and military aviation has obvious benefits, the hurdles are generally more onerous given the scale of risk involved.  Engine failure caused by a bad batch of biofuels, for example, would have more dire consequences for the passengers on board a plane than a cruise ship.

Compared to ground and aviation transport sectors, the international maritime shipping industry, which carries 90 percent of world trade, has been a laggard in improving its sustainability profile.  Increased utilization of biofuels will go a long way to enabling the industry and its supply chains to become increasingly carbon neutral.

Dominated by sugarcane in Brazil and corn in the U.S., the global ethanol industry was worth $66 billion dollars in 2011.  While it was the worst of times for the Brazilian sugarcane ethanol industry, for U.S. corn ethanol, it was the best of times.

According to estimates compiled by Pike Research in our report Biofuels Markets and Technologies, U.S. ethanol production reached 13.6 billion gallons per year (BGY), up from 13.2 BGY in 2010.  Brazil, a biofuels pioneer that turned sugarcane-derived ethanol into a mainstream automotive fuel in the 1970s, saw production drop from 6.9 BGY in 2010 to 6.4 BGY last year.

But all this may be changing.  Although collectively, the two leading biofuel markets accounted for 85 percent of global ethanol production, policy momentum suggests that history will not be repeating itself.

Brazil Sticks to its Guns

Looking to reverse a relatively dismal 2011 for the industry in which diminished output resulted in the importation of U.S. ethanol for the first time ever, the Brazilian government recently announced a $38 billion subsidy program to drive expansion through 2015.  The government hopes to stimulate private sector investment and increase ethanol production to the tune of 50 to 55 percent of its overall gasoline market.

For the global biofuels industry, there is much riding on this expansion.  A forthcoming Pike Pulse report, which looks at Big Oil’s impact on the commercialization of biofuels, estimates that Royal Dutch Shell, BP, Total, and Petrobras have collectively sunk nearly $20 billion into the market in a race for dominance in the most efficient ethanol market in the world.

Raizen, a joint venture between Shell and Cosan Industria & Comercio in Brazil, is projecting to process 9 percent more sugarcane this season in April than a year earlier, according to a company spokesman.  Petrobras, meanwhile, has committed $1.3 billion to deliver 1.5 billion gallons of ethanol to the market by 2015.

Pike Research expects production within the country to more than double by 2021, reaching at least 16 BGY, with exports meeting expanding demand in other markets as well.

U.S. Charts a New Course

North of the equator, meanwhile, a paradigm shift has rewritten the rules for an industry that has enjoyed unparalleled success over the past decade.  Riding $6 billion worth of subsidies, strong mandates, and sheer grit, ethanol derived from corn starch grew into the most dominant biofuels pathway by volume in world.  But more recently, corn starch ethanol’s association with rising food prices and environmental maladies has tarnished its reputation.  Even leaving these concerns aside, most now agree that corn starch ethanol is one of the least efficient pathways to biofuels at scale.

Nor is it the panacea to energy security as many proponents argue.  Last month, Bloomberg reported that the price of ethanol in the United States was following the price of oil higher.  Although a number of variables may lead to higher ethanol prices – improving economic conditions in the U.S. and increasing import demand from China, for instance – a heavy reliance on petrochemical-based fertilizer amendments for growing corn and for shipping the finished product exposes biofuels production to the whims of the oil markets.

Responding to these difficult realities, policymakers have replaced the foundational policies that led to corn starch ethanol’s decade-long ascent with strong support for advanced biofuel pathways from cellulosic, waste, algae, and other non-food feedstocks.  This trend is at least partly responsible for the scrapping of Volumetric Ethanol Excise Tax Credit (VEETC) – a key credit extended to ethanol producers – as part of a political gamble in favor of policies expanding ethanol’s broader market potential.

E10 (a blend of 10 percent ethanol and 90 percent gasoline), which is currently distributed at the majority of gas stations in the continental U.S., is fast approaching a so-called “blend wall,” in which production exceeds the volume of fuel that can legally be blended into the U.S. gasoline market.  Advocates are currently pushing for E15, which if approved by the EPA, would allow producers to expand production to keep pace with the Renewable Fuel Standard’s (RFS) 15 billion gallon per year cap on ethanol derived from corn starch.

Outside of that, there are currently few options available to soak up extra ethanol production.  Unlike Brazil, flex fuel vehicles (FFV) have struggled mightily in the U.S.  Less than 1 percent of refueling stations nationwide currently carry E85 (a blend of 85 percent ethanol and 15 percent gasoline) pumps, with most vehicle owners refueling with gasoline or E10.

If that sounds confusing, that’s because it is.  U.S. biofuels policy is piecemeal and fragmented.  Meanwhile, the industry is currently caught in a production bind.  Between blend walls and disappointing advanced biofuels production volumes, even the industry’s backbone, the Renewable Fuel Standard (RFS), is at risk of being scrapped.

Despite advanced biofuel’s long-term promise, Pike Research expects ethanol production to stumble mid-decade in the U.S., achieving more modest growth than its counterpart in Latin America through 2020.