Feds Dole Out $24 Million for Research to Turn Algae Into Fuel

The federal government had already invested hefty sums in alternative fuels even before the Gulf of Mexico oil spill, but the millions of gallons of crude that continue to gush from BP's (BP) damaged well are a stark reminder of the true price Americans pay for fossil fuel. Now, Washington is putting in another $24 million into the search for new fuel options, this time to figure out ways to turn algae into a good source of power for our cars.

The Department of Energy, which announced the grants Monday, hopes the money will help three groups solve some of the tricky issues involved in growing, harvesting and processing algae for fuel production. Algae has attracted a lot of attention in the biofuel world because some species have high oil content. In fact, some algal fuel companies are using these organisms to develop not only transportation fuel but also edible oils – think salad dressing – and cosmetics ingredients.

The government is eager to replace fossil fuels with more renewable sources, which include corn ethanol and a variety of other fuels made from plants, microbes and simple organisms like algae. Legislation passed in 2007 requires the country's refineries to blend 36 billion gallons of renewable transportation fuels into the U.S. fuel supply per year by 2022, and only 15 billion of them may come from ethanol made of corn starch.

Just last week, Agriculture Secretary Tom Vilsack released a report outlining the government's efforts to reach the 2022 goal. The United States produced 10.75 billion gallons of ethanol (mostly out of corn starch) in 2009, and the government expects the output to reach 12 billion gallons this year, according to the report. Except for biodiesel, all other types of alternative fuels remain in early stages of commercialization.

Three groups will divvy up the $24 million in funding from the DOE. A group led by Arizona State University will get up to $6 million while a consortium led by UC - San Diego is set to get up to $9 million. The only non-academic group, Cellana, a joint venture between Royal Dutch Shell (RDS.A)and HR BioPetroleum, will receive up to $9 million.

In addition to announcing the funding Monday, the DOE also issued a lengthy report detailing the various technologies and the obstacles to making algal biofuels.

A Second Look at Algae

The idea of mass-producing algae fuel isn't new: The government funded research from 1978 to 1996 to explore the concept. Now, oil price hikes and political discussions about reducing greenhouse gas emissions have put algae back in the spotlight.

Earlier this year, the DOE said a consortium led by the Donald Danforth Plant Science Center in St. Louis would get up to $44 million to work with universities, national labs and companies to show how mass-producing algae biofuel could be possible.

But skeptics say mass-producing algae fuel is so difficult that it just might never happen. For starters, creating an optimal environment to grow it has proven tricky. Some companies have opted to cultivate algae in open ponds, but that could subject the organisms to invasive species and viruses.

Another way to go is growing algae in bioreactors, enclosed and typically plastic devices into which carbon dioxide is pumped to spur their growth. But this method could be more expensive.

Bill Gates Believes in the Possibility

Controlling algae's growth rate in order to get ample but steady supply of fuel source also isn't easy. GreenFuel Technologies in Cambridge, Mass., which shut down last year because it ran out of money, initially had trouble harvesting its algae fast enough.

Squeezing the oil out of algae presents another set of technical challenges. Along the way, companies will have to raise millions of dollars to build pilot production lines and commercial plants.

Despite the obstacles, dozens of startup have formed to make something of algae, among them such companies as Solazyme and Sapphire Energy, which has gotten money from Cascade Investments, Bill Gates's private holding and investment company.

Large oil companies also have shown a keen interest in the potential of algae. BP, for one, struck a $10 million deal with Martek Biosciences to figure out ways to grow the organisms on a large scale. ExxonMobil (XOM) has said it would invest $600 million to commercialize algae fuel production, a process its executives say they expect to take at least five or 10 years.