U.S. Govt Gives $78 Million for Algae Biofuel – Big Deal or Small Deal?

In January the DOE handed out (or invested – depending on your point of view) $78 million* to two algae biofuel consortia. (Source) In other news, baseball player Derek Jeter is nearing the end of his $189 million contract and  may want to negotiate an extension earlier than the Yankees do. (Source)  I refernce this second story to illustrate a point: without context it is impossible to extrapolate meaning from the amount of money that the government is spending on algae biofuel.  As such, lets take a look at what % of DOE budget is going to algae biofuel, who is getting this money and what effect they are likely to have on the algae biofuel market, and what the government is likely to get in return.  Once we do this, we will see the extent to which this investment (or hand-out) is a big deal.

Where else is the DOE spending money?

The DOE budget for FY 2010 as reported to congress by U.S. Energy Secretary Steven Chu was $26.6 billion.  That puts the $78 million algae spend at 0.03% of the budget.  Not terribly encouraging for Algae fans.  On the other hand, the specific branch of the DOE that is investing in algae, the Advaced Research Projects Association (ARPA-E), has a budget of roughly $300 million, meaning it is using 26% of its budget on Algae.  We must also consider the fact that ARPA-E was only established in 2007, and did not have a budget at all until 2009.  The positive spin here is that the ARPA-E may give the DOE a good vehicle through which to invest in Algae.  The negative spin is that this branch could disappear due to budget cuts as the Obama administration reduces stimulus spending.  One more data point is that the 2011 proposed budget specficially asks for R&D budget of $302 million for solar, $123 million for wind, and $55 million for geothermal.  Nothing specifically allocated to algae.  OVERALL VERDICT – SMALL DEAL – 0.03% of DOE budget is barely a blip.

Who is getting the money and how much influence do they have on the market?

The money actually goes to two umbrella groups: $44 million goes to The National Alliance for Advanced Biofuels, and Bioproducts (NAABB), and the remaining $39 million goes to the National Advanced Biofuels Consortium (NABC).  Despite the fact that these groups are both “advanced,” they actually serve different purposes.  The NAABB will focus on technological improvements to enhance algae’s biofuel production efficiency and lower its carbon footprint, while the NABC will focus on how to make algae biofuel compatible with the current energy infrastructure for distribution and refining.  It is clear that the mission of both of these groups must be accomplished if algae biofuel is going to be commercially viable, but will $78 million really move the needle in these areas?  Compared to the $600 million that Exxon says they will put into algae biofuels or the $100 milion of funding raised by Sapphire Technologies (half of which comes from Bill Gates’ backed Cascade Investment), the government investment seems small.  On the other hand, it is unlcear over what time period Exxon plans to make the spend, and some of the money is contingent on hitting R&D milestones, so one might put forth the “bird in the hand” argument here.  Overall Verdict – Big Deal… assuming this isn’t a one time investment.  Serious dollars devoted to algal biofuel research is a fairly new phenomenon, and you have to start somewhere.

What is the government likely to get in return?

As we heard in President Obama’s recent state of the union address, the administration is focused on the development of alternative energy as a means for the U.S. to acheive economic advantage in the global market.  In other words, if we don’t develop the fuel of the future, China will.  The fuel of the future certainly doesn’t have to be algae, but algae does have a leg up on other biofuels in one regard, it can be used as jet fuel.  ARPA-E is modeled on the Defence Advanced Research Projects Agency (DARPA), the longstanding branch of the Department of Defense that has been intrumental in the development of military advances, such as stealth technology, as well as technology with more widespread application like the internet.  It turns out that DARPA has been investing in Algal Biofuel for several years because alagal biofuel tends to have a lower freezing point than first generation biofuels (like corn based ethanol), making it suitable for use as jet fuel.  The DOD is interested in having a domestic source of jet fuel for national security reasons, and because it is a matter of national security, they are relatively price insensitive and unlikely to give up on algae in the short term.  Overall Verdict – Big Deal – The $78 million investment form ARPA-E means that multiple government departments are investing in algae.  Additionally, even incremental success in production can have a positive impact, paving the way for further funding.

While it is tempting to dismiss this $78 million investment based on the paltry 0.03% of the DOE budget that it represents, I would argue that this represents an important step towards mroe serious government support of this emerging technology.  $78 million is certainly not enough to make this technology viable on its own (just ask Derek Jeter how small an amount it can be), but it is unlikely that any energy technology can succeed without government support.  The proponents of algal biofuel are starting to get that support.  

*The DOE press release states that there will be an additional $19 million of “private and non-federal cost share funds,” but I was unable to find when these funds would arrive and where they would go, so I left them out of this analysis.  Even with the $19 million, Jeter’s contract (though spread over 10 years) is bigger.

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