In recent weeks, Gevo flipped the switch on its first commercial-scale facility making advanced biofuels and renewable chemicals.  Retrofitting a brownfield ethanol facility in Minnesota to produce isobutanol from corn starch, a chemical that packs more energy than conventional corn-starch ethanol, the development may signal the beginning of the next wave of bioenergy innovation.

Principally designed to do one thing – ferment large quantities of corn starch into millions of gallons of ethanol – first generation production facilities are inefficient energy users and produce a great deal of waste.  Retrofitting first generation ethanol facilities, which are prodigious consumers of electricity and water, is proving to be a bankable (read: “capital light”) strategy for ramping up production of biofuels while reducing the industry’s environmental footprint.

In a typical ethanol retrofit, innovative conversion processes and technologies are “bolted onto” existing assets to create an integrated biorefinery.  Modeled after petroleum refineries, integrated biorefineries use biological matter to produce a range of end-products: transportation fuels, chemicals, and heat and power.  These facilities are designed to be more efficient, sustainable, and profitable than first generation corn-starch ethanol refineries.  Gevo’s 12 million gallon per year facility is just one of several integrated biorefineries arising from the ashes of first generation ethanol.

Accounting for around 10% of U.S. liquid fuel consumption in the transportation sector, corn starch-derived ethanol is a well-entrenched juggernaut in the global alternative energy landscape.  As discussed in Pike Research’s Biofuels Markets and Technologies report, the United States currently leads all countries in ethanol production with nearly 13.9 billion gallons per year in 2012 (Brazil is next with an estimated 7.3 billion gallons).  The industry grew 720% between 2000 and 2010, with strong foundational support from an even stronger agricultural lobby.  From a pure growth perspective, it has been hailed as the most significant success story in American manufacturing.

But despite ethanol’s rapid rise in the United States, the industry has faced significant backlash in recent years.  This opposition has stoked heated debate both inside and outside the industry.  From contributing to increases in food prices, causing indirect land use change (ILUC), and exacerbating efforts to reduce greenhouse gas (GHG) emissions, first generation ethanol has become a punching bag for environmentalists and tech-oriented clean energy enthusiasts alike.

Policy momentum has shifted as well.  The revised Renewable Fuel Standard (RFS2) administered by the Environmental Protection Agency (EPA) capped corn starch-derived ethanol at 15 billion gallons per year, shifting support to advanced biofuels derived from cellulose and other non-food resources.  VEETC, a key tax credit that played an instrumental role in the industry’s growth over the past decade, lapsed in 2011.

Lacking goodwill and facing a sluggish economy, growth within the industry has dropped off considerably in recent years from its 2008/2009 high.

Despite a precipitous drop-off in plant construction, existing ethanol facilities in the United States could provide fertile ground for the next wave of clean energy expansion.  With an estimated $45 billion in subsidies granted by the U.S. government over the past 30 years and more than $30 billion worth of steel already sunk by major players like Valero, ADM, and POET, the greatest near-term biofuels opportunity is likely to lie in brownfield plant conversions and retrofits rather than greenfield builds.  Gevo’s recent success suggests that we are likely at the bottom of this next innovation cycle.

As I’ll highlight in Pike Research’s upcoming Scaling the Bio-Based Economy webinar, emerging business models are demonstrating that existing ethanol assets provide a platform for the integration of a host of Smart Energy technology systems.  Bio-digesters, for example, can process waste streams into biogas for onsite power generation and process wastewater.  Companies like Lanzatech and algae producers such as Algae-Tec are seeking to prove that the waste carbon dioxide produced by ethanol facilities can be used to produce advanced biofuels and renewable chemicals.  Meanwhile, the integration of combined heat and power (CHP) technology offers plant managers the ability to consume energy more efficiently.

The world’s biggest cities are sometimes described as having an “urban metabolism,” akin to living entities that consume energy, food, water, and other raw materials and expel waste.  Via a well-planned web of municipal infrastructure, a streamlined urban digestive system enables economic advancement, growth in development, and population expansion by improving public health and the surrounding urban environment.

But even efficient digestive systems have their limits.  Over the last several hundred years, one of the defining measures of how far a city has advanced has been its ability to distance its inhabitants from trash, excrement, and emissions.  With more than half of the world’s population living in cities today, and megacities – defined by the UN as metropolitan areas with populations exceeding 10 million – on the rise, this out-of-sight, out-of-mind “Waste 1.0” paradigm is facing significant limits.  As urban entities gorge themselves on resources, the sheer volume of trash, limited geographies, and sustainability efforts are causing the urban digestive system to back up.

For cities faced with this predicament, treating waste as a strategic resource, a strategy I call Waste 2.0, is quickly becoming an enabler of urban growth.  Last year 3.7 billion urban dwellers produced an estimated 2 billion tons of municipal solid waste (MSW) and 375 billion gallons of wastewater, both lucrative potential sources of energy-rich biomass.  When this unprocessed waste is shipped to far away landfills in developed economies or dumped in open pits throughout much of the developing world, the energy potential contained in waste is vastly underutilized.

MSW, a primary urban biomass resource, satisfies one of the key requirements for bioenergy deployment: aggregation of biomass in sufficient quantities to allow for projects to be deployed at scale.  Accordingly, a slew of companies are advancing projects that convert waste to useable energy in the form of power, heat, and fuels for onsite consumption.  At Heathrow, in the United Kingdom, for example, Solena Group is partnering with British Airways to convert trash generated by London’s residents into biojet for use in commercial flights.  Plasco Energy Group is also targeting MSW, but aims to produce electricity for onsite generation.  Fleets of buses throughout Sweden, meanwhile, run on renewable natural gas produced in anaerobic digesters processing organic waste.

For projects targeting MSW, however, securing a consistent steam of garbage is only half the battle.  In some cases, MSW must be separated from inorganic components in order for conversion to be viable.  Although waste can be source-separated at the point of conversion, this can add significant cost.  Accordingly, Waste 2.0 is also about crowdsourcing separation of waste components at the upstream source in order to decrease the cost of technology deployment.  From dedicated waste bins for separate streams (e.g. recycling, compost, landfill) to pneumatic waste collection systems, Waste 2.0 is as much a cultural challenge and a behavioral shift as it is a technological chore.

The European Union has shown that viable Waste 2.0 projects will require a combination of political will fueled by a strong waste management policy framework, economic will fueled by high electricity or fuel prices, and grassroots will fueled by streamlined waste collection infrastructure to facilitate technology deployment around waste.

The last leg of the stool, requiring a cultural shift from the Waste 1.0 paradigm, is perhaps the greatest challenge to increased waste utilization in urban centers.  In regions like Asia Pacific, for example, where opportunities to capitalize on waste streams show the greatest opportunity, the ability of local governments to win over their public by branding or selling the idea of utilizing MSW will have a significant impact on the rate of technology deployment.  In order for urban dwellers to get a little closer to their trash, Waste 2.0 will require herculean efforts to educate the public, but will maximize sustainable growth throughout fast-growing advanced and developing cities.

It is the odorless and invisible 500-pound gorilla in the room.  Currently hailed as the antidote to U.S. energy insecurity and a bridge fuel for the 21st century, natural gas is every bit as fossil as its coal and petroleum cousins.  But for clean energy, which is coming off a stimulus-fueled high and $100-dollar-plus oil run, could it be a death knell?  My colleague Kerry-Ann Adamson has looked at this question from the point of view of Smart Energy overall.  In my world of bioenergy, the accelerating development and availability of biogas, a renewable form of natural gas, indicates that natural gas surge could actually hasten the transition to clean energy, not impede it.

In 2009, the U.S. passed Russia to become the world’s largest producer of natural gas.  Estimates suggest that at 2010 consumption rates, the U.S. has enough recoverable natural gas resources to supply over a century of use.  Meanwhile, the Nymex price has dipped below $3 per million British thermal units (MMBtu), down from nearly $14 four years ago.  The glut has analysts in the U.S. scrambling to recalibrate energy forecasts and renewable energy project developers searching for new off-take partners to make project economics pencil out.

The boom in shale gas has stripped renewable energy of two of its key arguments: that a heavy reliance on fossil fuels is 1) contributing to irreversible climate weirdness; and, since these fossil fuels tend to come from nefarious nations, 2) making the United States increasingly energy insecure.  With respect to mitigating climate change, studies point to natural gas being less carbon intensive than coal and potentially oil as well.  As for energy security, the sudden bounty of domestic carbon is fuelling what could be a huge shift in U.S. transportation fuel, away from petroleum-based fuels to compressed and liquid natural gas, and potentially hydrogen and fuel cells, longer term.

Crossing the Biogas Bridge

Many believe the natural gas bonanza may be a transition fuel for the larger clean energy transformation.  John Podesta, former chief of staff to ex-President Bill Clinton and now head of the Center for American Progress in Washington writes that natural gas can serve “as a bridge fuel to a 21^st-century energy economy that relies on efficiency, renewable sources, and low-carbon fossil fuels.”

No renewable is in a better position to cross this bridge first than biogas.  Vastly underutilized, biogas is essentially natural gas that is produced in a matter of millions of seconds rather than millions of years.  The result of anaerobic digestion – a naturally occurring process in which bacteria feed on organic matter in the absence of oxygen – biogas is commercially produced in anaerobic digesters (AD) and landfill gas recovery facilities designed to treat biowastes such as manure, sewage, energy crops, and organic matter.  Currently, in the U.S., the economics for generating electricity from biogas are dismal.  But with emerging technologies, raw biogas can be stripped of carbon dioxide and other trace gases, bringing it up to the quality level of natural gas.

This renewable natural gas, essentially purified methane, is virtually identical to natural gas, but without the fracking.  It’s a fully fungible alternative, avoiding many of the blending constraints you see with an alternative like ethanol.  Leveraging natural gas infrastructure, it can be distributed as CNG, LNG, or in pipelines via gas-to-grid injection.  Although upgrading biogas to pipeline quality results in a fuel considerably more expensive than natural gas, biomethaneis starting to gain momentum in the U.S., particularly as a potential renewable fuel that can satisfy advanced biofuels mandates under the Renewable Fuel Standard (RFS2) and emerging Low Carbon Fuel Standards (LCFS).

The challenge for the biogas industry will be scaling up in economical ways.  As Pike Research’s analysis in our upcoming biogas report shows, one model that can reduce costs and concentrate supply is the development of community biogas hubs.  Using gathering infrastructure that is shared across several smaller-scale biogas producers linked via a pipeline network to an upgrading facility, upgrading costs can be defrayed among all producers.

Longer term, by leveraging shale gas infrastructure, biogas is poised to capitalize on a free ride to widespread scale up, a notion unheard of in many clean energy technology circles.  Should a massive natural gas infrastructure build-out take place to move shale resources to market, with significant untapped feedstock potential, biogas could emerge as a clean energy Cinderella story over the next decade.

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.