Friday, April 20, 2007

Algae Amore

Ethanol gets most of the headlines when it comes to alternative fuels. It is time to give biogas its due.

I have mentioned biogas from time to time and have suggested that alternative fuels from waste products such as cow manure and sludge presents more compelling economic value than ethanol production from highly desirable food sources such as corn. Environmental Power Corp. (EPG: AMEX) was profiled in the November 2006 issue of our Small Cap SEARCH newsletter. At the end of March 2007, the Company announced first deliveries of natural gas produced from cow manure in biogas digesters at its Huckaby Ridge facility in Texas.

Biogas digesters are largely confined to locations immediately adjacent to the fuel source - large congregations of cows! This is a transportation issue, since it is much easier to send natural gas through a pipeline than it is to move…well…cow pooh!

The transportation problem is causing biogas producers look elsewhere. Algae as a feed stock for biofuel are gaining supporters. Algae can be a prolific grower, sometimes growing up to thirty times faster than land plants. This makes them highly renewable. Algae also have very high energy potential. Oil content can be as high as 40% and the photosynthesis rate of as much as 7% per acre. This compares to a 5% per acre photosynthesis rate for corn.

There are a variety of schemes to raise algae. Some are looking at sea water in large shallow desert ponds. Others are looking at farm wastes, such as chicken fodder, using algae growth as a step-up in energy content before the bio-digestion step. However, algae are temperamental. Conditions that increase growth rates also reduce oil content. The sunlight conversion rate is highest at low light levels, e.g. 10% full sun. The temperamental nature of algae implies investment in production infrastructure to control the environment.

Since the idea of using algae on a large scale for energy production is relatively new, the field is populated mostly with small private companies.
Solazyme, which describes itself as an algal biotechnology company, is developing photosynthetic bio-reactors for food, pharmaceutical and energy applications. Solix Biofuels is working along the same lines, but is focused exclusively on sustainable fuel solutions. Solix is working on the scalability issues that are incumbent in fuel production.

On the public side, investors have few pure play choices.
Cyanotech Corp. (CYAN: Nasdaq) produces BioAstin, its branded microalgae for use as a nutrient, but has yet to make a move toward energy applications. The Vertigro Energy System of Global Green Solutions, Inc. (GGRN: OTC/BB) is touted by Global Green as a cost-effective source of biodiesel fuel. The company claims it can produce as many as 4,000 barrels of oil per year per acre at a cost of about $25 per barrel. That is a very interesting value proposition. However, Global Green has yet to record revenue and has built a cumulative net loss of $7.8 million since its inception in 2003.

Investors need to have strong tolerance for risk to assume a stake in the algae-based biogas business. However, for those with amoré for algae, the rewards could be compelling.

Neither the author of the Small Cap Copy web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. EPG is one of the companies profiled in the Small Cap Newsletter.

1 comment:

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