Algae Biofuels Economic Viability: A Project-Based Perspective

The commercial viability of algae-based biofuels production is ultimately going to depend on economics. Regardless of whatever advances might come in terms of technological and biological breakthroughs, the fact remains that the commercial marketplace will not have an appetite for funding capital-intensive energy projects unless the risk-return ratio is acceptable to debt and equity financiers. A number of companies and government organizations have previously assessed different production designs and offered estimates of costs for algae systems. The most popular of designs previously analyzed include open ponds, open raceways and closed photobioreactors. Generally these assessments have taken a first-order look at capital and operations and maintenance (O&M) costs. The capital costs are usually broken down into costs associated with algal biomass growth, harvesting (removal of the biomass from the culture), dewatering (getting the algae to an acceptable concentration for further processing), and algal oil extraction systems. In addition, there are more traditional project costs such as engineering, permitting, infrastructure preparation, balance of plant, installation and integration and contractor fees. O&M costs generally include expenses for nutrients (generally N-P-K), CO2 distribution, water replenishment due to evaporative losses, utilities, components replacement and labor costs. In addition to capital and O&M costs, the costs of the land (or leasing) must also be taken into account as this can be a significant expense.

The data that has been publicly released shows major variations in capital and O&M costs. Some entities have reported capital costs as low as $10k/acre, while others have shown costs approaching $300k/acre. These wide variations in costs are also seen in O&M projections. For example, Sandia National Laboratories and National Renewable Energy Laboratory recently conducted an assessment of previously reported, open literature and concluded that average capital costs were roughly $57k/acre (with a 1-sigma standard deviation of a whopping $72k/acre) of utilized surface area and corresponding annual O&M costs were $27k/acre (standard deviation of $25k/acre)¹. This data represents over a dozen different types of open and closed architectures, albeit some of the data is older and obviously doesn't reflect the newest results being achieved today. It is therefore challenging to estimate the costs of such systems with even a modest degree of confidence. This uncertainty has been driven by three fundamental reasons: (1) there are no large-scale commercial algae biofuels production systems with which to develop and substantiate the data, (2) those companies developing new technologies and architectures are very protective of their detailed financial data, and (3) because of the immaturity of the market, there are many unknowns coupled with a number of companies making aggressive (and likely overly optimistic) claims.

The approach taken here is to address algae economics from a different perspective than has been the norm. Instead of forecasting the likely costs for capital and O&M for a given architecture and its reported yield, let's assess what a project would require in order to make it commercially viable. That is, using traditional discounted cash flow analyses, along with justifiable assumptions on yields and revenues from algal biomass, what would the capital and O&M costs have to be to satisfy the demands of those financing an algae biofuels project? The figure below is the result of such analysis. The vertical axis represents the "total installed costs" of a project – made up of the cost of the land, capital equipment, installation and other traditional project costs as described earlier. The land accounted for here represents the utilized surface footprint of algal biomass growth systems undergoing photosynthesis, not the gross land area. Therefore this likely underestimates the true land costs as there will be large tracts of acreage (sometimes as much as 2X) not directly contributing to photosynthesis, but instead providing for access ways, harvesting, dewatering, oil extraction, pipes and plumbing, storage, laboratory space, among other functions. The horizontal axis represents O&M costs as discussed earlier.