Sunfire, the German specialist in reversible electrolysis and fuel cell technology, says it has created a synthetic diesel-like liquid distilled from atmospheric CO2.

The company claims the "Blue Crude" can be made from a process powered by renewable energy, making it cleaner than petroleum diesel. When we received Sunfire’s excitable press release last week, we were skeptical, to say the least.

The project is being backed by the German auto giant Audi and has the endorsement -- and cash backing -- of the German federal government.

Sunfire, founded in 2010, also has the support of various venture capitalists, including Bilfinger Venture Capital, Total Ventures, KfW, and Electranova Capital, a venture capital fund financed by Allianz and EDF.

The new "wonder fuel" is currently being produced at a pilot plant in Dresden, and was publicly tested in an Audi A6 in Berlin last week at a conference in front of a prestigious audience that included German Minister of Education and Research Johanna Wanka.

According to the company, the power-to-liquids technology that synthesizes Blue Crude reaches system efficiencies of about 70 percent. The centerpiece of a three-stage production process is reversible electrolysis based on a Solid Oxide Power Core (rSOC). The rSOC generates hydrogen with an efficiency of approximately 90 percent, which reacts with atmospheric carbon to produce a mixture of hydrocarbon chains, of the type found in conventional crude.

Taking Sunfire and Audi’s figures at face value would indicate that around 50 kilowatt-hours of electricity are needed to produce one gallon of diesel. (According to Audi, the diesel is of a higher quality than the traditionally produced variety.)

The process can also go into reverse if electricity prices peak and make the production of Blue Crude uneconomical. After a short turnaround interval, says Sunfire, the system can be switched to fuel-cell mode and used to convert hydrogen reserves or any another fuel back into power and heat. This means that, in addition to providing fuel for mobility, the technology has a potential secondary market of grid balancing and energy storage.

In addition, as an ersatz crude, the synthetic product can be distilled into pretty much anything -- from kerosene to wax to petrochemicals -- and, of course, gasoline and the diesel that was on show in Berlin.

We spoke to Sunfire CEO Carl Berninghausen and Frank Dieninger, project leader for e-fuels at Audi, to fill in the details of how this could all work in the real world.

“The first critical question with any fuel is whether or not it’s compatible with the existing infrastructure. As a straight substitute for fossil fuels, Blue Crude certainly is," said Berninghausen.

And yes, with the exception of the reverse electrolysis step, all the expertise and infrastructure for mass production and adoption of Blue Crude and its derivatives are already tried and tested. Indeed, Sunfire has partnered with oil giant Total to help supply some of the fuel -- if the project gets further backing.

The next question is, of course, about the economics of the project. Here the two men give a number of caveats, revealing the project’s major stumbling block.

First, they say, legislative changes would be needed in Germany to exempt the production of Blue Crude from the high taxes on power. In the same vein, the success of its adoption is predicated on plentiful electricity. “The final cost of the product is almost wholly dependent on the price of electricity,” says Berninghausen.

But other costs can be a barrier to adoption too, as GTM Research storage analyst Ravi Manghani pointed out: “Most [fuel-cell-like] deployments have struggled to keep up production efficiency without requiring frequent stack or equipment replacement due to membrane or electrode degradation, which drives up costs.”

What about the claims that, despite being carbon-based, this is a green fuel?

Blue Crude is a heterogeneous mix of artificially produced short- and long-chain hydrocarbons that mimics the stuff you dig out of the ground, with, its backers point out, a crucial lack of the sulfur found in the naturally occurring product.

The fuel also extracts carbon from atmospheric CO2. The CO2 is released back into the atmosphere after combustion, rather than totally sequestering the pollutant -- making the fuel ‘green’ only if the electricity used to synthesize it comes from renewable resources.

“Of course,” said Berninghausen, candidly.

Both he and Dieninger emphasize that their project is predicated on plenty of cheap, excess energy that they see coming from Germany’s policy of energy transition.

However, Blue Crude will always be more expensive to produce than its fossil rivals. “It’s like comparing a farmer who is growing grain on one farm, while his neighbor simply digs into a huge silo of grain he has discovered on his property. Who do you think will be able to offer the cheapest product?” said Berninghausen.

So how serious is Audi about backing Sunfire? It's still an early relationship. Audi partnered with Sunfire around 18 months ago, with an interest in power-to-gas technology that has subsequently evolved into backing power-to-liquid.

When asked how e-fuels fit into Audi’s electric vehicle strategy, Dieninger’s reply was “perfectly."

The automaker hasn’t fully jumped into plug-in EVs, instead opting for hybrids, such as the Q8 e-tron. Audi is concerned about range anxiety and believes German motorists will continue to want the advantages of a hydrocarbon-fueled car. He also cites the current high price of batteries as a barrier to EV adoption and believes hybrids with smaller (and thus cheaper) battery packs are, therefore, more appealing.

This makes sense in the current climate. But if the price of lithium-ion batteries continues to fall thanks to economies of scale and sustained improvements in efficiency, the strategy may fall short.

Sunfire has a process that works at a pilot level and could be plugged into the existing fuel infrastructure, although questions remain about the reliability and potential hidden costs of the process once scaled up.

It relies on changes in legislation that will allow access to cheap, plentiful electricity -- and, for it to be a truly green alternative, much of that electricity will need to be from renewable sources.

Berninghausen also says that this process is unlikely to compete with fossil fuels without state subsidies. “Long-term, there will be a split in the energy market between fossil fuels and renewables,” he predicts -- implying that if Blue Crude can’t beat oil, it can become a part of a subsidized and “socially important” renewables market.

Finally, its success relies on pure EVs not becoming as popular as many believe they will be.

Berninghausen and Dieninger are hoping that a new round of funding for projects by the German government -- worth several billion dollars in total -- will allow the process to be scaled up. The pilot plant currently produces a modest 42.2 gallons of Blue Crude per day. In two to three years, it could potentially reach 475 gallons per hour, they predict.