Relatively high oil prices, advances in technology, and the Bush administration’s increased emphasis on renewable fuels are attracting new interest in a potentially rich source of biofuels: algae. A number of startups are now demonstrating new technology and launching large research efforts aimed at replacing hundreds of millions of gallons of fossil fuels by 2010, and much more in the future.

Algae makes oil naturally. Raw algae can be processed to make biocrude, the renewable equivalent of petroleum, and refined to make gasoline, diesel, jet fuel, and chemical feedstocks for plastics and drugs. Indeed, it can be processed at existing oil refineries to make just about anything that can be made from crude oil. This is the approach being taken by startups Solix Biofuels, based in Fort Collins, CO, and LiveFuels, based in Menlo Park, CA.

Alternatively, strains of algae that produce more carbohydrates and less oil can be processed and fermented to make ethanol, with leftover proteins used for animal feed. This is one of the potential uses of algae produced by startup GreenFuel Technologies Corporation, based in Cambridge, MA.

The theoretical potential is clear. Algae can be grown in open ponds or sealed in clear tubes, and it can produce far more oil per acre than soybeans, a source of oil for biodiesel. Algae can also clean up waste by processing nitrogen from wastewater and carbon dioxide from power plants. What’s more, it can be grown on marginal lands useless for ordinary crops, and it can use water from salt aquifers that is not useful for drinking or agriculture. “Algae have the potential to produce a huge amount of oil,” says Kathe Andrews-Cramer, the technical lead researcher for biofuels and bioenergy programs at Sandia National Laboratories, in Albuquerque, NM. “We could replace certainly all of our diesel fuel with algal-derived oils, and possibly replace a lot more than that.”

To be sure, the use of algae for liquid fuels has been studied extensively in the past, including through a program at the National Renewable Energy Laboratory (NREL) that ran for nearly a decade. At the time, the results were not encouraging. The NREL program was terminated in 1996, largely because at the time crude-oil prices were far too low for algae to compete.

But Eric Jarvis, an NREL scientist, says that enough has changed that NREL researchers expect to restart the program within the next six months to a year. When the program was cancelled in 1996, oil prices were relatively low. Today’s higher oil prices will make it easier for algae to compete. Still, Jarvis cautions that “you have to be careful because there’s a lot of hype out there right now.”

Biotech advances in the past decade could help. New genomic and proteomic technologies make it much easier to understand the mechanisms involved in algae-oil production. One of the challenges researchers have faced is that while some types of algae can produce large amounts of oil–as much as 60 percent of their weight–they only do this when they’re starved for nutrients. But when they’re starved for nutrients, they lose another of their attractive features: their ability to quickly grow and reproduce. Researchers hope to understand the molecular switches that cause increased oil production, with the added hope of triggering it without starving the algae. This could dramatically increase oil production and drive down prices.

A better understanding of biology may help researchers address another problem. The cheapest way to grow algae is in open ponds. But open ponds full of nutrients invite other species to take over, competing with the algae and cutting down production. LiveFuels, which is funding and coordinating research at its own lab and at those at both Sandia and the NREL, hopes to create algal ecosystems that resist such invaders by ensuring that all the nutrients are converted to forms the algae can easily use, says David Kingsbury, the chair of the company’s scientific advisory board.

Recent tests of an algae-based system developed by GreenFuel, which, unlike LiveFuels, is developing closed bioreactors, showed that it could capture about 80 percent of the carbon dioxide emitted from a power plant during the day when sunlight is available. Although this carbon dioxide will later be released when the fuel is burned in vehicles, the carbon dioxide would have entered the atmosphere anyway. Reusing it in renewable liquid fuels makes it possible to prevent the release of carbon dioxide from fossil fuels, thereby decreasing total emissions.

The growing interest in regulating carbon-dioxide emissions could also be a boon to algal fuels. “If there is a carbon tax, or another way to basically make money by capturing carbon dioxide, that could definitely impact the economics,” Jarvis says. But GreenFuel’s John Lewnard, vice president of process development, says the company thinks it can reach competitive prices without carbon taxes.

But for now, lowering costs will mean overcoming many technical hurdles. “Clearly, [producing fuel from algae] can be done,” says Lissa Morgenthaler Jones, LiveFuels’s CEO. “The only question is whether we can do it cheaply. And the only way we’re going to find that out is if we do it–if we actually go out, crank it through, spend some millions on it, and make it happen.”

There is plenty of federal interest these days. In his State of the Union address, President Bush set an ambitious goal of replacing 20 percent of gasoline consumption in the United States by 2017, largely by producing 35 billion gallons of renewable fuels. Meeting those goals will be a challenge. Right now, biofuels come from food crops such as soybeans and corn; already the demand for corn to produce ethanol is driving up staple foods’ prices and fueling protests in Mexico. One alternative to food sources is cellulosic materials such as wood chips, grass, and cornstalks, which are more abundant than corn grain. But these require special processing methods, and although some of these techniques have been demonstrated at small plants, they have yet to be proved commercially.