As Pentagon invests in green fuel, critics focus on the cost

WASHINGTON >> When the U.S. Navy sailed an imposing fleet near Hawaii that was powered in part by algae and used cooking grease, environmentalists weren’t the only ones who were thrilled.

Executives at bioenergy startups in the San Francisco Bay Area, Chicago and elsewhere – and the venture capitalists backing them – had reason to cheer. The Obama administration has made the military, the largest consumer of energy in the country, a financial lifeline for cash-strapped alternative fuel innovators.

But the pilot voyage of the Navy’s "great green fleet" came with a troubling aspect: price.

The fleet’s green fuel costs $26 a gallon, several times more than conventional diesel and jet fuel. And the costly experiment came just as the military moved into an era of deep budget cuts.

Republicans in Congress have howled over the price tag, and they’re not alone. Some independent energy experts doubt the military’s projections that spending on pioneering technology will yield sufficient benefits.

Pentagon officials argue that national security justifies the drive for new fuels, even at initially high prices. Remaining at the mercy of global oil markets poses too high a risk, they say, arguing that using military purchasing power to jump-start new industries eventually will make alternative fuel prices competitive.

Although the prices are high, the cost is a fraction of the more than $20 billion the military spent last year on fuel, backers say.

"We don’t want to find ourselves with our backs against the wall in some future crisis where the availability and price of petroleum-based fuels limits all our options and makes them unattractive," said Dennis McGinn, assistant secretary of the Navy for energy, installations and the environment. "This is something we can’t not do."

With encouragement from the White House, the military has pursued an Obama administration alternative energy agenda that otherwise has stalled in Congress.

The Pentagon has allocated millions to help incubate a Bay Area firm that extracts oil from algae and another trying to make fuel from switchgrass. A Northern California firm working to turn massive amounts of garbage into liquid fuel and Emerald Biofuels, an Illinois company hoping to do the same with the kinds of grease used in cooking and food processing, are each positioned to win as much as $70 million in grants.

Critics contend the spending will line the pockets of lucky entrepreneurs, not bolster national defense or help the environment.

"This is really a house of cards," said Ike Kiefer, a recently retired Navy captain and faculty member at the U.S. Air Force Air War College, who has spent the last few years studying the fuel purchases.

"When you look at the absolute limits of what is possible, it doesn’t work," he said. "This is not a question of waiting for another generation of technology."

Some notable green energy thinkers endorsed Kiefer’s findings, which were published this year in Strategic Studies Quarterly, an official Air Force journal. Jesse Ausebel, a scientist involved in global efforts to cut emissions, said in an email that the Kiefer paper was "the best analysis of biofuels that I know."

The RAND Corp. declared in a 2011 report commissioned by the Pentagon that "there is no direct benefit to the Department of Defense or the services from using alternative fuels." Keith Crane, director of the RAND Environment, Energy and Economic Development Program, said in a recent interview that he remained "very skeptical."

Doubters say that growing and processing algae, wood chips and other biomass on the scale the military needs would require an irrationally large amount of energy, land and other resources. Plans to convert massive amounts of used cooking oil and household trash to liquid fuel, meanwhile, have long been undermined by technological and environmental problems.

Researchers have tried for years to produce economical fuels from algae, with little success. This year, Exxon Mobil acknowledged that a $600 million plan it began in 2009 to hit the marketplace with such a fuel within a decade had failed. It is starting over.

"I have yet to see the evidence that this is around the corner," said Heather Youngs, a senior fellow at the Energy Biosciences Institute at the University of California, Berkeley. She said forecasts used by the Defense Department seemed wildly optimistic.

"Growing algae is very expensive," she said.

The Pentagon is undeterred. In the 1890s, when the Navy built its first steel ships, the fleet paid double the price that European suppliers were offering to jump-start a domestic steel industry, Navy Secretary Ray Mabus recently wrote in Foreign Policy magazine, defending the biofuels effort. The transition from ships powered by sail to coal, coal to oil, and oil to nuclear would not have happened without upfront investment and faith in innovation, he wrote.

In that spirit, the administration is going ahead with plans to spend $510 million to help construct advanced biofuel plants. The Navy intends to start purchasing 170 million gallons of biofuel a year to meet its goal of getting half its energy from renewable sources by 2020.

In Pleasanton, Calif., Fulcrum BioEnergy was having a hard time attracting investors for plans to convert 550 tons of trash per day into fuel that can be poured directly into gas tanks – until the Navy stepped in. Now, the Pentagon is committing as much as $70 million to Fulcrum’s plans. The military funding is contingent on companies attracting an equal amount from private investors, which Fulcrum now has.

"It is important these projects get built," said Ted Kniesche, a vice president at Fulcrum. "It is not only for national security, but also reducing greenhouse gases. Government understands that."

The plant location has yet to be announced. Nonetheless, Kniesche says, it will be producing military-grade fuel by early 2016 – at less than $4 per gallon.

Some boosters of the program, though, bristle when asked when the fuels will be mass produced at such prices without big upfront subsidies.

"That is the question everyone wants answered," said Stephen Gorin, who oversees defense research at the National Renewable Energy Laboratory. "It is not an easy one."

Despite the previous failure of algae-to-fuel projects, another company is vowing it will be the game changer. South San Francisco-based Solazyme, which uses large fermentation tanks to grow algae, went from a small startup to a hot IPO in 2011 with the help of millions of dollars in military contracts. Green energy investors are buzzing about projections that the company will produce fuel at prices competitive with petroleum within five years.

Solazyme is investing in large plants in the Midwest and Brazil, which Graham Ellis, a company vice president, says underscores the company’s faith in those projections.

In an early, experimental contract with the Navy, Solazyme was paid more than $400 per gallon of fuel it provided. It got substantially less during the "great green fleet" pilot project last year. Whether it can get the price down to $4 remains to be seen.

"How far away is it?" Ellis said. "Less than five years is the headline. I can’t see a reason why that would not remain our target."