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The White House's Office of Science and Technology Policy last week unveiled its Bioeconomy Blueprint, a collection of actions for federal agencies to promote economic growth based on advances in life sciences research. But also last week, an entrepreneur and financial adviser in the energy field pointed out in a paper that for the government to move scientific discoveries from the lab to the energy marketplace, agencies need to fill a gap in funding that the private sector up to now has been reluctant to address.

Among the examples of bio-based innovations described in the Bioeconomy Blueprint report is the generation of biofuels that make use of advanced technologies such as genetic engineering and synthetic biology. The document recognizes that federal agencies can at best encourage the development of these advances, with the private sector taking the lead to make them commercially viable. To encourage the transition from lab to market, the blueprint calls for more steps like Small Business Innovation Research and Small Business Technology Transfer (SBIR/STTR) grants, private/public R&D partnerships, and use of the government's purchasing power to lead by example.

That process of taking discoveries from the lab to marketplace was also a subject at a press conference in Washington, D.C. the day before publication of the Bioeconomy Blueprint, and dealing with the U.S. alternative energy future. The American Academy of Arts and Sciences held the press conference to discuss the findings in the Spring 2012 issue of its journal Daedalus devoted entirely to the topic of alternative energy.

Among the companies encouraging action on alternative energies are commercial airlines, who have historically suffered from world oil price fluctuations, and developers of bio-based aviation fuel alternatives. The industry took a major step in this direction last July with the publication of an ASTM standard for alternative aviation biofuel blends.

Suppliers of biofuels for aviation are now ramping up production for commercial and military customers, in some cases from pilot and demonstration stages. Suppliers include:

  • Dynamic Fuels LLC, a joint venture of Tyson Foods Inc. (NYSE:TSN) and Syntroleum Corporation (NASDAQ:SYNM)
  • SkyNRG, a collaboration of Air France-KLM, energy-services company Argos North Sea Group, and consulting firm Spring Associates
  • Solazyme Inc. (NASDAQ:SZYM), a developer of algae-based biofuels
  • UOP LLC, the energy subsidiary of Honeywell International (NYSE:HON)

Several airlines have biofuel initiatives that include scheduled flights - not demonstrations - in the past year with blends of biofuels and conventional jet fuel: Alaska Airlines (NYSE:ALK), Finnair, KLM, LAN Chile (NYSE:LFL), Lufthansa, United/Continental (NYSE:UAL), and privately-held Porter Airlines and Thompson Airways.

Private Sector Funding Available Early and Late

While this critical mass of suppliers and customers in the marketplace takes shape, the market development process may still need a boost. In the issue of Daedalus and press conference, Kassia Yannosek - a private equity investor in the energy sector, a principal at the private equity firm Quadrant Management, and founder of energy advisory company Tana Energy Capital LLC - says the public sector can help make the transition to alternative energies by helping companies finance the gap from small-scale pilot and demonstration projects to full-scale production.

Yannosek, who is also entrepreneur-in-residence at the Steyer-Taylor Center for Energy Policy and Finance at Stanford University, says without addressing this gap, alternative energy companies will remain dependent on government subsidies. And given the limited appetite for long-term financial commitments at any level of government, the prospect for continued subsidies is hardly encouraging.

Yannosek notes that private sector funding is often available for a new enterprise's early stages, provided by angel and venture capital financing, where the risk may be high but the capital requirements are relatively low. Likewise in later stages of development, after the technology's commercial feasibility is proven, debt or private-equity funding is often available.

The problem Yannosek highlights for innovative technologies in the energy and other life sciences fields comes after prototype or pilot-scale development, but before full-scale production. Devising a prototype or creating a pilot-scale facility may prove that the company has mastered the technology, but not necessarily the technology's commercial viability. This interval between prototype/pilot and full-scale production is called the "commercialization gap." Other life science fields use the more graphic term "valley of death" to describe this chasm.

Filling the gap, says Yannosek, requires funders to take more risk and commit more money than usual, which for government has not been a recipe for success. The establishment of the Synthetic Fuels Corporation in 1980, for example, promised to produce two million barrels of fuel a day, only to run into collapsing oil prices, and ending up with some 10,000 barrels-a-day output after spending about $5 billion.

The Department of Energy's loan guarantee program is one of today's attempts by government to help companies with innovative technologies bridge the commercialization gap. The program has come under scrutiny from the bankruptcy of solar energy developer Solyndra. DoE has nonetheless proceeded with backing a loan to Spanish biofuels developer Abengoa SA (OTCPK:ABGOY) for a commercial-scale plant in Kansas producing cellulosic ethanol from agricultural residues, thus not grown on land converted from food production.

That plant is expected to produce 23 million gallons of ethanol per year, using an enzyme-based conversion process. The plant is also expected to generate 20 megawatts of electricity to power the plant, which will help it achieve economic self-sufficiency.

DoE's loan guarantee program, says Yannosek, should focus on financing innovation, but too often it gets caught in political crosswinds, particularly when the goal of job creation is added to its mission. To be commercially feasible, new technologies need to also be efficient, which means maximizing production with the fewest possible workers.

The Abengoa ethanol plant in Kansas, for example, is expected to generate only 65 new permanent jobs. While that scale of efficiency may indeed make the plant economically viable, when the political bottom line is measured in job creation, the reaction may well be, "that's it?"

Cost Measured in Casualties

Another government effort helping companies scale up from pilot to production scale is the Department of Defense's green energy initiatives. DoD's interests in renewable energy, as spelled out in the 2010 Quadrennial Defense Review, comes from strategic needs for lower reliance on fossil fuels, since those fuels often depend on unreliable sources of supply and can catch the U.S. military in world wide price fluctuations, much like commercial airlines. For DoD personnel in the field, however, that cost can also be measured in casualties. In 2009, the U.S. Army estimated it suffers one casualty for every 24 fuel supply convoys in Afghanistan.

Because DoD's strategic interests extend beyond economics, it can make investments in production scale technologies through its procurement process, although like any federal agency, DoD still needs to be a responsible steward of taxpayers' dollars. In December 2011, Dynamic Fuels was awarded a contract to supply the U.S. Navy with 450,000 gallons of biofuels, in partnership with Solazyme Inc. The contract calls for delivery of drop-in jet fuels and marine distillates, made from renewable feedstocks such are used for cooking oil and algae. The fuels are being produced at Dynamic Fuels' plant in Geismar, Louisiana, with first deliveries scheduled for later in May 2012.

Honeywell's UOP subsidiary says it has produced more than 800,000 gallons of biofuel for U.S. military and commercial aviation customers. Also in December 2011, the Federal Aviation Administration awarded UOP a contract to develop and demonstrate a technology converting isobutanol from renewable feedstocks to jet fuel.

The isobutanol for the contract - an alcohol more chemically similar to gasoline than ethanol - will be supplied by Gevo Inc. (NASDAQ:GEVO), which in March was awarded a patent for its isobutanol production process.

At the American Academy press conference on 25 April Yannosek acknowledged that DoD's interest in developing alternative energy was a "bright spot" in an otherwise mixed federal record. Still, she cautioned that DoD's efforts so far do not guarantee buyers for alternative energy sources beyond DoD. Utilities, for example, have strategic interests different from those of the Defense Department.

These initiatives to produce biofuels in commercial quantities are a result of initial private funding, but also with federal dollars from loans or contracts to reach the point of full-scale production. For aviation fuels, however, private sector customers seem as eager as government agencies to see the market develop, with increasing numbers of commercial airlines flying real passengers with planes burning bio-based as well as fossil fuels. As a result, the goal of a self-sustaining market in jet fuel alternatives appears more achievable than other renewable transportation fuels.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.