Algae and Coal: Turning Pollution into Prosperity
By
Patrick McNamara
Dr. Timothy L. Johnson, Advisor
May 2010
Submitted in partial fulfillment of the Requirements for the Master of
Environmental Management degree in The Nicholas School of the
Environment of Duke University 2010
Table of Contents
Abstract……………………………………………………………………………3
Introduction……………………………………………………………………….4
Background………………………………………………………………………..7
Coal…………………………………………………………………………………7
GHG Mitigation Options…………………………………………………..……….9
Algae………………………………………………………………………………11
Methods…………………………………………………………………………..19
Variables…………………………………………………………………………..21
Equations………………………………………………………………………….30
Results…………………………………………………………………………….32
Discussion………………………………………………………………………...37
Conclusions……………………………………………………………………….39
2
Abstract
Algae have long been researched as a potential source of biodiesel and biofuel because of
their quick growth rate, simple inputs and ability to grow under environments unsuitable for
many other plants. Using a Monte Carlo simulation, this analysis examines the circumstances
under which an algae farm might become profitable now and in the future. The use of CO2 from
fossil fuels, specifically coal-fired power plants, is potentially valuable for both the utility and
the algae farm because algae require large amounts of CO2 for their high growth rates. My
results show that the success of algae farms in the United States is currently unprofitable in the
short and mid-term (five to ten years). Moreover their long term profitability is heavily
dependent on the system design, fuel prices, location, the existence and increase of prices being
placed on air pollutants such as CO2 and NOX, as well as successive scientific breakthroughs
under reasonable assumptions.
3
Introduction
The earth is continuously bombarded with energy from the sun during the day,
approximately .1-.5%1 of which plants utilize via photosynthesis, driving most living systems on
the planet. That energy is used to capture carbon dioxide (CO2) and ultimately increase earthen
biomass. These Ppants emit oxygen during photosynthesis, approximately 70%2 of which algae
are responsible for, making it arguably the world’s most important plant. Algae can grow almost
anywhere as long as there is adequate moisture, sunlight and nutrients (phosphorous, nitrogen,
potassium, iron and chloride). There are tens of thousands of species of algae, many of which
have the ability to double in growth multiple times a day, making them very efficient
photosynthesizers. Not only do they use solar energy to increase biomass, they have a potentially
valuable byproduct in the form of oils and lipids. These oils can be converted into biodiesel even
more easily3 than conventional crude oil, and contain no sulfur; the oils can even be used for
bioplastics, although that market is nascent at best4. The starch in the biomass can also be
converted into biofuel, making them a potentially renewable substitute for both gasoline and
petroleum diesel. These characteristics make algae a very attractive source of fuel, and there has
been a large amount of research in this area including at the U.S. Department of Energy5.
A very similar area of study is the use of CO2 from the flue gas of our coal-fired power
plants for algae growth facilities. This concept was introduced only in the last decade at MIT, but
1
Rabinowitch, E., 1961. Photochemical utilization of light energy. Proc. Natl. Acad. Sci. USA 47, 1296–1303.
<http://www.mckinsey.com/clientservice/ccsi/pdf/low_carbon_economy.pdf>.Nick Hoffman and James. 2009.
Profiting from the Low-Carbon Economy. McKinsey London Office.
2
Hall, Dr. Jack. "Ecology.com | Algae; The Most Important Organism?" The Ecology Global Network | Ecology
News and Information for Residents of Planet Earth. Web. 22 Mar. 2010.
3
"HowStuffWorks "How Oil Refining Works"" HowStuffWorks - Learn How Everything Works! Web. 22 Mar.
2010. <http://www.howstuffworks.com/oil-refining4.htm>.
4
Williams, Andrew. "US Company Transforms Algae into Bioplastic: Could Slash Petroleum Use by 50% :
CleanTechnica." CleanTechnica - The Future of Clean Energy Technology. Web. 22 Mar. 2010.
5
United States. Department of Energy. National Renewable Energy Laboratory. A Look Back at the US DOE
Aquatic Species Program - Biodiesel from Algae. By John Sheehan.
4
commercial algae farming is an established industry with over 50 years experience6. Many
parties are showing a great deal of interest in the idea of algae-based carbon capture, with test
facilities in the United States and China, both coal-rich countries7,8. The flue gas contains other
regulated and priced pollutants in SO2 and NOX, as well as unregulated ones like mercury, which
algae can absorb in their growth process9. The potential exists for algae to add to the options of
mitigating regulated pollutants if it can absorb emissions at a lower cost. By acquiring CO2 more
easily, and taking advantage of a future price on CO2, the economics for algae growth facilities
can improve. The potential for this type of facility is significant: we could use a cheap, abundant
domestic natural resource to generate electricity in a carbon-constrained market and grow
transportation fuel in the process. That potential, along with a pending climate change crisis,
makes research into the biophysical processes, engineering and economic aspects of this type of
facility both crucial and lucrative.
To help eliminate the climate change problem, the greenhouse gases (GHGs) from coalfired power plants must either be reduced, or there must be a large-scale shift away from coal to
less GHG-intensive forms of electricity, like natural gas, wind or solar. A wide variety of clean
coal technologies are under development and testing10, including carbon-capture and
6
Clayton, Mark. " Algae like a Breath Mint for Smokestacks." News, Travel, Weather, Entertainment, Sports,
Technology, U.S. & World - USATODAY.com. 10 Jan. 2006. Web. 21 Nov. 2009.
<http://www.usatoday.com/tech/science/2006-01-10-algae-powerplants_x.htm>.
7
Lever, Robert. "Algae Blooms Into Promising Biofuel." World Business Council for Sustainable Development, 26
July 2009. Web. 14 Sept. 2009. <http://www.wbcsd.org/Plugins/DocSearch/details.asp?ObjectId=MzUxNTQ>.
8
Khan, Shakeel, and Rashmi. "Algae: A Nover Source of Renwable Energy and Carbon Sequestration." Renewable
Energy. 21 May 2009. Web. 15 Sept. 2009. <http://www.scribd.com/doc/15688667/Algae-a-novel-source-ofrenewable-energy-and-carbon-sequestration>.
9
E. M. Sunderland, D. P. Krabbenhoft, J. W. Moreau, S. A. Strode, and W. M. Landing. "Mercury Sources,
Distribution, and Bioavailability in the North Pacific Ocean: Insights from Data and Models." Global
Biogeochemical Cycles 23 (2009): 1-14. American Geophysical Union. 1 May 2009. Web. 10 Apr. 2010.
<http://proxy.lib.duke.edu:3170/journals/gb/gb0902/2008GB003425/>.
10
Hoffman, Nick, and James Twining. Profiting from the Low Carbon Economy. Publication. McKinsey and
Company, 2009. Web. 17 Sept. 2009.
<http://www.mckinsey.com/clientservice/ccsi/pdf/low_carbon_economy.pdf>.Nick Hoffman and James. 2009.
Profiting from the Low-Carbon Economy. McKinsey London Office.
5
sequestration systems which would remove CO2 from flue gas after combustion and sequester it
underground before it enters the atmosphere. Algae-based carbon capture is among many clean
coal technologies, but algae do not technically sequester CO2; algae merely get more energy
from that same unit of CO2 and displace crude oil-based transportation fuels in the process.
A reliable and comprehensive investigation into the long-term economic feasibility of
these systems may help promote the development of this new industry, which may possibly offer
more cost-effective options to reduce carbon emissions. The following analysis adds to the
literature in this area by exploring the facts that drive the net present value (NPV) of an algae
growth facility using flue gas CO2 based on real data and under specific assumptions such as the
price of carbon dioxide, biodiesel and biofuel subsidies, and related factors. This information
will be used to compare the potential of algal-based carbon capture and reusing (CCR) with the
more familiar carbon capture and sequestration (CCS) method. It will begin with a review of the
relevant literature; providing background information as well as summarizing the political and
non-political benefits, potential markets and similar analyses previously conducted. The next
section will discuss the methods and variables, including a Monte Carlo simulation, a covariance
estimation to minimize the uncertainty present in fuel prices, absorption and abatement potential,
facility costs, and will ultimately provide a range of NPVs to analyze under given assumptions.
The third section contains the results and analysis, in which the basic statistics on the NPVs
under each set of assumptions will be analyzed and interpreted, with a discussion of the most
important costs and revenues. The final section will discuss the limitations of this analysis and
outline where further research is needed.
6
Background
Coal
The use of coal-fired electricity has spurred decades of strong economic growth in the
United States. Coal mining is an industry contributing over $20 billion to US GDP annually11.
More importantly for economic growth, it has provided a cheap, reliable, domestic source of
electricity to American factories and businesses for over a century. Coal continues to maintain its
near majority hold in the electricity industry at approximately 49 percent in 200912. Even though
19 percent of new generating capacity is expected to be coal in the year 2030, only a modest
decrease to 47 percent of overall generating capacity is predicted for 2030 in the Department of
Energy’s 2009 Annual Energy Outlook; these numbers do not assume carbon-constrained
economy, but do illustrate the magnitude of the invested infrastructure. Given that we have
enough proven domestic reserves (271 million short tons) to maintain our current annual
consumption increase of 2.4% per year until 208413, we know that coal can be securely utilized
well into the future.
The emissions from coal-fired power plants contribute significantly to increasing
atmospheric concentrations of greenhouse gases (GHGs), specifically CO2. Carbon dioxide
emissions are the leading contributor to global climate change, making technologies with the
potential to reduce CO2 from coal-fired power plants important from an environmental
standpoint and attractive from a business standpoint in a carbon-constrained economy. Another
pollutant from coal-fired power plants is nitrogen oxides. Although they are a pollutant most
11
Jorgenson, Dale W., and Kevin J. Stiroh. Raising the Speed Limit: U.S. Economic Growth in the Information Age.
Rep. National Research Council. Web. 21 Jan. 2010.
<http://muse.jhu.edu/journals/brookings_papers_on_economic_activity/v2000/2000.1jorgenson_comment.pdf>.
12
United States. Department of Energy. Energy Information Administration. U. Mar. 2009. Web. 14 Sept. 2009.
<http://www.eia.doe.gov/oiaf/aeo/index.html>.
13
United States. Department of Energy. Energy Information Administration. US Coal Supply and Demand:2008
Review. Web. 18 Jan. 2009. <http://www.eia.doe.gov/fuelcoal.html>.
7
commonly from motor vehicles, the third leading source is coal-fired power plants. More
specifically, nitrogen dioxide (NO2) is a criteria pollutant, requiring the EPA to set national
standards for its emission. This is in large part because NO2 is a precursor to ozone (O3)
formation, which has been shown to exacerbate asthma problems for those who come into shortterm contact with it. It also contributes to emphysema and bronchitis in urban areas, along with
other respiratory ailments14. Nitrous Oxide (N2O) is a GHG with global warming intensity
approximately 298 times that of CO2 per unit weight15 and is present in very small quantities in
the flue gas from coal-fired power plants (~10ppm). There is no known distinction in the
absorption potential amongst nitrogen oxides by algae42, so they will fall together under NOX
absorption rather than being accounted for separately.
However the pollution does not stop there; two other major pollutants in the flue gas of
coal-fired power plants are sulfur dioxide (SO2) and mercury (Hg). SO2 is not a major GHG, but
is a leading contributor to acid rain in the United States, as well as emphysema, bronchitis, and
asthma in urban areas. After the creation of the Acid Rain Program in Clean Air Act of 1990, the
level of SO2 has been reduced significantly mostly via the burning of low-sulfur coal and flue
gas scrubbers. This reduction was achieved through a pollution permits program, allowing the
use of any method to reduce SO2 emissions levels as long as the goal was reached. This method
stands in stark contrast to the Best Available Control Technology (BACT) standards instituted in
many EPA regulations in years past, which did not allow the use of any technology besides those
prescribed by the EPA. The BACT approach is widely believed to be less efficient than a
market-based approach such as pollution permits markets. Mercury is not an EPA criteria
14
"Health | Nitrogen Dioxide | US EPA." U.S. Environmental Protection Agency. Web. 11 Nov. 2009.
<http://www.epa.gov/air/nitrogenoxides/health.html>.
15
IPCC. Climate Change 2007: Synthesis Report. Rep. Intergovernmental Panel on Climate Change, 2008. Web. 2
Apr. 2010. <http://www.ipcc.ch/publications_and_data/ar4/syr/en/contents.html>.
8
pollutant, but is a well known toxin because “exposure at high levels can harm the brain, heart,
kidneys, lungs, and immune system of people of all ages” 16. Coal-fired power plants are also the
leading cause of mercury emissions to the air in the US, accounting for over 40% of all domestic
emissions5. While algae can absorb mercury in the growth process9, reliable data on their
absorption potential in a controlled system is not available, and they are consequently excluded
from this analysis.
GHG Mitigation Options
These pollutants are important because while CO2 from the electricity generation sector
must be reduced in the long term, coal-fired electricity causes much more damage to the
environment than just through its emission of GHGs. Reducing these is an added benefit of an
algae-based sequestration method versus large-scale post-combustion sequestration. The current
methods of choice for carbon mitigation from coal-fired power plants is large-scale CCS, more
demand being met by natural gas, renewable energy and even nuclear power. Oxyfuel and IGCC
are forms of electricity generation that would significantly reduce the aforementioned pollutants
from coal-fired power generation. These methods make the flue gas suitable for sequestration
without the use of chemical scrubbers by significantly reducing many other pollutants in it,
including CO2 by around 10% because of their increased combustion efficiency17, 18, but the
levels of CO2 would still be high enough to require underground sequestration19. Moreover,
16
"Basic Information | Mercury | US EPA." U.S. Environmental Protection Agency. Web. 19 Jan. 2010.
<http://www.epa.gov/hg/about.htm>.
17
United States. Department of Energy. Office of Fossil Energy. Oxy-Fuel Combustion. By Madhava Syamlal,
George Richards, and Sean Plasynski. National Energy Technology Laboratory, Aug. 2008. Web. 26 Jan. 2010.
<http://www.netl.doe.gov/publications/factsheets/rd/R&D127.pdf>.
18
Brown, Jay A.R., Lynn M. Manfredo, Jeff W. Hoffmann, Massood Ramezan, and Gary J. Stiegel. An
Environmental Assessment of IGCC Power Systems. Nineteenth Annual Pittsburgh Coal Conference, 28 Sept. 2002.
Web. 22 Jan. 2010.
19
United States. Department of Energy. Naitonal Energy Technology Laboratory. By Julianne M. Klara and John G.
Wimer. May 2007. Web. 2 Feb. 2010. <http://www.netl.doe.gov/energyanalyses/pubs/deskreference/B_IG_GEE_CCS_051507.pdf>.
9
IGCC and Oxyfuel would require entirely new power generation infrastructure, while traditional
pulverized coal power is already in place. Public understanding or even knowledge about the
existence of CCS is very low20; however this is not just because of an information dissemination
problem. CCS systems are simple to understand in theory: the CO2 would be separated from the
flue gas, compressed into liquid form and transported to appropriate underground storage sites. It
is the true costs and abatement potential of CCS that are very uncertain and confusing, even
amongst well known organizations like the IPCC, which estimates a range of $20-270 CO2
sequestered21, or the IEA which predicts costs ranging from $20-8022, at an 80-90% capture rate.
This cost includes a 10-40% parasitic load, the additional electricity required to be generated to
run the entire CCS system, with the weight of the probability on the upper end for older plants.
The National Energy Technology Laboratory (NETL) at the Department of Energy (DOE) says
that “water consumption by thermoelectric plants is predicted to grow… 35.7%” by 2030
(approximately 10- 15% of which will be from CCS) 23. CCS therefore requires the continued
mitigation or continued pollution for the currently unregulated ones, or the investment into new
power infrastructure. Finally, the risk of CO2 leakage into the air or water formations, albeit
small13, is one that could potentially nullify the capital expenditures and climate savings of its
employment, or acidify a large water table.
These flaws lead one to look more closely at cleaner electricity generation options, such
as renewable energy or even nuclear power. Renewable generation such as solar or wind power
20
Curry, Thomas E. A Survey of Public Attitudes towards Climate Change and Climate Change Mitigation
Technologies in the United States. Massachusetts Institute of Technology, Apr. 2007. Web. 3 Jan. 2010.
<http://sequestration.mit.edu/pdf/LFEE_2007_01_WP.pdf>.
21
Simbolotti, Giorgio. IEA Energy Technology Essentials. Rep. CO2 Capture and Storage, Dec. 2006. 4 Dec. 2009.
22
United Nations Intergovernmental Panel on Climate Change. 2006. “Special Report on Carbon Capture and
Storage” Jan. 2007. 4 Dec. 2009.
23
National Energy Technology Laboratory. Department of Energy. DOE Estimates Future Water Needs for
Thermoelectric Power Plants. 6 Dec. 2007. Web. 4 Feb. 2010.
<http://www.netl.doe.gov/publications/press/2007/07083-Water_Use_Analysis_Updated.html>.
10
is outside the scope of this analysis, and not for the sake of simplification. First, while the
economics for each are continually improving, solar is still cost prohibitive on a large scale24.
Wind presents its own set of challenges in that it is nearly on par with coal economically, but
only in certain regions; relative to coal, the areas with the most wind potential are either small
and far away (North Central U.S.) from the heaviest areas of consumption (east and west coasts,
south) or currently cost prohibitive (offshore)25. Additionally, wind power generates most of its
electricity at night, when demand is usually at its lowest26. Nuclear power has the most
complications of all three, including waste management, permitting costs and political reticence,
which make it challenging to assess or predict US deployment of nuclear power in the near or
long term. While the author does not argue that the aforementioned energy technologies will not
be a significant part of our power infrastructure in the future, they are outside the scope of a
pulverized coal-CCS vs. algal CCR comparison.
Algae
Before describing the details of algal CCR research or its significant potential, the design
of the two main competing system designs must be discussed; open pond and photobioreactor.
The open pond system will be discussed simultaneously with the open raceway pond as the
designs are very similar27. The open pond system more closely simulates algae’s natural growth
environment, and is relatively cheaper than a photobioreactor to build and operate. These cost
savings come with many drawbacks, including the inability to control the growth environment,
24
Wiser, Ryan, Galen Barbose, and Carla Peterman. The Installed Costs of Photovoltaics in the US from 1998-2007.
Rep. Lawrence Berkeley National Laboratory, Feb. 2009. Web. 5 Feb. 2010.
<http://eetd.lbl.gov/ea/emp/reports/lbnl-1516e.pdf>.
25
United States. Department of Energy. Increasing Wind Energy's Contribution to US Electricity Supply. Dec. 2008.
Web. 5 Feb. 2010. <http://www.nrel.gov/docs/fy08osti/41869.pdf>.
26
Wald, Matthew L. "Utility Will Use Batteries to Store Wind Power." The New York Times. 11 Sept. 2007. Web. 2
Feb. 2010. <http://www.nytimes.com/2007/09/11/business/11battery.html>.
27
"Cultivation of Algae - Open Pond - Oilgae - Oil from Algae." Biodiesel from Algae Oil - Oilgae.com. Web. 22
Mar. 2010.
11
the risk of contamination, evaporation, gas leakage, and most importantly, relatively low algae
production on surface areas. The raceway pond model increases costs and energy usage but does
so to increase growth and extraction efficiency over the same land area. These drawbacks, and
the obvious limitation on space for shallow, open pond systems, have lead to research and
investment into using photobioreactors. These allow for nearly complete environmental control,
significantly reduce the risk of gas leakage or evaporation, and have much greater productivity,
which reduces land requirements and can lower per-unit harvesting costs, since algal density can
be much greater in the photobioreactor than the shallow pond28. Largely because of the ability to
manage important factors like gas accumulation, temperature and species, the costs of a
photobioreactor system are much higher. The dynamics of these two designs will be compared in
the final analysis.
With an idea of the system designs, the specifics of the system’s pollution absorption and
byproducts can be discussed. What makes algae valuable as a pollutant mitigator is that it can
reduce CO2, SO2, NOX and mercury at potentially high levels. The absorption efficiency can be
up to 90% for carbon oxide and up to 96% for nitrogen oxides29. The effects of different
pollutant levels vary by strain, however generally the more NOX in the gas stream the more
biomass produced relative to lipids for oil production, and vice versa30. While we cannot believe
these levels are achievable with every strain, the potential for high levels in one species exists
with hybridization or genetic modification. Mercury absorption is a nascent area of research for
28
J. Benemann, 5th Annual World Congress on Industrial Biotechnology, Chicago, April 30, 2008
Nagase et al. "Improvement of Microalgal NOx Removal in Bubble Column and Airlift Reactors." Journal of
Fermentation and Bioengineering 86.4 (1998): 421-23. Print.
30
Schenk et al. "Second Generation Biofuels: High-Efficiency Microalgae for Biodiesel Production." Bioenergy
Research 1 (2008): 20-43. Print.
29
12
microalgae, but studies to date have shown volatilization levels in the 90% range31, but the lack
of validating studies and variety in the original study justifies its exclusion from this cost
analysis. Finally, sulfur dioxide emissions are already restricted pollutants with an established
market and two compliance methods in the form of low-sulfur coal or a chemical scrubber. The
potential exists for algae to replace one or both of these options if it can reduce emissions at a
lower cost than either current remediation method. However, research up to this point has only
identified levels of tolerability for algae species, not absorption potential. The continuance of
existing SO2 mitigation methods is recommended32, because algae cultivation slows and
eventually stops at untreated (treated is defined as “scrubbed” or the burning of low-sulfur coal)
levels33. In addition, the recent reduction of sulfur requirements in diesel fuel from 500ppm to
15ppm34 makes the potential revenue stream from biodiesel, which contains no sulfur, very
small. Assuming 7.34lbs per gallon of diesel, over 18,000,000 gallons of algae biodiesel would
need to be consumed in place of petroleum diesel to eliminate one ton of SO2 emissions after the
institution of the ULSD requirement. This is outside the realm of currently reasonable algae
production possibilities. Therefore the use of algae as a mitigator for SO2 emissions is excluded
from this analysis, but its potential is acknowledged.
Most research surrounding algae has centered on the use of its lipids and starch for
conversion to transportation fuels. With current average estimates varying widely from 5,000-
31
Kelly. "Biotransformation of Mercury in pH-stat Cultures of Eukaryotic Freshwater Algae." Microbiology 187
(2007): 45-53. Springer Link, 10 Oct. 2006. Web. 6 Feb. 2010.
<http://proxy.lib.duke.edu:2461/content/y5363252032k1370/fulltext.pdf>.
32
Kadam, Kiran L. "Power Plant Flue Gas as a Source of CO2 for Microalgae Cultivation: Economic Impact of
Different Process Options." Energy Management 38 (1997): 505-10. Print.
33
Matsumoto et al. 1997. Influence of CO2, SO2 and NO in flue gas on microalgae productivity. J.Chem. Eng. Jpn.
30, 620–624.
34
"Biodiesel Performance, Costs, and Use." Energy Information Administration - EIA - Official Energy Statistics
from the U.S. Government. 4 June 2004. Web. 2 Feb. 2010. <http://www.eia.doe.gov/oiaf/analysispaper/biodiesel/>.
13
20,000 gallons/acre/year of biodiesel35, it is much more productive than other energy crops such
as wheat, palm and soy36. The variety of the claims leads one to natural skepticism, as many are
taken from laboratory experiments, not taken full scale operations. Nevertheless the potential is
widely recognized22, so a range of values for gal/acre/yr will be used each year and over time.
The potential benefits for this type of abatement system do not stop with pollution
reductions; politically speaking this system is very palatable. First, by growing fuel, a country
can reduce the need to import oil from parties in the Middle East, such as Saudi Arabia, and
increase our economic and energy security by not being subject to supply constraints outside
their immediate control37. Secondly, the growth method uses non-arable land, which reduces
food price spikes and avoids global ‘food-instead-of-fuel’ issues. Third, the use of
biofuel/biodiesel does not require the enormous infrastructure changeover that electric
automobiles require. While electric or hydrogen vehicles may be part of our long-term
transportation future, they have their own environmental, engineering and cost downsides, and
are excluded from this analysis38, 39. Fourth, by continuing the use of domestic coal, a political
battle with a strong lobby is avoided, the jobs in poor coal states can not only be maintained but
expanded, and subsidies for CCS in a climate change or energy bill may be unnecessary. Finally,
the use of coal as a relatively cheap source of electricity can help economic growth in a carbonconstrained world. Contrastingly, the continued use of coal does nothing to address the upstream
35
"Algenol Biofuels - The Science - The Biology." Algenol Biofuels - Harnessing the Sun to Fuel the World. Web.
09 Feb. 2010. <http://www.algenolbiofuels.com/thescience-biology.html>.
36
Haag, Amanda L. "Algae Bloom Again." Nature Magazine. 31 May 2007. Web. 13 Sept. 2009.
<http://www.nature.com/nature/journal/v447/n7144/full/447520a.html>.
37
Blomberg, Brock, Gregory Hess, and Hunter Jackson. "Terrorism and the Returns to Oil." Economics & Politics
21.3 (2009): 409-32. 19 Aug. 2009. Web. 4 Feb. 2010. <http://proxy.lib.duke.edu:2333/cgibin/fulltext/122563663/HTMLSTART>.
38
Wise, Marshall, Kyle G. Page, James J. Dooley, and Son H. Kim. "The Impact of Electric Passenger Transport
Technology Under an Economy-Wide Climate Policy in the United States." International Journal of Greenhouse
Gas Control 4 (2010): 301-08. Print.
39
"Hydrogen-Fueled Cars Call for Stricter Safety Requirements for the Fueling System." Chemical Business 23.12
(2009): 45. Web. 2 Feb. 2010.
14
damage of coal mining and production like those from mountaintops mining with valley fills. A
recent study found that that even after reclamation, groundwater still has higher levels of minederived chemicals than un-mined sites, and that even those who live around the mines have
higher levels of mortality, lung cancer, hypertension, and heart, kidney and lung disease40.
This analysis aims to understand the circumstances under which the use of algae as a
carbon dioxide mitigation tool can be profitable, taking both an optimistic and pessimistic
approach in the short, medium and long term in the hopes of better quantifying the potential of
this system. There have been two valuable analyses done on the subject, which will be discussed
here. First, EniTechnologie from Spain conducted a comparable analysis in 2006 where they set
parameters for worst case, median case and best case scenarios and analyzed the results41. Their
worst case scenario produced a loss of €410/hectare (ha)/yr, while their best case scenario
achieved a profit of €210/ha/yr. Their median case assumption had a net profit of €0, but their
most likely assumptions were all leaning towards those of their best-case scenario. However this
analysis is limited because it looks at the European market, not the United States. The carbon
market in Europe is mandatory and therefore has a more reliable price structure, whereas the US
market is only voluntary and operates at much lower prices. The authors conclude that the
system has economic viability in the mid to long-term, but remains unlikely to be viable in the
short term because of capital costs and technological uncertainty.
A similar analysis by the British Columbia Innovation Council takes a slightly different
approach and tries to determine the cost of production for open ponds, photobioreactors and
40
Palmer, M. A. "Mountaintop Mining Consequences." Science 327.5962 (2010): 148-49. Print.
Harmelen, Toon V., and Hans Oonk. Microalgae Biofixation Process: Applications and Potential Contributions
to Greenhouse Gas Mitigation Options. Tech. 2006.
41
15
fermenters42. The fermentation option is where the algae are fed sugars and nutrients in a heated,
sealed environment and the yeast does not rest. The costs for this type of system are similarly
high relative to open pond systems, but provide an entirely oil-oriented growth, producing
double or more the lipids of even either photosynthesis-based system43. This option is excluded
from this analysis because relatively little research has been done on the subject relative to open
ponds and photobioreactors. Nonetheless, the authors find that the fermentation method currently
produces a kilogram of algae at the lowest cost at laboratory scale, $1.54/kg, while open ponds
produce at $2.66/kg and photobioreactors at $7.32/kg. This analysis brings in another option for
algae growth, and competition can only help this burgeoning industry. The authors conduct a
cost-benefit analysis, listing the lipid content under each system and accounting for the value of
the oils and other byproducts sold under different scenarios. The lack of a long-term approach
limits the usefulness of these numbers, as they are based on current production capabilities, while
photobioreactors are being heavily researched precisely because they have such significant
potential.
In addition to using algae to grow fuel from the emissions of coal-fired power plants,
algae can also provide substantial nutritional benefits. It has the potential to be grown cheaply
enough that it was a central tenet of Mark Reynolds’ book “Green Algae Strategy: End Oil
Imports and Engineer Sustainable Food and Fuel”44. In it Reynolds outlines his proposal for
growing algae biodiesel from the flue gas of coal-fired power and selling the resulting biomass
as a cheap, sustainable source of food even in a changing climate. Similar to tofu, algae can
42
Alabi, Abayomi, Martin Tampier, and Eric Bibeau. Microalgae Technologies and Processes for
Biofuels/Bioenergy Production in British Columbia: Current Technology, Suitability and Barriers to
Implementation. Rep. 2009. Print.
43
"Fermentation or Photosynthesis: The Debate in Algae Fuel | Green Tech - CNET News." Technology News CNET News. Web. 21 Mar. 2010. <http://news.cnet.com/8301-11128_3-9859455-54.html>.
44
Edwards, Mark R. Green Algae Strategy: End Oil Imports and Engineer Sustainable Food and Fuel. [S.l.:
CreateSpace], 2008. Print.
16
provide many vitamins including A, B1, B2, B6, C, niacin and are rich in iodine, potassium, iron,
magnesium, calcium and even omega-3 fatty acids. The dry algae biomass sells for around
$200/tonne, but the tofu market is much more valuable and widespread, selling for roughly
$4000/tonne42. The current market for algae as a food source is relegated to Asia, especially
China and Japan, where over 90 species are eaten regularly. A discussion on how to expand the
currently market is absent, limiting the books prescriptive usefulness.
The life cycle energy usage of an algae farm is important to discuss even in an economic
analysis because producing algae for biofuels is not a renewable fuel if it does not produce more
energy than it takes in (excluding the sun). The first energy analysis, “Life-Cycle Assessment of
Biodiesel Production from Microalgae”45 analyzes just what its title says it will; however it
should be noted that the numbers were based on laboratory results, since no algae-for-biodiesel
commercial facility existed to their knowledge at the time of writing, and are therefore merely
approximations. While the energy balance for the facility is significantly negative, the authors
note that 90% of the energy consumed by the facility is dedicated to dry lipid extraction (70% if
the cake is wet), making it a crucial area for future efficiency research. The authors excluded the
use of co-firing biomass for electricity generation, which could only have lessened the impacts
relative to merely excluding it. Moreover, many of the systems and studies reviewed use
technology from ten years ago, much of which is likely no longer relevant given the large
amount of research into the area since.
45
Bernard et al. "Life-Cycle Assessment of Biodiesel Production from Microalgae." Environmental Science and
Technology 43.17 (2009): 6475-481. 27 July 2009. Web. 15 Oct. 2009.
<http://pubs.acs.org/doi/abs/10.1021/es900705j>.
17
The second life cycle study to discuss is “Environmental Life Cycle Comparison of
Algae to Other Bioenergy Feedstocks”46. This analysis looked to quantify the upstream
environmental impacts of algae, corn, canola and switchgrass, also excluding the conversion to
liquid or solid fuel. The authors find that the other three crops have lower impacts than algae on
energy use, greenhouse gas emissions and water consumption, while algae are most favorable
with respect to eutrophication potential and total land use. However, when including the use of
flue gas and/or wastewater treatment as substitutes for water and fertilizer inputs47, the impacts
of algae are reduced significantly. Algae became more environmentally friendly than the rest
when source-separated urine was employed as a fertilizer source. The authors find that algae
growth in their model was “largely insensitive to inputs widely associated with algae
productivity such as water and sunlight availability” while nutrient supplies dominated the
environmental impacts. Recycling fertilizer would make these impacts much smaller, although
energy inputs would have to go up.
A life cycle assessment is useful, but should only be part of the decision making process
when trying to reduce the greenhouse gas concentrations in the atmosphere. Since this system
will be used to absorb or remove pollutants, a positive energy or resource balance is not
necessarily a requirement. We should merely desire that it be more environmentally friendly than
the next best alternative to the mitigation of that pollutant: CCS, solar power, wind farms,
geothermal and others.
46
Clarens et al. "Environmental Life Cycle Comparison of Algae to Other Bioenergy Feedstocks." Environmental
Science and Technology 44.5 (2010): 1813-819. 19 Jan. 2010. Web. 26 Jan. 2010.
<http://pubs.acs.org/doi/abs/10.1021/es902838n>.
47
Howell, Katie. "NASA Bags Algae, Wastewater in Bid for Aviation Fuel - NYTimes.com." The New York Times Breaking News, World News & Multimedia. 13 Nov. 2010. Web. 29 Apr. 2010.
<http://www.nytimes.com/gwire/2009/05/12/12greenwire-nasa-bags-algae-wastewater-in-bid-for-aviation12208.html>.
18
Methods
Whereas previous analyses looked at the one-time profitability of an algae farm under a
given set of assumptions, none have explored the long-term potential of algae farms in a
statistically meaningful way41, 42. The long term impact of fuel subsidies on the viability of these
systems has also not been studied, in large part because the subsidies have to be renewed almost
annually48, 49. Third, recent legislation such as the Waxman-Markey bill gives us an idea of what
a U.S. carbon market might look like in the United States, allowing us to have a much more
reliable estimate of the potential an algae farm has. Additionally, the European Trading Scheme
(ETS) for greenhouse gases has been in place for over three years, giving valuable information as
to the price fluctuations we may be able to expect in a U.S. carbon market. Finally, the prospect
of algae becoming a sustainable, nutritious food source like tofu holds a great deal of potential
for the algae market. Tofu currently sells for about twenty times algae on the open market39, and
the use of algae as a substitute good for tofu has been mentioned42 but has not been quantified up
to this point.
This analysis will be exploring the aforementioned areas through the use of a Monte
Carlo simulation (MCS). An MCS is a non-deterministic method that uses independent,
randomly generated numbers to reduce the uncertainty and increase the understanding of future
outcomes. The randomly generated numbers are from distributions chosen to represent the
probability spectrum of a given variable (i.e. a normal distribution for the heights of men in the
United States). The use of an MCS makes sense when exploring these aspects of a future algae
farm because there is a lot of uncertainty as to how productive they will be or what fuel prices
will be like; this allows the range of possible outcomes to be explored.
48
Abuelsamid, Sam. "Expiration of Biodiesel Subsidy Ends Bad Year for Industry Autoblog Green." Web. 23 Mar.
2010. <http://green.autoblog.com/2010/01/03/expiration-of-biodiesel-subsidy-ends-bad-year-for-industry/>.
49
American Workers, State, and Business Relief Act of 2010, S. 4213, 111th Cong. (2010). Print.
19
Here I will outline the steps in the model, followed by a description of the variables
included, their units and the assumptions for each. With the goal of finding the annual profit for
the system, an MCS was run in which 1000 simulations are run in Excel for every year from
2010 to 2040 using key variables and inputs outlined in the sections below. A Monte Carlo
simulation makes sense for a few reasons. First, these systems have a variety of outputs with
uncertain prices, and a Monte Carlo simulation can provide information as to their effects.
Second, these uncertainties also occur over time with different price characteristics for each
market. The prices of pollutants are expected to rise steadily over time, but the price of CO2 will
likely vary less widely than N2O. Fuel prices are expected to increase in the long-term, but the
year-to-year variation between prices is high relative to pollutant prices. The risk surrounding the
investment into algae farms can be quantified with an MCS and allow for more intelligent,
targeted investment into increasing the economic viability of algae farms.
In each year from 2010 to 2040, the profit for that year is calculated by subtracting the
capital costs, operating costs (labor, electricity, fertilizer, water, maintenance, and flocculation),
taxes, waste and insurance from the revenues of gas and diesel fuel, CO2, NOX and biomass. The
annual profits are used to find an NPV under given market assumptions, growth rates and farm
types using Microsoft Excel’s “=NPV()” function. Because of the thirty year time horizon, a 4%
discount rate will be used to find the NPV. This is a realistic assumption for a mid-term
investment of this magnitude given that historical averages for discount rates are around 4%50.
However the discount rate could be higher or lower over the next thirty years, making this an
important simplifying assumption.
50
"Historical Changes of the Target Federal Funds and Discount Rates - Federal Reserve Bank of New York."
FEDERAL RESERVE BANK of NEW YORK. 19 Feb. 2010. Web. 28 Feb. 2010.
<http://www.newyorkfed.org/markets/statistics/dlyrates/fedrate.html>.
20
Variables
For each revenue variable, a random number will be drawn from a chosen distribution
with the mean and standard deviation based in historical data where possible, and academic
literature or legislation otherwise. For regulated pollution prices and biomass, a normal
distribution will be used to reflect the fact that there is a great deal of uncertainty as to what the
exact prices will be, that they will be relatively more stable under government regulation than
market prices, but that there is also only a small chance for very high and very low prices. Since
these market prices cannot be negative but numbers drawn from a normal distribution can be,
price “collars” will be used for CO2 and NOX, discussed below. The mean and standard deviation
are those of the annual permits prices since inception for NOX. The specifics of CO2 prices are
discussed below. For fuel prices I used the statistical program R to create a covariance matrix of
historical prices from the Energy Information Administration (EIA) dating back to 1991 for
gasoline and 1995 for diesel fuel51. Academic literature will be used for biomass prices, as
information on the market is not easily available.
For CO2, the yearly averages will be based on H.R. 2454, otherwise the Waxman-Markey
legislation. These prices are preferable to academic projections because the bill gives us a
reasonable indication of what a US GHG market might look like52. Secondly, while the European
Union (EU) market for GHGs is a mandatory one, but there are failures in the EU market that are
likely to be learned from when implementing the U.S. market, as well as the general differences
between the U.S. and EU economies that will not necessarily make the results comparable.
51
"U.S. Retail Gasoline Historical Prices." Energy Information Administration - EIA - Official Energy Statistics
from the U.S. Government. Web. 20 Jan. 2010.
<http://www.eia.doe.gov/oil_gas/petroleum/data_publications/wrgp/mogas_history.html>.
52
"H.R. 2454: American Clean Energy and Security Act of 2009 (GovTrack.us)." GovTrack.us: Tracking the U.S.
Congress. Web. 22 Mar. 2010. <http://www.govtrack.us/congress/bill.xpd?bill=h111-2454>.
21
Finally we must consider the global effects of a CO2 market in the U.S.; not only will the U.S. be
limiting its GHG emissions, but the effect of limiting its own emissions will greatly increase the
likelihood of a global treaty to limit GHG emissions. However, to keep prices both consistent
and reliable, we will use domestic (U.S.) prices for all pollutants. The EPA analysis of the
Waxman-Markey bill finds that CO2 permits will be worth $11 to $15 in 2012 and $22 to $28 in
202547. Consequently, the prices of CO2 for 2012 in this analysis will be $13/ton in 2012,
increasing $1/year to 2040. For 2010 and 2011, Chicago Climate Exchange averages are used
(~$2/ton) 53. A price “collar” is included in the Waxman-Markey legislation to prevent price
shocks to the market, and they will be used in this analysis as well. The bottom bracket will be
50% of the expected yearly average, while the upper bracket will be 150% of the yearly average.
The Waxman-Markey legislation uses the minimum reserve auction price for the previous year
plus 5%, plus the rate of inflation (as measured by the Consumer Price Index). This is sufficient
for the legislation as they will have those numbers available in that given year, but they are not
available now, so the price collar here is a simplified assumption. The standard deviation for CO2
prices will be based on the data obtained from the European Climate Exchange’s historical price
database54. Over the life of the European climate accord, future spot prices have averaged
approximately $20.95/ton with a standard deviation of $4.93/ton for a standard deviation that is
23.5% of the average price. This will be used as the standard deviation for carbon prices in this
analysis, as it is the most representative of the fluctuations we might experience in a U.S. market.
The price of NOx is likely more volatile than CO2 because it is less studied, the spot
prices have ranged from $350-$5000 since its inception in 2003, and the specifics of the
53
"Privately Negotiated Transactions." Chicago Climate Exchange. 20 Apr. 2010. Web. 29 Apr. 2010.
<http://www.chicagoclimatex.com/content.jsf?id=1813>.
54
"ECX Historical Data." Welcome to the European Climate Exchange - Home. 20 Apr. 2010. Web. 29 Apr. 2010.
<http://www.ecx.eu/ECX-Historical-Data>.
22
domestic market for NOx are uncertain. The current National Ambient Air Quality Standard
(NAAQS) is 0.053ppm, however we can expect them to continue to be regulated under the Clean
Air Act, and we will make that assumption in this analysis. Prices dropped after the Clean Air
Interstate Rule (CAIR) was vacated on July 11th, 2008 in North Carolina v. EPA because
polluters were no longer certain when the EPA would issue a new rule, though they are legally
required to and say it may take over two years55. As an exploratory analysis, it is assumed that
NOx can be used as fertilizer, even though it has not been conclusively proven56. The Alabi et al.
paper assumes nitrogen as 5.5% of the dry mass by weight, and an estimate of 1% NOx is
assumed here. For NOX the average annual permit prices found at the EPA database are used57.
The price for NOX in 2010 will be the same as 2009 (~$350), but the average for 2011 will be the
average of prices from 2003-2009 ($2028.57), under the assumption that it will be regulated, and
it will increase 2% per year to 2040. The same price collar as used for CO2 is used here, as it is
plausible that any future national NOX would incorporate such a measure. These assumptions
significantly affects the viability of an algae farm, and therefore this analysis, because the
potential for the nitrogen oxides to be absorbed in the growth process or used as fertilizer has
much greater value in a regulated market.
As discussed above, dry algae biomass currently sells for around $200/tonne42 on the
open market, a slight premium over its competitor market in distillers grain and corn starch42.
There is the possibility of making algae biomass a substitute for the tofu market, so both prices
will be used in the model to examine their effects on the viability of the system. Total biomass
55
"EPA: Clean Air Interstate Rule - Basic Information." U.S. Environmental Protection Agency. Web. 23 Mar.
2010. <http://epa.gov/interstateairquality/basic.html>.
56
Zeiler, K.G. Biological Trapping of Carbon Dioxide: Draft Milestone Report. National Renewable Energy
Laboratory, Golden, CO. February. 1994.
57
"Annual Auction | Allowance Trading | Clean Air Markets | Air & Radiation Home | US EPA." US Environmental
Protection Agency. 23 Mar. 2010. Web. 28 Apr. 2010. <http://www.epa.gov/airmarkt/trading/auction.html>.
23
productivity is measured in tonnes of dry biomass per hectare per year and is based on realized
growth rates in the Alabi et al. study42, extrapolated to the southwest United States’ solar
radiation levels of about 6.5 kWh/m2/day58 instead of the 3.1 kWh/m2/day42. The growth rates in
the Alabi et al. study are used as the 2010 baseline (11.4 g/m2/day for open ponds and 15.3
g/m2/day for photobioreactors) and converted to tonne/ha/yr. These productivity levels are used
for 2010, with optimistic, moderate and pessimistic annual growth rates (2%, 3.5% and 5%,
respectively) used to account for different possibilities. There is also chance applied to each year
for a significant scientific breakthrough in the algae industry. Since there is no reliable way to
predict a scientific breakthrough, a random number from log-normal distribution is drawn. This
makes sense because we expect more steady growth in new technologies to be combined with a
significant one time breakthroughs more heavily in the early years of emerging technologies than
in later years. For the log-normal distribution’s x-value a random number from 0 to 1 was
generated, with a mean of 1 and a step-scaled standard deviation. The standard deviation was 1
for 2010, 0.985 for 2011, 0.97 for 2012 and so forth. This is done because greater productivity
gains are expected in the early years when the technology is just emerging. A Monte Carlo
simulation of 5000 iterations was conducted on these random numbers for each year, and the
average was used as the scientific breakthrough component for the given year. Photobioreactor
systems receive an additional .05 added to the standard deviation of the random number
generated so as to account for the more nascent nature of the technology and therefore greater
likelihood of more significant scientific breakthroughs. To further account for the likelihood of
significant breakthroughs early in the life of algae farms, the resulting Monte Carlo average will
be multiplied by 2 in the first decade (2010-2019) and 1.5 in the second decade (2020-2029).
58
"U.S. Solar Radiation Resource Maps." Renewable Resource Data Center (RReDC) Home Page. Web. 21 Mar.
2010. <http://rredc.nrel.gov/solar/old_data/nsrdb/redbook/atlas/>.
24
To come up with revenues for each byproduct, productivities from various species of the
academic literature were averaged to come up with 5% and 15% carbohydrate productivity for
open ponds and photobioreactors, respectively42. The carbohydrates are processed to form
cellulosic ethanol, very similarly to other cellulosic ethanol stocks. For lipids to be processed
into biodiesel, a 15% productivity rate is used as the base case for raceway ponds and 25% for
photobioreactors42, indicating that photobioreactors produce more fuel and less biomass59. The
output for biomass is a simple multiplication of 0.01 by the productivity, which is the same as is
used in the Alabi et al. study42. These productivities are multiplied by the total productivity for
that year in tonnes/ha, and then converted to gallons using 7.34 pounds per gallon for biodiesel
and 6.58 pounds per gallon for biofuel to give a number in gallons/ha/yr. There is no reliable
information available on whether the learning gains and increases in technical efficiency will
outweigh the use of more technologically advanced equipment in such a new market, so a
simplifying assumption is made that real capital and operating costs are assumed to stay constant
over time. Real dollars will be used as both costs and revenues are discounted in the NPV
calculation.
For gasoline and diesel fuel markets, historical prices will make up the average and
standard deviations for future prices in the MCS. The prices of biofuel and biodiesel will exhibit
significant levels of uncertainty60 as the prices of crop inputs, food prices, subsidies, substitutes
(petroleum) and renewable mandates changes. There are also a number of other markets for
algae-based byproducts to be sold in, including animal feed and plastics. However, those two
markets are very different in their uncertainties, as algae has been grown and sold for decades in
59
Kim, D.D. 1990. Outdoor Mass Culture of Spirulina platensis in Vietnam. Journal of Applied Phycology, 2(2),
179-181.
60
"Biodiesel Market Marked by Uncertainty: EIA | Articles & Archives |." NPN. Web. 22 Mar. 2010.
<http://www.npnweb.com/ME2>.
25
the pharmaceutical industry61, but the market for the use of algae in plastics and bioplastics is
new or non-existent, so it comes with a great deal of uncertainty. Data on both markets is not
readily available, so they are excluded from this analysis. Secondly, the prospect exists for the
use of algae as a vegetarian substitute for tofu, which sells at roughly $4000/tonne42, so one
analysis will use this price point as a value for algae biomass. The effects of renewable fuel
subsidies and mandates are integral to the success of many renewable fuels, and algae are no
exception. Biodiesel receives a $.01 per gallon tax credit for every percent of biodiesel blended
with regular diesel, and it is approximately the same for biofuels45, 46. Biofuel from algae does
not currently receive a specific subsidy, but it is assumed the same as other biofuels because the
subsidy is for biofuels in general. Since transportation fuel will be arguably the most important
byproduct, reliable prices are necessary. Annual average pump prices for gasoline and diesel are
used back to 1991 and 1995, respectively50. Using those prices, and the statistical program R, a
variance- covariance matrix was created to account for the relationship between the prices. The
R output table that of that matrix is shown in Table 1 below.
Table1
var(fuelprices)
Annual.Gas.Prices
Annual.Diesel.Prices
Annual.Gas.Prices Annual.Diesel.Prices
5724.79
6578.99
6578.99
7644.02
By incorporating the historical relationship between gasoline and diesel prices, this
method of price estimation significantly increases the reliability of the 1000 simulations in R that
form the basis for gasoline and diesel (and therefore biofuel and biodiesel) prices into the future.
61
"Algae Use in Pharmaceuticals - Definition, Glossary, Details - Oilgae." Biodiesel from Algae Oil Web. 22 Mar.
2010. <http://www.oilgae.com/ref/glos/algae_use_in_pharmaceuticals.html>.
26
For 2010 and 2011, EIA projected prices will be used, while future prices will be based on last
year’s price plus the average increase in known prices over the span of current EIA data. Since I
am assuming this facility will not be doing its own refining, pump prices are discounted by 30%
to account for wholesaler profits and refining costs.
The two main facility types in use for algae growth algae growth largely determine the
output of the aforementioned byproducts. The open pond systems are characterized by relatively
low costs and low efficiencies, but are currently the most cost-efficient means of algae growth.
Photobioreactors are more complex systems, with algae in tubes or bags and in a highly
controlled environment; they are more costly to build and operate, but hold a higher growth
potential than the open pond systems. The productivity will have a high degree of uncertainty, so
these values will be based on current academic literature from the few known results, based on
maximum daily yield in tonnes/ha/year. While discussing the byproduct orientation of growth
methods, a discussion on species must be had. There is an enormous variety of algae species in
existence, each with its own tolerance for SO2, and CO2 and NOX absorption abilities. With that
in mind, an individual species is not used in this analysis. The species characteristics used are
from Alabi et al.42 and are discussed on an individual basis. This is especially helpful because
many companies are looking to create a hybrid species with the best characteristics of various
strains in the growth process. Capital costs for each system vary dramatically, with ranges from
$100,000 (lab scale) to $1.5million (large-scale) per hectare for the photobioreactors, and
$60,000 to $260,000 for open pond systems (all at 30 year time spans from 13-14% interest)42.
The capital and operating costs from the Alabi et al. study will be used, making annualized
capital costs $36,497/ha/yr for open pond systems and $210,000/ha/yr for photobioreactor
27
systems. The costs for maintenance, taxes, waste disposal and insurance are $13,455/ha/yr for
open ponds because of greater simplicity compared to photobioreactors, costing $75,846/ha/yr.
The final set of variables includes electricity, labor, fertilizer and water use, which can
obviously be very high in a temperature controlled environment growing the most efficient
plants on Earth. The price for electricity is important for an algae facility from both an input and
output perspective. As an input, the facility obviously requires some electricity to run and
maintain, with significantly higher requirements for closed bioreactor systems as compared to
the open pond systems32. However, the dry algal biomass that is leftover after oil extraction can
also be co-fired in the power plants to generate electricity. This option will not be considered
though, as there is little data on the concept. This analysis separates the harvesting and energy
intensive drying process from all other power uses, as it is currently an area of intense research
and is therefore more likely to change over time. As such, $1600/ha/yr is assumed for the open
pond system, while $5257/ha/yr is assumed for the photobioreactor system, with the higher cost
largely because of the complications of the system. For labor, it is assumed that an employee will
cost about $40,000 per year to employ, using on employee for every two hectares for the open
ponds, one employee per hectare for photobioreactors33. This is a roughly optimistic assumption
because the photobioreactor systems will be more productive than open pond systems, but they
may require relatively better trained employees to operate. Finally, for fertilizer there are many
estimates of use, but a conservative, average estimate is $3,000/ha for open pond systems and
$5,106/ha for photobioreactor systems due to their much higher productivity42. There is the
possibility of recycling the nutrients to keep costs down, or even using wastewater, since algae
do not require treated water. This possibility will be looked at by eliminating the cost of water
and fertilizer, which assumes a deal between the wastewater treatment and algae growth facilities
28
in which it is cheaper to pump untreated water to the growth facility than treat it at the plant.
When this deal is not in place, we use $500/ha in annual water costs for the open pond system
and $1000/ha for photobioreactors42.
Table 1 below shows the variables that formed the basis for the cost and revenue streams.
For the variables that were randomly generated, normal distributions were used. In some cases
upper and lower bounds were utilized, as discussed above for CO2 and NOX. A lower bound was
placed on fuel prices because it is less likely that fuel prices will bottom out lower than a dollar
per gallon that spikes will be experienced due to their relationship with oil prices62. The standard
deviations for both biomass and productivity were arbitrarily large at 25% to reflect the fact that
it is not plausible to make a reasonable assumption about either value. This assumption adds a
significant level of uncertainty to the model. In the case of biomass, there is too little data
available on the algae biomass market42. Nearly all of the data on productivity changes over the
past decade, when scaled systems were initially tested and designed, is not publicly available or
is no longer relevant because of the time frame differences.
GAS
DIESEL
Distribution
Normal
Normal
Standard
Deviation
Historical Prices
Historical Prices
CO2
Normal
23.5% of average
NOX
BIOMASS
CAPITAL COSTS
OPERATING COSTS
PRODUCTIVITY
Normal
Normal
Constant
Constant
Normal
Historical Prices
25% of average
0
0
25% of average
Table 1
62
Upper Bound
N/A
N/A
50% annual
average
50% annual
average
N/A
N/A
N/A
N/A
Lower Bound
$1/gal
$1/gal
150% annual
average
150% annual
average
0
N/A
N/A
N/A
Source
EIA (#51)
EIA
ECX (#54)
EIA
Alabi et al. (#42)
Alabi et al.
Alabi et al.
Alabi et al.
Borenstein, Severin, Colin A. Cameron, and Richard Gilbert. "Do Gasoline Prices Respond Asymmetrically to
Crude Oil Price Changes." The Quarterly Journal of Economics (1997). MIT Press Journals. Feb. 1997. Web. 21
Apr. 2010. <http://www.mitpressjournals.org/doi/pdf/10.1162/003355397555118>.
29
Equations
Below is the list of equations to be considered in this analysis. ‘Y’ is the year in which
the investment in the algae farm is made, ‘O’ indicates an open pond design, ‘P’ indicates a
photobioreactor design, ‘D’ is the discount rate applied to both benefits in costs (4%), GR is the
growth rate for that analysis, where ‘R’ indicates the growth rate percentage (2, 3.5 or 5%) and
SBy is the additional scientific breakthrough component for that year. ‘NX’ is equal to the tons of
NOX mitigated in any given iteration, ‘CO’ is equal to the tons of CO2 mitigated, and ‘BM’ is
equal to the tons of dry biomass left over after drying and oil extraction. ‘BD’ is equal to the
gallons of biodiesel sold at producer prices and ‘BF’ is equal to the gallons of biofuel sold at
producer prices. ‘W’ is the price of the water usage and ‘F’ is the price of fertilizer usage for a
given system. ‘334.845’ is the number of gallons of biofuel per tonne based on biofuel weighing
6.58lbs/gallon and ‘300.357’ is the number of gallons of biodiesel per tonne based on biodiesel
weighing 7.34lbs/gallon. NOX and biomass are considered mutually exclusive revenue sources
because the sale of the biomass leads to its consumption and therefore release of the NOX into
the atmosphere. However they will be addressed together in this analysis to determine which is
the most valuable market under a given circumstances. The price of each byproduct is shown βX
where ‘X’ is used in place of the indicator symbol for each byproduct (NX, CO, BD, BF, BM and
‘T’ for tofu).
Case 1: Base Case
NPVY, P or O = x
ˉ
Y…40 (((BD*βBD*334.845
+ BF*βBF*300.357 + BM* βBM + CO * βCO + NX*
βNX)*(1 + (GR + SBy)) – (Capital Costs + Operating Costs + Maintenance + Taxes and
Insurance)) + D) - (40-Y)
30
Case 2: Fuel Subsidies
NPVY, P or O = x
ˉ
Y…40 (((BD*βBD
+ (1*BD) + BF*βBF*300.357 + (1*BF) + BM*βBM + CO*βCO +
NX*βNX)*(1 + (GR + SBy)) – (Capital Costs + Operating Costs + Maintenance + Taxes and
Insurance)) + D) - (40-Y)
Case 3: Wastewater
NPVY, P or O = x
ˉ
Y…40 (((BD*βBD*334.845
+ BF*βBF*300.357 + BM*βBM + CO*βCO +
NX*βNX)*(1 + (GR + SBy)) – (Capital Costs + Operating Costs – (W+F) + Maintenance + Taxes
and Insurance)) + D) - (40-Y)
Case 4: Tofu Case
NPVY, P or O = x
ˉ
Y…40 (((BD*βBD*334.845
+ BF*βBF*300.357 + BM*βT + CO*βCO +
NX*βNX)*(1 + (GR + SBy)) – (Capital Costs + Operating Costs + Maintenance + Taxes and
Insurance)) + D) - (40-Y)
31
Results
The first table in each scenario indicates the years in which the photobioreactor (PBR) or
open pond first generates a profit and has a positive NPV. The less-than and greater-than signs
indicate a goal was reached before or after the time horizon of the study, respectively. The first
scenario is the base case (Table 3) which assumes all the values outlined above in its
calculations. The subsequent scenarios are all slight derivatives of the base case. The second
scenario (Table 4) is the Fuel Subsidy case in which a $1/gallon subsidy is given to the algae
farm for each gallon of biofuel and biodiesel it produces. This is on top of the producer price
stated earlier, which is assumed to be 70% of the retail value of each fuel. Scenario three (Table
5) is the Wastewater case in which it is assumed that the algae farm receives wastewater at no
cost from the local wastewater treatment facility and that the wastewater is nutrient dense enough
so as to not warrant the use of applied fertilizer. The water and fertilizer costs are therefore $0 in
this case. The fourth scenario (Table 6) to be discussed is the Tofu case in which the value of the
biomass is sold as a substitute for tofu, which sells at approximately $4000/ton42 instead of the
current $200/ton for algae biomass.
Table 3
2%
3.50%
5%
1st Year Positive NPV
1st Profitable Year
Open Pond
2019
2013
< 2010
PBR
> 2040
> 2040
2031
Open Pond
2029
2026
2024
PBR
> 2040
> 2040
2036
% Biofuel
0.206
0.012
-0.0013
% Biodiesel
0.662
0.021
0.0013
% Biomass
0.007
0.002
-0.0002
% NOX
0.054
0.028
-0.0032
PBR
Annual Average
Annual Std dev
Annual % Change
32
% CO2
0.076
0.021
0.0026
Revenue
$123,270.25
$99,283.66
$10,239.01
Costs
$339,356.00
0
0
PROFIT
-$216,408.44
$99,343.37
$10,239.01
Annual Average
Annual Std dev
Annual % Change
% Biofuel
0.204
0.0103
-0.0010
% Diesel
0.657
0.0275
0.0018
% Biomass
0.007
0.0019
-0.0002
Annual Average
Annual Std dev
Annual % Change
Revenue
$92,762.88
$73,057.96
7597.771884
Costs
$75,448.00
0
0
Profit
$17,308.10
$73,040.45
7584.994631
Annual Average
Annual Std dev
Annual % Change
OPEN POND
% NOX
0.062
0.0368
-0.0041
% CO2
0.073
0.0245
0.0027
In the base case we see that the open pond systems become profitable many years before
the PBR systems by an average of 13+ years, given that that PBR systems with a 2% and 3.5%
growth rate never become profitable. There are minimal differences in the importance of each
byproduct in the revenue streams, likely due to the differences in the random numbers in the
1000 iterations per year. In both systems, biodiesel makes up the majority of the revenue stream.
As time goes on, NOX becomes an increasingly less important revenue stream (-.41%/yr) while
CO2 becomes an increasingly valuable revenue stream (.27%/yr). The standard deviation of the
revenues was 78.7% of the annual average for the open pond systems and 80.4% for the PBRs.
Table 4
2%
3.50%
5%
1st Year Positive NPV
1st Profitable Year
Open Pond
2013
< 2010
< 2010
Open Pond
2026
2024
2022
PBR
> 2040
2034
2026
33
PBR
> 2040
2037
2033
PBR
Annual Average
Annual Std dev
Annual % Change
% GAS
0.219
0.012
-0.0012
% Diesel
0.674
0.016
0.0010
% BIOMASS
0.006
0.001
-0.0001
Annual Average
Annual Std dev
Annual % Change
Revenue
$150,466.14
$116,837.73
$12,122.83
Costs
$339,356.00
0
0
PROFIT
-$188,791.33
$116,965.95
$12,122.83
Annual Average
Annual Std dev
Annual % Change
% GAS
0.2174
0.0100
-0.0010
% Diesel
0.6697
0.0192
0.0013
% BIOMASS
0.0056
0.0011
-0.0001
Annual Average
Annual Std dev
Annual % Change
Revenue
$106,572.03
$80,680.92
$8,384.54
Costs
$75,448.00
0
0
Profit
$31,140.06
$80,664.28
$8,384.54
% NOX
0.042
0.018
-0.0021
% CO2
0.060
0.018
0.0023
% NOX
0.0473
0.0239
-0.0025
% CO2
0.0602
0.0180
0.0023
OPEN POND
With the fuel subsidy in place for all thirty years, biofuel and biodiesel make up an
average of 84.2% of the revenue stream, an increase of 3.8% over the base case. A positive NPV
is achieved in 2013 for the open ponds at the pessimistic growth rate, and before 2010 for the
moderate and optimistic growth rates. The PBR does not have a positive NPV at the pessimistic
growth rate, but does so in 2034 at the moderate rate and 2026 at the optimistic rate. The open
pond systems have their first profitable year an average of 12+ years sooner than PBRs. The
standard deviation of the revenues was 75.9% that of the annual average for the open pond
systems and 77.6% for the PBRs.
34
Table 5
1st Year Positive NPV
1st Profitable Year
Open Pond
2019
2013
< 2010
PBR
> 2040
> 2040
2031
Open Pond
2028
2026
2025
PBR
> 2040
> 2040
2036
Annual Average
Annual Std dev
Annual % Change
% GAS
0.206
0.012
-0.0013
% Diesel
0.662
0.020
0.0012
% BIOMASS
0.007
0.002
-0.0002
% NOX
0.054
0.028
-0.0031
% CO2
0.076
0.021
0.0026
Annual Average
Annual Std dev
Annual % Change
Revenue
$123,401.33
$99,492.40
$10,456.98
Costs
$335,729.50
0
0
PROFIT
-$215,931.98
$99,507.31
$10,456.98
Annual Average
Annual Std dev
Annual % Change
% GAS
0.204
0.010
-0.0010
% Diesel
0.657
0.026
0.0018
% BIOMASS
0.007
0.002
-0.0002
% NOX
0.062
0.036
-0.0041
% CO2
0.075
0.022
0.0027
Annual Average
Annual Std dev
Annual % Change
Revenue
$87,273.04
$68,847.75
$7,172.04
Costs
$73,448.00
0
0
PROFIT
$11,812.37
$68,847.16
$7,172.04
2%
3.50%
5%
PBR
OPEN POND
The open pond system is once again potentially profitable in all scenarios, with the first
positive NPVs coming in at the same years under the same growth rates as the base case, as is the
same for PBRs. This is likely due to the low costs for water and fertilizer relative to other inputs
such as labor and capital expenses. The standard deviation of revenues is 77% of the overall
average for open ponds and 78.8% for PBRs.
35
Table 6
1st Year Positive NPV
1st Profitable Year
Open Pond
2017
2011
< 2010
PBR
> 2040
2038
2029
Open Pond
2027
2026
2023
PBR
> 2040
2039
2035
Annual Average
Annual Std dev
Annual % Change
% GAS
0.180
0.005
-0.0005
% Diesel
0.582
0.035
0.0034
% BIOMASS
0.127
0.030
-0.0032
% NOX
0.047
0.023
-0.0026
% CO2
0.067
0.020
0.0025
Annual Average
Annual Std dev
Annual % Change
Revenue
$136,863.86
$108,539.51
$11,385.37
Costs
$339,471.28
$838.95
$0.00
PROFIT
-$202,607.43
$108,439.65
$11,385.37
Annual Average
Annual Std dev
Annual % Change
% GAS
0.178
0.004
-0.0002
% Diesel
0.579
0.039
0.0036
% BIOMASS
0.127
0.028
-0.0030
% NOX
0.054
0.030
-0.0034
% CO2
0.066
0.020
0.0025
Annual Average
Annual Std dev
Annual % Change
Revenue
$96,995.29
$74,862.77
$7,678.65
Costs
$75,414.83
$214.59
$0.00
PROFIT
$21,580.47
$74,864.00
$7,678.65
2%
3.50%
5%
PBR
OPEN POND
The most noticeable change is the increase of biomass in the revenue stream, now at
12.7% for both systems instead of .5-.7% before. The open pond system has a positive NPV at
the pessimistic growth rate starting in 2017, becoming profitable 13+ years before PBRs, with
the positive NPV for moderate coming in 2011 and before 2010 for the optimistic growth rate.
The standard deviation of revenues is 77.4% for the open pond systems and 78.6% for PBRs.
36
Discussion
The results of the model reinforce many earlier conclusions concerning the prospects of
algae growth for carbon remediation in the US, and provide evidence for some previously
unexplored ideas. First, CO2 offsetting constitutes 6 to 7.6% of the average revenues at every
growth rate and under every scenario in which it is included. At the same time, the combination
of gasoline and diesel fuel makes up over 70% of the revenue in every scenario and under every
growth assumption (over 80% in the Wastewater and Fuel Subsidy scenarios). This makes CO2
only the 3rd most important source of revenue when looking at the viability of algae farms, or 4th
if the use of algae substitute for tofu is a viable market. The fact that the value of CO2 is small
relative to the value of the fuels implies that an energy policy designed to produce more
transportation fuels domestically may have a greater impact on the viability of algae farms than a
price on greenhouse gases. Secondly, in every case besides the tofu case, the NOX revenue is
significantly higher than for biomass, averaging around eight times as much per year. In the tofu
case, the biomass contributes about 150% more to the revenue stream than NOX. This suggests
that unless a market is created for algae as a tofu substitute, an efficient algae farm would sell the
NOX reduction credits and either co-fire the biomass for electricity generation or use it to fertilize
the next batch of algae. With the algae-for-tofu market in place, revenues were approximately
$13,000/Ha/yr greater for the PBR systems and $4,000/Ha/yr for the open pond systems over the
base case, suggesting the tofu market could be more valuable using a photobioreactor design
than an open pond design. Third, the standard deviations on the revenue streams are extremely
high (75.9-80.4%), indicating the great uncertainty surrounding these systems. This large
uncertainty is likely due to the dependence upon the prices of transportation fuels for the vast
majority of the revenues, which are notoriously uncertain. Fourth, the 5% growth rates for open
37
pond systems always have positive NPVs before 2010, indicating that investing before 2010
would lead to positive returns by 2040. This makes sense and fits reality because of the many
groups that are heavily investing in this technology cited earlier, including government,
academic institutions and the private sector. Finally, the differences in first years of profitability
between open pond and photobioreactor systems are significant, always at least a decade apart.
The photobioreactor system is never profitable under the 2% growth rate, and only profitable
under the 3.5% growth rate for the fuel subsidy and tofu market scenarios. This is likely due in
large part to capital cost differences, as much of the operating cost differences are because the
photobioreactors have higher productivities and require more staff. The capital costs ratio
(PBR/open pond) is 5.73:1, while the operating costs ratio is 3.35:1 and the revenue ratio is only
1.42:1. For photobioreactor systems to become a more viable investment there must be a
significant reduction in capital costs, or a significant increase in the productivity of the same
capital investment, as some portion of the productivity gains will likely be nullified by operating
cost increases.
38
Conclusions
A long-term algae farm would be unlikely to only include only one or two of these cases;
optimally it would take into account all of these options at some point. Fuel subsidies could be
used in the beginning years until the system becomes profitable. Dry biomass would be co-fired
or used as fertilizer until the marketing scheme for algae as a tofu substitute is viable enough to
warrant its sale to the market. Long-term negotiations between a wastewater treatment plant and
an algae company could lead to the development of a pipeline to centrally located algae farms. In
comparison to other low-carbon energy options, algae has some significant advantages and some
disadvantages. First, an algae farm actually has the potential to sequester CO2 in a profitable
manner, especially with open ponds. This represents a significant advantage over CCS, which
could cost anywhere from $20-27021 per ton of CO2 to sequester. The uncertainty of price
represents a significant challenge for utilities since they need to set rates based on long term cost
forecasts; whereas CCS requires large initial capital investments21, an algae farm could be slowly
scaled up to meet mitigation needs. Moreover, the parasitic load will require either the
replacement of lost generation capacity from one of every three coal plants22 with CCS or
significant investments in energy efficiency. The energy efficiency investments seem more likely
given the potential to save money by doing so, according to McKinsey and Company63.
Secondly, the limited amount of coal available on the earth64 make renewable forms of energy
like solar and wind attractive methods of future electricity generation. However neither are
currently price competitive in their fully distributed form on any reasonable scale24, 25. An algae
farm is also not necessarily competition for solar or wind: an algae farm could buy CO2 if coal63
Granade et al. Unlocking Energy Efficiency in the US Economy. Rep. McKinsey & Company, July 2009. Web. 21
Apr. 2010. <http://www.mckinsey.com/clientservice/electricpowernaturalgas/downloads/
64
"World Distribution of Coal." Encyclopedia - Britannica Online Encyclopedia. Web. 21 Apr. 2010.
<http://www.britannica.com/EBchecked/topic/122863/coal/50690/World-distribution-of-coal>.
39
fired electricity generation stopped, or it could be used as a cheap mitigation system for an
increasingly smaller coal-generation capacity in the United States, all the while producing
renewable domestically. Finally, the potential for algae as a carbon remediation mechanism is
obviously limited by the amount of transportation fuel used, which could easily shrink over time
with the electrification of automobiles in either plug-in or full electric models, the increased use
of public transportation or even hydrogen cars. The first two possibilities are more likely than the
third, but the third could eliminate the need for transportation fuel entirely full electric vehicles
would likely be preceded by plug-in hybrids, which still require liquid fuels.
This model is for an approximately 400 hectare system, and says nothing about whether
or not algae can meet the United States’ long term carbon reduction goals. Moreover, the
widespread scaling up of algae farms could present its own set of problems like water and
fertilizer scarcity and land limitations surrounding coal-fired power plants. Taking into account
data from private facilities would enhance the reliability of this analysis significantly. Future
work should look into increasing both the reliability and scalability of algae farm designs.
Second, the market for dry algal biomass as a valuable co-product is not very well understood; it
needs to be explored because the system is noticeably less viable on transportation fuels and
pollution reduction alone. Finally, knowing how the renewable fuels requirements will affect an
algae farm is very important. A permanent increase in the price of transportation fuels will
improve algae’s economic viability, but would make modes of transportation that do not use
gasoline, ethanol or diesel relatively more viable than they otherwise would be.
40