December 13, 2011

What Affect is the Navy Having on the Cost of Alternative Fuels?

The Navy’s investment in algae biofuel is having a significant
impact on the cost of alternative fuels. Earlier this year, the Navy announced
a request for 450,000 gallons of algae biofuel
, the largest demand for
advanced biofuel to date.  At a
Department of Defense Bloggers Roundtable in August 2011, Secretary of the Navy
Ray Mabus said that with the Navy’s modest demand alone, the
price of algae biofuel fuel was cut in half last year and is projected to be
cut in half again this year

Last week, Secretary Mabus announced that the Navy will
spend $12
million to buy the requested 450,000 gallons of alternative biofuel
continued testing and evaluation in the Navy’s aircraft, ships and remote
piloted vehicles. The cost, according to Mabus, comes to about $26
a gallon
. Granted, that’s still a steep price to pay for fuel. But, Secretary
Mabus, said, “This
is still R&D
.” He added, “As
the market develops, you will see the cost come down
.” Moreover, the new
purchase is about 94 percent cheaper than what the Navy paid for its first
batch of alternative fuel in 2009: $424
a gallon for 20,055 gallons of biofuel

The price difference in just two short years aptly
demonstrates that significant impact that Navy’s demand signal is having on the
cost of alternative fuels, just in the research and development phase alone.

Of course, the Navy’s efforts to develop, test and evaluate
algae biofuel are not meant to change the biofuel industry; they are intended
to promote the Navy’s energy security.  By
2020, the Navy aims to have half of its afloat energy generated from
alternative sources: about 25 percent from nuclear and 25 percent from
alternative fuels
. Regardless, the Navy’s efforts are having a positive
impact on the biofuel industry, in particular by sending a steady demand signal
to the private sector to invest in commercially available alternatives that will
serve as drop-in equivalents to petroleum. 

The Navy’s testing and evaluation appears to already be
generating positive knock-on effects by encouraging others in the aviation community
to invest in alternative fuels, including the commercial aviation industry.  Last month, Continental
Airlines made history when it tested a 20 percent blend of algae in its Boeing
. Continental’s parent company, United Continental Holdings Inc.,
announced that it would purchase
20 million gallons of algae-based biofuel annually, beginning as early as 2014
Alaska Airlines made a similar announcement in November, stating that its regional
affiliate Horizon Air will operate 75 U.S. flights over the next year using a
20 percent blend of algae biofuel
.  Although
it is difficult to link the Navy’s efforts with commercial operators’ decisions
to fly on an algae biofuel blend, the Navy’s testing and evaluation likely played
a role by reducing the costs the individual airlines would have to incur by
testing and evaluating the fuels on their own. Given that the Navy has already
tested 50-50 blends in its own aircraft fleet – which have very specific fuel
standards in order to ensure that the Navy’s aircraft can perform just as well
on a biofuel blend as on 100 percent conventional JP-5 petroleum – the commercial
aviation industry and the Federal Aviation Administration likely have fewer
tests to perform to ensure the fuel meets industry standards.

The Navy’s efforts alone won’t likely help the biofuel
industry reach commercial scalability. 
The federal government and the private sector will need to continue to
send a consistent demand signal to generate the capital investments necessary
to develop this still fledgling market and help move the nation away from its
dependence on petroleum. The Obama administration’s announcement that the
Departments of Agriculture, Energy and Navy will match, dollar-to-dollar, the
private sector’s investments in alternative biofuels with up to $510 million
is an important effort to drive demand for this game-changing
technology. Energy experts are optimistic that the industry is just a few short
years away from moving from R&D to commercial deployment – perhaps as early
as the next decade. Reaching that time horizon though will require persistent efforts
by the federal government, investors and the biofuel industry. Moving beyond
petroleum as the dominant source of liquid fuels is worth the effort.