About $180 million in venture capital money has been raised for algae research, with more than half coming in the third quarter of this year, according to Cleantech, an industry research group.
Some academic institutes have set up dedicated algae research centers, and a handful of start-ups are planning to test algae on larger demonstration projects in coming months.
"I'm convinced algae will work, but it'll take a different, out-of-the-box approach," said Silicon Valley billionaire Vinod Khosla, delivering the keynote address at the Algae Biomass Summit in Seattle last month.
The potential for algae to compete with fossil fuels is there, but it will take scientific breakthroughs to bring down costs and solve climate change, said Khosla, co-founder of Sun Microsystems whose Khosla Ventures has invested in renewable energy though not algae.
That hasn't tempered interest in the field.
The federal government is starting to throw money into it. The Department of Energy has invested $2.3 million in algae-to-fuel grants so far this year. It invested $2.2 million in algae research in 2006 and 2007, though it wasn't specific to fuel production.
And the Defense Advanced Research Projects Agency, the research arm of the Defense Department, is launching a new program to study algal feedstock material, said Jan Walker, an agency spokesman.
About two dozen startups and researchers are developing ways to maximize growth and reduce costs - including growing it in the dark, increasing the amount of sunlight that reaches the organisms and experimenting with oil-rich strains.
Algae offer the promise of a non-food feedstock with extremely high yields per acre. But how to grow it cheaply on a large scale is one of the biggest challenges facing the industry.
"We can grow algae. It's been demonstrated," said Al Darzins, a manager at the National Bioenergy Center at the National Renewable Energy Lab in Golden, Colo.
But it costs anywhere from $10 to $100 a gallon now, and "obviously that's not cost-effective," he said.
The Colorado lab led a $25 million study of algae from 1978 to 1996, before money dried up and government research shifted to ethanol. The lab is now working with Chevron Corp. on a five-year project to research transportation fuels from algae.
But "people are starting to make the move from small little ponds to thinking about acres," Darzins said. "It's starting to scale up."
Sapphire Energy in San Diego is planning to build a demonstration station in Las Cruces, N.M. The startup has raised more than $100 million from investors, including Bill Gates's Cascade Investments LLC firm and ARCH Venture Partners.
Solazyme, in South San Francisco, said it produced thousands of gallons of fuel from algae that was tested to meet strict ASTM international standards for jet fuel.
"We are far beyond proof of concept," said Harrison Dillon, co-founder of Solazyme, which grows algae in the dark by feeding it biomass such as woodchips. "The test at hand is to bring the manufacturing cost down."
Dillon said the company is about 24 to 36 months away from hitting its target manufacturing cost of $2 to $3 a gallon, or $40 to $80 a barrel.
In Virginia, Old Dominion University has teamed up with a contractor to grow algae in a one-acre farm.
And GreenFuel Technologies in Cambridge, Mass., announced plans last month to build greenhouses in Spain to produce 25,000 tons of algae biomass a year with partner Aurantia SA.
In the Seattle area, startup Bionavitas is testing a process to bring light deeper below the surface, solving the problem of algae shading out growth below the initial top layer.
"If this can be done, the payoff will be large," said Bionavitas's chief executive officer Michael Weaver.
PetroAlgae, based in Melbourne, Fla., plans to complete a 20-acre demonstration farm early next year, said Fred Tennant, the company's executive vice president of business development.
The company was acquired in August by PetroTech Holdings Corp., a joint venture of a group of investors managed by New York based Valens Capital Management.
"The cost has to be low, the product has to be valuable," Tennant said. "Nobody needs another feedstock that is not economically sustainable."
On the Net:
Algae Biomass Organization: http://www.algalbiomass.org/
National Renewable Energy Laboratory: http://www.nrel.gov/