Dow Partners With Solazyme on Algae Chemical

There’s a whole lotta stuff to make out of algae beyond the oft-discussed algae fuel. The latest is an algae-based insulation fluid to bathe transformers, courtesy of a partnership between Dow Chemical (s DOW) and algae startup Solazyme.

The algae chemical is a replacement for so-called dielectric insulating fluid, which is used to insulate transformers from heat and electricity, and is traditionally made out of petroleum or occasionally plant-based oils like soy beans. Solazyme’s founder Harrison Dillon told me in an interview on Tuesday that Solazyme can make the algae version optimized for that insulation application with characteristics like an optimal viscosity and oxidation point.

Dow says as part of its deal with Solazyme, it plans to buy 20 million gallons of the fluid from Solazyme in 2013 and up to 60 million gallons in 2015, if everything goes as planned. While Solazyme has been working with Unilever on algae-based soaps, the algae fluid made for Dow is its first major industrial chemical product.

Solazyme has raised at least $125 million throughout its eight years of existence, from investors including Chevron’s (s cvx) VC arm to Morgan Stanley (s ms) to Richard Branson to food and personal product giant Unilever (s ul). Unilever wants to use algae to replace palm oil, because the harvesting of palm oil has led to deforestation in Indonesia and Malaysia and has drawn the criticism of environmentalists.

The first applications for Solzayme’s algae oil will be food, lotions and now industrial chemicals. When I visited Solazyme’s headquarters in  2009, I drank some of the company’s prototype algae milk (tastes like soy or rice milk), and checked out some of their oils and lotions under development in their labs.

But ultimately, the company wants to scale up algae oil production to tackle the biofuel market: hence, why a company like Chevron is interested. The company is looking to commercialize its technology in the 2012-2013 time frame, with a production cost target of $60 to $80 per barrel. To get there, it will have to build a commercial-scale algae plant, which can cost over $100 million.

Unlike some algae fuel companies that grow algae in open ponds, Solazyme engineers efficient algal strains and grows its designer algae in fermentation tanks without sunlight by feeding it sugar, then using existing industrial equipment to extract the oil. Solazyme is a leader in the algae fuel space, but competes with Sapphire Energy, Craig Venter’s Synthetic Genomics, and a handful of other companies that are looking to scale up algae oil production.

Dillon told me in an interview this week that even though Solazyme is commercializing industrial chemicals, its biofuels are still on track.

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