Two articles out this week deftly explore the dilemma the algae, and for that matter the entire biofuels, industry finds itself – in the wake of the House Armed Services Committee (HASC) recently passing the 2013 Defense Authorization bill (H.R. 4130) banning the Defense Department from making or buying an alternative fuel that costs more than traditional fossil fuel.

While the military itself has been an outspoken supporter of the need to have more reliable and controllable fuel sources, the Republican-dominated HASC feels the greater need to bring down costs, especially the premiums that the military has been paying for early-stage green fuels; costs that have helped to cover some of the biofuels industry’s development.

In Eric Beidel’s piece in National Defense Magazine he calls it the classic chicken and the egg conundrum, where the developing biofuels industry needs the military to buy big, providing a demand signal that could help reduce prices. But a lot of things have to be sorted out before the Pentagon can afford to do that.

The Navy, most recently, is paying $12 million for 450,000 gallons of biofuel to power a carrier strike group off the coast of Hawaii this year. That $26.6-per-gallon purchase is nowhere near the $2.50 the service pays for each gallon of petroleum, but is quite an improvement over a previous Solazyme contract, earlier in industry’s development (way back in 2009) when the Navy spent $8.5 million for 20,000 gallons of algae-based fuel, which works out to $425 per gallon, writes Beidel.

That price was put in perspective by Solazyme president Harrison Dillon, when asked recently by former Republican senator from Virginia, John Warner, “How much per gallon does the military pay you?”

Dillon replied, “It’s unfair to count the contracts currently being rewarded as per-gallon fuel purchases. All of our contracts with DoD…involve research, purchase of new equipment and actual production of fuel…The cost has come down in each of these contracts and we are confident that at full commercial scale we can be competitive with petroleum.”

Exemplifying the chicken-egg situation is the lack of production facilities and refineries. The Energy Independence and Security Act of 2007 mandated that the country’s fuel supply include 36 billion gallons of biofuel by 2020. In 2010, the Agriculture Department reported that the United States still needed 527 new biorefineries at a cost of $168 billion to meet that mandate.

But military fuel contracts are not awarded for more than a five-year window. And building a large-scale production facility to make biofuels is an expensive proposition that requires financing. So companies are finding it difficult to obtain large sources of up-front money for the construction and operation of new plants on the basis of these short-term contracts.

Beidel concludes that collaboration will be key in moving forward. The departments of Agriculture, Energy and the Navy, which last year announced that they would invest up to $510 million over three years – with financial help from the private sector – to produce biofuels for both military and commercial transportation, have their work cut out for them. The Agriculture Department will focus on feedstocks, the Energy Department will take the lead on technology and the Navy will provide the market by buying the fuels.

Officials hope the effort leads to the establishment of commercial-scale biorefineries in different regions of the country that produce jet and naval drop-in biofuels from a variety of feedstocks and processes.

In Noah Shachtman’s Wired News article, he suggests that the HASC banning the Defense Department from making or buying an alternative fuel that costs more than a “traditional fossil fuel” may be a standard almost impossible to meet; there’s almost no way the tiny, experimental biofuel industry can hope to compete on price with the massive, century-old fossil fuels business.

If the measure becomes law, he writes, it would make it all-but-inconceivable for the Pentagon to buy renewable fuels. It would likely scuttle one of the top priorities of Navy Secretary Ray Mabus. And it might very well suffocate the gasping biofuel industry, which was looking to the Pentagon to help it survive.

When Mabus took over as Navy Secretary, he declared that the service would get half of its energy from sources other than petroleum by 2020. The two-day Great Green Fleet demo, scheduled for the end of June in Hawaii, is supposed to be the biggest step yet towards that beyond-ambitious goal.

Mabus and his allies argue that the Republican committee is taking an overly-simplistic view of things. Of course relatively small batches of a new fuel are going to be expensive. With development time and big enough purchases, the costs of biofuels will come down. Already, the price has dropped in half since 2009.

Mabus added, “We simply buy too much fossil fuels from places that are either actually or potentially volatile, from places that may or may not have our best interests at heart,” he said. “We would never let these places build our ships, our aircraft, our ground vehicles, but we do give them a say on whether those ships steam, aircraft fly, or ground vehicles operate because we buy so much energy from them.”

But the armed services committee didn’t put limits on all alternative fuels, Shachtman observes — just the ones with environmental benefits. The Energy Independence and Security Act of 2007 forbids federal agencies from buying alternative fuels that are more polluting than conventional ones. Last week, the congressmen ordered to exempt the Defense Department from those regulations.