The U.S. Department of Energy is giving Solazyme Inc. $21.7 million to figure out how to make diesel from sawdust and cooking oil from food-factory waste, on an industrial scale, at a former Merck & Co. Inc. plant on the Susquehanna.

This isn't your standard fuel refinery: Little blue and green algae will be doing the refining.

Taxpayers are covering most of the cost. Solazyme, based in South San Francisco and owned by a string of private investment firms, will add $3.9 million.

Solazyme says it already knows it can make commercial-grade hydrocarbons. It says the U.S. Navy has agreed to pay for 22,000 gallons of Solazyme jet fuel and ship fuel, for delivery next year. It won't be made in Pennsylvania, but near a Navy base Solazyme wouldn't identify.

So why fund this project at the ex-Merck plant in Riverside, Pa.? Because small-batch pond-scum refineries are still more expensive than their big petroleum rivals. Solazyme says it can bring the cost down.

"Energy has to be done at a very large scale to be cost-effective and meaningful," Solazyme president Harrison Dillon, a microbial geneticist who says he founded the company in his garage six years ago, told me.

Big oil companies won't fund that research during the years it takes to get from lab to factory, he added. "The cost of doing things at that scale are very high. It's near impossible to get venture capital. You're not generating revenue and profit."

So the government steps in, in the name of the environment and national security. Says Dillon, "We believe we'll be at a cost in the $60 to $80 [a barrel] range in two years."

How's this work? "We take biomass like wood chips, switchgrass, waste glycerol. And we feed it to algae in a process where the algae will convert that biomass into crude oil," which can be used to make "diesel fuel, jet fuel, high-nutrition edible oil like olive oil, or plastics."

Don't we already do that when we turn corn into ethanol? That requires lots more energy to distill alcohol and boil away the water, Dillon said. And it takes corn out of the food supply, boosting prices.

Doesn't fermentation stink? "We've never observed an odor in our laboratories in San Francisco." Wastewater? "No."

Why Pennsylvania? Gov. Rendell and Sen. Bob Casey (D., Pa.) cheered the DOE deal, but their spokesmen disclaimed credit.

"We looked at sites all over the country," Harrison told me. The Riverside plant, now owned by PRWT Services Inc. of Philadelphia and operated by its Cherokee Pharmaceuticals division, "has the right mix of available facilities and talented available staff who were able to help us take a fairly old facility and integrate into it an extremely cutting-edge technology process."

PRWT, headed by Willie F. Johnson, is best known for operating call centers for government agencies; its executives include former Gov. Mark Schweiker and former Philadelphia Councilman George Burrell. The Cherokee plant employs 420 making drug ingredients.

Solazyme's project will employ 50 or more workers (some from Cherokee) in the next three years. Dillon isn't promising it'll be followed by a full-scale industrial refinery anyplace nearby. He's come to Pennsylvania to prove this can be an industry, not just an experiment.

Deli wars

A team from Philadelphia-based Dietz & Watson Inc. was on Florida's west coast over the weekend running a promotional cold-cut taste test, combined with a breast-cancer fund-raiser for the local chapter of the Susan G. Komen for the Cure foundation.

Try the ham. Make a donation, get a pink hat.

Rival Boar's Head Provisions Co. Inc., of Sarasota, Fla., responded to the Dietz incursion with a caravan of its own red trucks, horns blaring.

"My parking lot was full of Boar's Head trucks," Bill Conway, owner of the City Deli in Port Charlotte, Fla., told me, of Saturday's demonstration.

"It was bully tactics. I got there, they had 20 or 30 Boar's Head trucks blocking my store. They were intimidating my girlfriend that was working here, and the people from Dietz & Watson that were trying to set up this thing."

The Boar's Head people told him, shucks, they just wanted to be part of the taste test. "I asked them, 'Does this little company, Dietz & Watson, scare you?'

"They tried to tell me they'd give us a better deal on product and service. I told 'em, 'I tried you, I like Dietz & Watson better.' "

Boar's Head didn't return my calls. Dietz & Watson made the most of the incursion, issuing a news release and announcing the Boar's Head convoy descended on at least three other local delis, to the detriment of breast-cancer research. The local Fox News station ran a video on its evening news.

Conway says the Boar's Head caravan left 10 minutes after he told it to go. "They never did take part in that deli challenge," he told me.