An algae biofuels company planning a pilot farm in Waiawa is the fourth company to finalize a contract with Hawaiian Electric Co. to supply locally produced fuel to its generating units.

The contract with Ohio-based announced Thursday is for 100,000 to 150,000 gallons of fuel to be tested in the utility鈥檚 Kahe Generating Station. If successful, a follow-up contract for three million gallons a year for three years is expected.

While the electric utility has successfully tested 1.6 million gallons of Malaysian palm oil in its Kahe generator, Phycal CEO Kevin Berner said that testing the algae biofuel was required to ensure compliance with emissions standards.

Testing is a smart idea, Berner said.

鈥淎re you willing to roll the dice with a $2 billion power plant?鈥� he said. 鈥淚f we blow up the power plant, your computer doesn鈥檛 work.鈥�

Neither Hawaiian Electric or Phycal disclosed the cost of the test fuel, though Berner said that he expected to lose money on the pilot. The algae farm is expected to break ground by the end of the year, or in early 2012. The fuel has to be delivered to Hawaiian Electric by April 2014.

The announcement comes at a time when Phycal is trying to raise a large amount of capital for its project. The contract could help attract investors by providing greater assurance that there will be a future revenue stream for the fuel. While algae biofuels have attracted a large amount of attention for their high energy yields, and pulled in millions of dollars in investments, the fuel has yet to be commercialized.

Phycal received a $48.5 million grant from the U.S. Department of Energy to develop its 34-acre pilot farm near Poamoho camp. Berner would not reveal how much money he was trying to raise for scaling up the project to commercial production.

Hawaiian Electric鈥檚 recent contracts for locally produced biofuels have attracted controversy because the fuel is expected to carry a substantial premium and the technologies have yet to be proven.

The current contract with Phycal is for a small amount of test fuel. Berner said that the price for the algae fuel in any future contract with Hawaiian Electric remains to be seen, and will depend on how things go at the algae farm.

鈥淭he whole point of the pilot farm is to find out where we overestimated costs and where we underestimated costs,鈥� said Berner.

Twenty percent of the fuel produced is expected to go to jet fuel and ground transportation.

Cellana, another local company that has been working to produce algae biofuel on the Big Island, and wants to supply fuel to Maui Electric Co., is also hoping to secure a contract from Hawaiian Electric Co.