Few sharemarket sectors are as frustrating as clean technology. As the need for renewable energy sources increases, clean-tech stocks have mostly disappointed over the past decade. But occasionally a small clean-tech company kicks big goals and restores one’s faith in the sector.

Microcap Algae.Tec this week signed a deal with Macquarie Generation, the energy giant owned by the New South Wales government, to put an Algae.Tec facility next to the Bayswater coal-fired power station in the Hunter Valley and feed waste carbon dioxide into an enclosed algae system.

Algae.Tec spiked from 16 cents to 26.5 cents this week on the news on sharply higher volume, but is still well down on its 52-week high of 38 cents, and prices above 50 cents in  2011. Like most small clean-tech stocks, Algae.Tec has suffered from a lack of interest in the listed clean-tech sector and a low company profile.

The Australian CleanTech index shed almost 3.5 per cent in 2012-13, compared with a 17 per cent rise in the S&P/ASX 200 index. The index has plunged 38 per cent over three years to June 2013; the ASX 200 index was up 10.5 per cent over that period.

By any measure, the collective performance of clean-tech stocks has been abysmal. Carbon tax uncertainty, funding concerns and the market’s lack of interest in speculative, loss-making companies, which usually characterise small clean-tech stocks, have weighed heavily on the sector.

Algae.Tec has the added problem of stgeloping an unusual technology that harvests algae as an energy source. Although it seems an odd process, algae research has attracted plenty of global interest and has even been described as a new frontier of biofuel research.

I first wrote about Algae.Tec in July 2010 when it tried to raise $7.5 million through an initial public offering (IPO) and list on ASX. The Australian Securities and Investments Commission (ASIC) placed a stop order on the prospectus, which featured cost and revenue projections.

Algae.Tec rightly wanted to help investors understand its unusual business model. ASIC rightly wanted information based on a full-scale operating plant rather than bench-scale and pilot-plant results. The float eventually got up and, for a time, was among the best performing within a year of launch.

Capitalised at $52 million, Algae.Tec still trades above its 20 cent issue price, which is rare for small floats in this market. Better still, the Perth-based company has made solid operational progress in the past few years, culminating in the Macquarie Generation deal.

Algae.Tec’s technology allows sequestration of carbon dioxide by producing micro-algae in modules resembling shipping containers. In turn, the modules create ideal conditions to grow algae and provide large-scale commercial production.

The modules can be stacked next to power plants, which provide unwanted carbon dioxide emission as an input to grow algae, the world’s fast-growing plant and an emerging source of vegetable oil, bio-diesel and biomass for animal feed.

The modules use far less land than competing algae ponds and algae production is more reliable and faster because it is grown in an enclosed module rather than outdoors.

The technology’s best endorsement comes from its commercial partners. WorleyParsons announced a memorandum of understanding with Algae.Tec in March to support the stgelopment of algae projects. WorleyParsons is an ideal partner for an up-and-coming clean-tech company.

The Macquarie Generation announcement has no details on the financial benefits for Algae.Tec, but suffice to say the deal substantially lifts the company’s profile and is an important validation of its technology and commercial potential.

The announcement said algae at the Bayswater site would feed on “waste” carbon dioxide emitted by the power station and the resulting algal oil would be converted to biodiesel and hydrogenated to grade A jet fuel. Who would have though common algae could be a key input for jet fuel?

In September 2012, Algae.Tec and Lufthansa signed a collaboration agreement to construct a large-scale algae-to-aviation biofuels production facility.

These excellent milestones have been relatively unrewarded by the market, with the company’s shares slipping from their peak, amid the broader sharemarket malaise. This is no market for tiny technology companies that are still making losses as they commercialise their inventions, and have low cash balances.

Algae.Tec’s latest quarterly report showed $255,268 in cash. It has since received commitments for a $1 million placement to corporate investors and launched a similar capital raising for retail investors, which has been extended to July 10, at 22 cents a share.

Algae.Tec, clearly speculative, does not suit conservative long-term portfolio investors. But it has a genuine claim as one the more interesting micro-cap clean-tech stocks overlooked by the market in the past year.

Tony Featherstone is a former managing editor of BRW and Shares magazines. All prices and analysis at Feb 14, 2013. The author implies no stock recommendations from the above commentary. Readers should do further research or talk to their financial adviser before acting on themes in this article.