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Energy efficiency leads the way?

Rob Day: March 31, 2010, 11:35 AM

Well, it appears it's finally happened -- energy efficiency is now the hot sector in cleantech venture capital.  That's based upon the writeup of Q1 as reported by The Cleantech Group and Deloitte, who put out their numbers today.

Overall, the picture is one of continued return to healthy dealflow in the sector.  They tallied $1.9B in global cleantech venture dollars, across 180 disclosed deals.  On a dollar basis, this is their largest quarter since 2008, but in terms of deals they claim it was the largest quarter ever.  With Project Better Place providing $350M in one single tracked deal, this implies that deal sizes are relatively down.  

As I have said for a while, it's important to track the number of deals, not just the dollars.  And this Q1 tally illustrates this well. 

Thanks to PBP, the transportation sector had the highest dollar totals.  But in energy efficiency they counted 39 deals totaling $217M, versus 27 each in transportation and solar. 

What's interesting to me is to look at those three sectors in comparison to recent history.  For this, let's look at annual totals, not the ups and downs of quarters. 

  • Solar:  In 2008, 110 tracked deals.  In 2009, 86 tracked deals.  In Q1 2010, 27 tracked deals for an annualized rate of 108 deals.
  • Transportation (which I assume is their catch-all for both Vehicles and Advanced Batteries):  In 2008, 40 tracked deals.  In 2009, 60 tracked deals.  In Q1 2010, 27 tracked deals for an annualized rate of 108 deals.
  • Energy efficiency:  In 2008, 87 tracked deals.  In 2009, 120 tracked deals.  In Q1 2010, 39 deals for an annualized rate of 156 deals.

So energy efficiency indeed leads the way and has been coming on strong. 

But transportation has been growing quite rapidly as well.  And the venture capital love affair with solar is still far from over.  I see plenty of anecdotal evidence, in my conversations with colleagues among VCs, that folks are starting to turn against solar and vehicle and battery deals to an extent, but that may be a biased sample.  And also, the rapid growth of corporate venture dollars into the sector, and the need for follow-ons into existing portfolios may also be the reason why VC attitudes may be shifting but the dealflow isn't yet.


On another topic, I had the opportunity to review the recent Greentech Media report on Ultracapacitors, and it's a quite good report.  Not just the usual market overview, but some good meaty explorations of specific innovations and specific companies.  Tactically useful information for investors and industry participants.  Definitely recommended.



An update from DC

Rob Day: March 21, 2010, 10:26 PM

This past week I and several senior cleantech private equity investors were invited to DC for meetings with Administration and legislative staff to discuss climate and energy legislation.  We were there to provide input in meetings with Valerie Jarrett and Austan Goolsbee at the White House and also to connect with DOE staff and the staff of several Senate offices that are working on various alternative climate bills.

I've participated in such swings through DC in the past, but this one was particularly educational, and I thought I would pass along a few takeaways in case they're useful intel for any readers, since these things have a significant impact on the industry, no matter what side of the climate / energy debate they're on (note that these are just one man's impression of where things stand in regards to national climate and energy policy, I can't promise my impressions are right or even shared by my fellow investors in these meetings):

1.  Climate and energy legislation (CEL) is "next"... maybe.  By all appearances, the Obama Administration is gearing up to start making a push on this once health care is done, and as of tonight that appears to be the case.  However, there's also financial reform, economic stimulus/ jobs, schools, and a host of other issues that will also press for attention.  While climate and energy have been getting a lot of rhetorical attention from the Administration (they were quick to cite numbers about the number of times the President has talked about it publicly), it's clear that the White House's "A-Team" has been focused on health care instead of anything else for the first year-plus of the Administration.  But the early signals so far are that the next big push for this high-level group will be CEL.  We'll have to wait and see.  If we learned anything from watching the health care reform effort, it's that nothing is going to get through the current legislature unless the Administration gets actively engaged and even puts out their own legislative suggestions.  My impression from meetings at the White House is that they are now gearing up for such a role, but are still very much in the early stages.  In short, when you start seeing top Administration advisors on the Sunday talk shows talking about CEL, that might be the advanced signal that they're actually going to start pushing it.

2.  It probably won't happen this year.  Had a positive meeting with staff involved with Kerry-Lieberman-Graham, the emerging front-runner for CEL.  Not to say everyone we met with was a fan of that proposal, and in fact there was criticism that the language hasn't been released yet.  In this one meeting with someone actually involved in writing that bill, it came through that the effort is real and thoughtful and that there's a lot of work going on behind the scenes ahead of any language being released.  However, in that same meeting, in trying to figure out a pathway where the bill could jump through all the necessary hoops and get passed this year... Well, it was possible, but to my ears highly improbable, to expect anything to happen before midterm elections.  So my guess is most of the CEL discussion this year will actually be positioning ahead of a push in 2011.  Of course, that'll be after the elections, so who knows...

3.  "Revenue-neutrality" is going to be key to any proposal that moves forward.  Regular readers will know this is something I've pushed on this site in the past.  We met staff from 3 different senate offices, each of which were working on separate competing versions of CEL -- all three of which included some type of dividends back to taxpayers from the government revenues from credit auctions or from a carbon tax (as opposed to all the fees going straight into other government spending programs).  So I'm gratified personally to see that the idea has some legs.

4.  Expect "death by a thousand alternatives" in the CEL debate.  In addition to Kerry-Lieberman-Graham, there's also Cantwell-Collins, and we confirmed the rumors of Murkowski's staff working on a revenue-neutral carbon tax idea.  And none of them are going away quickly, it was clear.  Plus, Waxman-Markey did pass last year of course, setting up the same kind of Senate-House conflict down the road that marked the health care reform debate. 

I hope that's a helpful download for anyone wondering what's going on in terms of CEL in Washington, DC.  Many thanks to the good folks at the Clean Economy Network for arranging the day, and to the team at the Administration that invited us to provide our input.

To the integrators go the spoils?

Rob Day: March 12, 2010, 11:31 PM

Most high-profile cleantech VCs will tell you they're looking for breakthrough technology.  The "black swan".  The "grid parity".  The "unicorns". (Okay, I made that last one up, but it wouldn't surprise you to see some VCs talking like that, would it.)

But there's an alternative model -- that the winners in cleantech will be the integrators, those combining proprietary and non-proprietary technologies into systems, rather than those innovating breakthroughs at the component level.

Absolutely, there's value to further innovation at what I'm describing in this column as the "component level" but which can be pretty important.  Cheaper solar cells, better battery chemistries, more efficient LED chips -- all these have value that I don't mean to discount.

But at the end of the day, all such innovations will need to be integrated into products, if not systems, intended to cannibalize existing markets and applications. 

I would argue that the "economic rent", or the real economic value, is going to be captured by the system integrators, not the component innovators, however valuable those component innovations are.


First of all, the existing markets don't know how to use such component innovations.  Adoption is slow. Lighting fixture OEMs have shown themselves to not be able to incorporate solid state lighting into their product portfolios either rapidly or effectively.  Solar installers have little interest in the latest hot but unproven solar cell technology.  Utilities don't want to risk reliability in the pursuit of efficiency improvements.  The markets aren't automatically incorporating innovations into actual products in a timely fashion.

Secondly and relatedly, component manufacturers don't have the point of contact with the customer.  By having to work through channel partners or other influencers, the component manufacturers lose sight of what the customers really care about.  When it comes to lighting, does the customer really care about how the fixture puts out light, and how much total light is sprayed out from the fixture in all directions?  No, they care about the amount of light that is delivered to where they need it -- on the manufacturing floor, or workers' desks.  All of a sudden, directionality matters.  If you're just selling LED chips, do you get that message from customers? No, but the integrators do.  And designing a system to meet a customer's specific needs becomes do-able to them.

Thirdly, the component manufacturers are delivering, for the most part, a commodity.  In solar or other generation technology? Kilowatt-hours.  In water? Gallons. In batteries it gets a bit more complex, but essentially it comes down to the amount of power that can be stored, and how quickly it can be released. There are lots of ways to accomplish this.  But from the customer's perspective, they want a comprehensive solution, not just the commodity or process itself.  All these components are best used when managed intelligently.  That's what the integrators do.  That's not what a solar cell manufacturer, an LED chip manufacturer, or a battery manufacturer necessarily do.  The integrators will be able to cherry-pick each such innovation as it comes along. Plus, customers will have specific needs for their products beyond just the basic commodity being delivered.  And the integrators will be developing products that not just accomplish the main mission, but do it with the right mix of other attributes.  And the smart integrator will also be future-proofed -- offering customers the promise that the components may be evolving rapidly, but the core system being bought will be stable for several years to come.

Finally, integrators are at the point of contact between products and services.  And I believe that is where the money is going to be made in cleantech.  Component innovation by itself is just building a better mousetrap and expecting the world to beat a path to your door.  Maybe one such innovation catches on, but many such pure tech bets will end up disappointing, even if the tech makes sense on paper.  Meanwhile, services without technology innovation are from the VCs' perspective low-margin and slower-scaling.  But at the intersection between those you find the integrators, who can latch onto access to new technology to drive installation and implementation services that can create a sticky customer relationship with good win-win margins for both vendor and customer.

So what kind of system integrator is best positioned to take advantage of these factors? An attractive system integrator will combine some proprietary technology with off-the-shelf components.  Ideally, the main tech engine (LED chips, solar cells, battery cells, etc.) are treated by the company as a flexible input.  And the proprietary technology comes in the form of controls or other "ancillary" features that actually make a significant difference to customer value.  This gives the company an edge versus competing integrators, but allows them to take advantage of the rapid innovation cycle at the component level.

Such thinking may not go over well in a venture community that values component-type ARPA-E fund-able intellectual property more than it values systems-level IP and know-how.  But it's what I've found so far to hold true in the cleantech sector.



Some thoughts from MIT Energy Conference and ARPA-E Summit

Rob Day: March 9, 2010, 10:31 AM

I'm not one to flog corporate green marketing stuff, but in this case I'll make an exception.  I can't attest to the validity or accuracy of the presentation, but I've found the numbers being shared by Exelon, and their general attitude about green energy and stakeholder engagement, to be encouraging.  You can see a good example here (note: link opens a large pdf).   I'd be curious to hear what Joel Makower thinks about it...

I'm intrigued by two things in particular in this report:  First, I'm pretty interested in their presentation of their carbon abatement cost curve (pages 3-4).  I think they've done it in a funny way, and not necessarily the way I'd like to see (for example, they put some green power techs way down the curve but a closer look shows that net of incentives they should actually be much further up the curve).  And as I noted to a colleague at the event, it's a bit funny that utilities like Exelon spent years talking about how cheap nuclear power is, but now that the government is actually willing to throw money at it, they talk about how expensive nuclear is, and gimme gimme gimme.  But with those kinds of caveats, I really like this kind of cost curve analysis and wish it was a requirement for all major utilities.  And note how crucial energy efficiency, existing nuclear plant improvements (not new-build), new natgas plants, and wind power (net of incentives) are for this utility.

Secondly, on their website, I'm gratified to see a clear indication that they see environmental strategy as an area where they can actually create a competitive advantage, not just something to be managed to avoid downside risk.  I can't tell you if they truly believe that and act that way, but the message itself is very much in line with arguments we were making a decade and a half ago in the business sustainability movement.  And it still holds true today.

John Rowe of Exelon spoke at the MIT Energy Conference, which is what drew my attention to the above literature.  But Rowe's speech was also pretty interesting, coming out strongly for pricing carbon and against renewable energy standards.  Below are some quotes I jotted down (apologies for any scribble-induced inaccuracies):

"Every $10/ton in the price of carbon to us is an extra penny per kwh we'll have to charge.  It would cost us an additional 5-10 cents, from our current 11 cents per kwh average, if we were asked to do all new nukes, wind and solar [under a renewable energy standard, for example].  The public is willing to believe the [climate change] problem is real.  Most people polled, however, didn't like carbon tax or cap and trade because they thought it would cost them money.  But they loved the renewable energy standard, because they thought it was free."

"I support the renewable energy standard of Bingaman, but that's because he recognizes the limits of how far we can go.  You run real risks when setting energy policy by mercantilism, we're not good at having Congress pick technologies.  We need carbon cap and trade and a moderate level of support for specific policies.  We need to harness the market.  It's better at correcting mistakes than government is.  But the market needs to be constrained by policy as well."

"The EPA has clear mandates to regulate carbon, mercury, coal ash, and new source performance.  Coal-burning power plants have to navigate a labyrinth, it's an endless series of hammer blows on existing coal fleets.  The EPA is frustrated that they can't synchronize these regulations, to shut down smaller less efficient plants and do more with newer cleaner coal plants, but they don't have the authority to do so.  It's an expensive mess, which will reduce carbon, but neither effectively or efficiently."

"We can't make sense of nuclear with $5 natural gas.  We need $8 gas and $25/ton carbon in the forecast for it to make sense... The key driver of change is the cost of natural gas.  Gas you use to back up wind power became cheaper -- that's what made wind cost effective."

"Some significant portion can be solved by efficiency and upgrading nuclear plants.  After that, the next thing is natural gas, replacing inefficient gas or coal.  It's much cheaper than sexier things we would want to do.  After that, wind, then new nuclear.  Solar is still very expensive."

"One advantage these new technologies have is that they can be implemented smaller scale.  As innovation happens, it's not as big of a problem for the utility.  Nuclear plants take so long to build that the utility is really worried about picking a wrong technology.  Nuclear's problem is that it's big and chunky."

"Every month or so I call up my friend Rahm Emanuel and ask him if it's time to push for a carbon tax yet.  [He makes it clear it's not going to happen.]  So it looks like cap and trade, if anything.  In order to get to a bill that could work, you'll need to put in a price cap, some kind of $10-20/ton collar, with a real escalator in place.  Need to put in a renewable energy standard like Bingaman's, with something similar for nuclear, and then you have a good start."


It's always fun to wander the exhibit halls and poster boards at tech-driven conferences like MITEC and ARPA-E.  Here are some tech development efforts that caught my attention:

Low temperature solid oxide fuel cells -- research at the University of Maryland, to bring SOFC operating temps to around 400C.  High conductivity electrolytes, and novel electrode materials.  ...Although now that Bloom has solved all problems for SOFC forever, you have to wonder what the point is...

Geothermal electricity coupled with CO2 sequestration -- being researched at the University of Minnesota.  Essentially using CO2 as the working fluid.  I'm not sure how restrictive the geological and geographic requirements would be, however...

Nano-dipole PV -- research at the University of Toledo.  This ARPA-E finalist is pursuing "fourth generation PV" in the form of "junctionless PV."  This nanoparticle approach is at the very early stages, but they will be testing it with existing thin-film PV materials as well as some new systems like liquid PV, and enhanced photoelectrochemical cells.

Thermoacoustic cooling technology -- research at PARC looking to more than double the efficiency of traditional vapor compression systems for air conditioning.

Carbon labeling -- the Carbon-Efficient Supply Chains Research Group at MIT is working on developing methodologies and labels to be able to help consumers better understand the carbon impact of products they buy.  First off?  A banana!  Why?  I don't know...  But it would be interesting to see some rating system that could be broadly applied at the retail level.

Microchannel reactors for Fischer-Tropsch -- We're seeing more efforts to capture syngas from distributed waste streams, but what to do with it when F-T based plants to generate liquid fuels are typically so big and expensive?  New research into microchannel reactors might be able to bring economically-viable FT reactor scale down by 80-95%.

Higher power density flow batteries -- While flow batteries remain too expensive for broad use as a grid-scale energy storage technology, United Technologies Research Center is working on technologies brought over from PEM fuel cells to bring flow battery power density up 4x or better, which would thus significantly reduce system cost.


“Oil & Gas” need a divorce

Rob Day: March 3, 2010, 2:13 PM

At ARPA-E, listening to Jim Woolsey talk about the possible important role of natural gas in any effort for both "energy independence" and climate change mitigation in the U.S.

It reminds me of a personal opinion I've been sharing with peers for a while now:  That Oil & Gas need a divorce.

Historically, in the U.S. it's been a single industry.  "Oil&Gas", practically all one word.  You put a hole in the ground, and sometimes one comes out, sometimes the other comes out, so many large producers do a bit of both.  You can see how a marriage of convenience, at the very least, would be natural for the group.  Represented by the same industry servicers: Trade associations, lobbyists, PR efforts, organizations, research, etc. 

But the universe of oil and gas producers is not monolithic.  To use the parlance of Wall Street, there are "oily" producers and "gassy" producers.  The "oily" ones have been larger and have largely driven the industry's public positioning over the past few decades.  Which works for the overall group when priorities are in alignment.

But energy independence and climate change are creating a serious divergence of interests.  Oil is an imported commodity in large part, natural gas is domestic and seemingly abundant.  Natural gas fired generation, and transportation, has a very different carbon emissions profile than coal, or oil, the two incumbent fuels in each category respectively.

The problem is that the "oily" part is still driving the overall "Oil&Gas" community's positioning and perception.  So in climate change legislation that's been proposed, coal gets significant incentives to go "clean", but natural gas fired generation gets relatively little support.  There's significant opportunity in the U.S. for natural gas fueled transportation, but other alternative fuels get more support.  Switching home heating and appliances to natural gas from oil or even coal-fired electricity would make a significant emissions and efficiency impact, but the incentives have been underwhelming to date. 

Longtime readers will know I'm an "all of the above" proponent -- we need a robust mix of clean and cleaner energy sources if we're to make any kind of impact on our energy challenges.  Certainly, in my mind, natural gas has a very important role to play, as the most available already-scaled solution representing at least some improvement on the incumbent oil and coal fuels.  The natural gas industry, in my opinion, actually stands to gain significantly from many of the climate change policy ideas being thrown around in DC.  Some experts have described it as the best "bridge solution" to carry us through to an eventual low-carbon energy system.  But right now, the natural gas industry seems to be getting tarred by the same brush being applied to the oil industry.  And the "gassy" players seem to increasingly recognize that as a problem.

There are now some efforts out there to provide a voice specifically for the natural gas industry.  I expect to see even more such shifts going forward.

“Shift happens”

Rob Day: March 2, 2010, 1:47 PM

I've stolen the title of this post from a very funny line delivered by Daniel Nocera (MIT, SunCatalytix) at the ARPA-E Summit in DC this morning.

Yes, I'm attending the first ARPA-E Summit, and I'm glad I did.  It's proving to be one of the best events of the year, in the cleantech sector.  A who's who list on stage and amongst attendees, a great mixing bowl for researchers and practitioners and investors, and some really impressively innovative ideas.  Kudos to the organizers at the DOE and CTSI, among others.

The idea of ARPA-E, of course, is to try to get the energy landscape shift Nocera was referring to, to happen more quickly.  To fund breakthrough, but practical innovation, that otherwise wouldn't get funded.  It hits directly at one of the capital gaps I've described before, at the very early stage, where VCs and angels and other private sector funders aren't fully able to get involved, for reasons I laid out a while back.  So it's an important effort.  In many ways, ARPA-E is just following in the footsteps of DARPA, another successful government program, and one that typically gets very strong support amongst legislators.

But while you can sense the optimism in the crowd here at the summit about this program and what it's doing, ARPA-E is going to face quite a few challenges going forward.

1. Demonstrating economic impact:  The work being sponsored by ARPA-E is necessarily forward-looking.  It's about investing in technology and commercialization efforts that are too far out or risky for the private sector to fund.  In theory.  But in this economic climate, the pressure will be on all programs to demonstrate economic impact, specifically jobs.  These technology development efforts don't lead to too many jobs being directly created.  Perhaps the funding helps hire another engineer or two at each company, but realistically, it's a bank shot to get to jobs growth -- we innovate and commercialize something that then eventually creates jobs once it starts being rolled out.  But here's the crux of the challenge -- many of the manufacturing jobs that get created via this innovation, when it happens, will be overseas.  This is just the way the world works, I'm not criticizing ARPA-E for this.  But my guess is others will, at some point -- and specifically when an ARPA-E recipient outsources manufacturing and gets visibly "outed" for it.


2.  Demonstrating additionality:  "Additionality" means a very specific thing in the carbon world.  It means proving that carbon emissions reductions wouldn't have already happened under the status quo.  ARPA-E is going to face a similar challenge.  Among the ARPA-E grant recipients are several startups that were already pretty well-funded by VCs.  It raises a critical question:  Is the role of ARPA-E to fund projects that wouldn't have been funded otherwise?  Or is it simply to accelerate development of ideas, regardless of how or if they've been funded to date?

If ARPA-E is only supposed to fill the capital gap, then there's a problem when it provides additional capital to a high-profile venture-backed startup.  The private sector had already demonstrated its willingness to put money into the development effort, so what's additive about ARPA-E's role, and why wouldn't they have better-deployed the money into something else with breakthrough impact potential but no venture funding to date?

On the other hand, if ARPA-E is only to fund efforts that haven't been able to get venture funding yet, doesn't that create a selection bias issue, where the agency is only funding ideas that the private sector has rejected, perhaps at times for good reason?  And why shouldn't the agency support really important ideas regardless of their funding status, because additional capital and visibility still helps?

Again, my point isn't to criticize ARPA-E, which I believe has done a great job to date.  But I do think the conundrum posed by these questions will be a challenge that the agency will continue to wrestle with going forward, and will likely face some scrutiny over at some point.


3.  Demonstrating good selection judgment:  This dovetails with the second point from above.  ARPA-E has been flooded with requests and applications for funding.  It will continue to be so, and many worthwhile efforts therefore won't get selected, it's impossible to back every deserving project.  And so as the agency staffers choose one recipient over another, it raises the likelihood of the agency getting criticized for their choices -- either as being wrong, or as showing favoritism.  The agency, as far as I've seen, has worked hard to help avoid this, bringing in a significant number of outside reviewers as part of the process, and now also reportedly providing a lot more transparency to the process.  This is very good.

But still, sooner or later one of these efforts will utterly and visibly fail.  VCs are used to this, but elected officials are not.  So sooner or later, competency of selection will be a debate that arises, whether justified or not.

And, sooner or later, someone is going to ask why a wealthy VCs' portfolio company just got more "free money" from the government.  This goes to that second point above, and has already been the subject of some external criticism.

Finally, sooner or later there will be an example of where the visibility inferred upon an ARPA-E grant recipient is perceived as having disadvantaged some other startups in the same subsector.  Government intervention affecting the competitive landscape, in other words.  There's a legitimate counter-argument to be made that any legitimacy for one player in a subsector generally helps all players in the subsector, but still, I know from talking with contacts at the DOE that they're already being bombarded with complaints from elected officials whose constituents were denied in their grant applications, etc.


I'm a big fan of the ARPA-E effort.  And, knowing some of the people involved, and knowing some of the major process overhauls they've been going through to try to get it right, I think we'll look back on the early days of ARPA-E as a really standout effort in terms of the level of execution of this versus other government programs in other policy areas.  I just also know that nothing is ever executed flawlessly, and thus ARPA-E will likely eventually face some of the criticisms I've described above. 

I hope that when that time comes, members of the cleantech research and investment communities will stand up and support it as the very valuable program it is.