What if energy was free?

Readers be forewarned, this is going to be a bit of a different (ie: useless) post from the usual…

I was reading an Andrew Revkin column today, where he poses the question about what unintended consequences might result if the energy tech revolution succeeds in making “solar panels as cheap as paint,” or to paraphrase:  “What happens if energy is virtually free?”

Talk about your deep thoughts, it sounds like the premise of a Neal Stephenson novel, not your typical NYT type of thing.  But at the risk of pontificating outside of my investment horizon, I thought it was an interesting question, hearkening back to my days at an environmental economic thinktank (way back before cleantech was cool, even before it was “cleantech”).

What Andrew is asking is, what would go WRONG if energy is no longer a limiting factor for human population growth?  Would we somehow end up worse off?

The obvious answer is to simply look at the last couple of centuries, when for much of the developed world energy really hasn’t been the limiting factor.  As we’ve bled off our global stockpiles of non-renewable energy sources, we haven’t had free energy, but it’s been artificially inexpensive, to be sure.

With artificially cheap (ie: prices not incorporating all externalities such as damages from climate change, etc.) energy, the U.S. in particular has seen dramatic population growth, expansion of population into new territories putting significant pressure on species and habitats, and significant withdrawal of non-energy natural resource stocks.

So with artificially low energy prices, that’s what happened.  Thus, to be flip, if we have artificially low energy prices, that’s what what will happen.  But what Revkin is really asking, I suppose, is what happens if energy is even LESS expensive than that historically suppressed level.

But I would argue that it’s a flawed question.  Energy will never be free or close to it.  Revkin mentions the possibility of synthesizing food.  If energy is cheap enough, we will use it to address scarcity of other natural resources.  We already have learned just how much all of what we consumed is in reality some other form of consumed energy.  Corn-based ethanol isn’t very net-energy-positive because of all the energy-derived fertilizer we pour into the ground to grow the corn.  The entire “Green Revolution” in some ways is really about the use of cheap energy to grow food.  Same story with water—the embodied energy in water (the energy used to withdraw it, purify it, and transport it) is huge. Food is mostly embodied energy.  Water is mostly embodied energy.  By the time we consume them (factoring in extraction, treatment, transportation, etc.) just about all materials are mostly embodied energy.

Walk through the logical chain here:  If virtual energy is free, Revkin’s fear is the potential for dramatic population expansion, putting more pressure on natural resources.  But if natural resources are under pressure, they will get more expensive.  Given the inherent interlinkages between all the material we consume and the embodied energy, over the long run we would find new ways of supplementing those resources with some solution that would essentially be a huge consumption of energy transmogrified into supplied demand for materials.  And so we would end up with what happened over the last two centuries—a significant increase in Earth’s carrying capacity for humanity, a dramatically expanded population, but nothing like a crash in standards of living, etc.  Energy almost always has been, and almost always will be, the limiting factor for human population growth.  The second law of thermodynamics says so.

EXCEPT:  That’s a very long-run, economics-education-based perspective.  The problem with the long-run is that it ignores near-term inefficiencies.  To whit:  If there is a time gap between the provisioning of virtually-free energy and solutions to turn that surplus into substitutes for other material resources, during that gap (which, as we’re seeing in the painfully slow transition from the Oil Age) we could expect very dramatic impacts on natural resource stocks and non-human habitats.  And, based as well upon history, that’s likely what would happen.

So is there a scenario where all our efforts to find ways to make clean energy dirt-cheap end up having negative unintended consequences?  Of course!  And the above is just one path where that might happen, there are others (more concentrated wealth among the energy “Haves”, more economic power clustered in places where renewable resources are more readily available, etc., to name a couple).

But look, that’s a really long-term question, the answer of which is effectively moot for you and me.  Energy is not going to be virtually free anytime soon.  It takes energy to make solar panels.  It takes energy to make paint!  Basically, because it’s so central to EVERYTHING, the cheaper energy is, the more we will consume it, thus bringing back up prices in a typical economic cycle.  And we’re definitely an awful, awful long way from any period where clean energy generation technologies are significantly cheaper than the subsidized fossil fuel based energy prices we’re already used to.

But we can dream, can’t we?  Solving climate change, and then having unintended problems because of a surplus of clean energy supplies… Boy, that would sure be nice.

Whistling past the graveyard

Happened upon a very sobering account of the economic crisis today on PoliticalWire, well worth reading:

On C-Span, Rep. Paul Kanjorski (D-PA) explained how the Federal Reserve told members of Congress about an electronic run on the banks “to the tune of $550 billion dollars” within “an hour or two” last fall.

According to Kanjorski, on September 18, 2008 the Fed tried to “stem the tide” by pumping money into the financial system but it didn’t work and decided instead to announce an immediate increase in deposit insurance to $250,000 per account to stop the panic.

Said Kanjorski: “If they had not done that, their estimation is that by 2 p.m. that afternoon, $5.5 trillion would have been drawn out of the money market system of the U.S., would have collapsed the entire economy of the U.S., and within 24 hours the world economy would have collapsed. It would have been the end of our economic system and our political system as we know it.”

And then there’s this (admittedly simplistic) argument from FiveThirtyEight.com that the economic recovery won’t be quick…

So with that unhappy news in mind, let’s celebrate the cleantech venture deals that have been announced recently:

• How did I forget to mention this one???  Luca Technologies raised a $75.9mm Series C led by JP Morgan’s One Equity Partners and Kleiner’s Green Growth Fund.  ASF Group and Oxford Bioscience Partners also participated in the round, which appears to have been done at around a $175mm pre-money.  The deal was done a while back…

• Borrego Solar has raised a $14mm Series A from an undisclosed corporate investor.

• Israel-based AORA has raised a $5mm Series A led by EZKlein Partners and including L&Q Solar.  The money will be used to commission a hybrid solar thermal gas-fired generation installation.

• Sweden’s Xylophane has raised a $4.3mm round of financing to support biopolymer manufacturing.  New investors SEB Venture Capital and Capricorn Venture Partners from Belgium, via its Cleantech Fund, joined existing investors KTH Chalmers Capital and Innovationsbron together with Hans and Ingrid Wallstén in the round.

• Israel’s BrightView, a solar PV startup, has raised a $6mm Series A co-led by Israel Cleantech Ventures and Hasso Plattner Ventures.

• VentureWire reported that stealthy carbon sequestration startup C12 Energy has raised $4.5mm in venture financing, reportedly from Sequoia and possibly others.

• Solar Power Partners has added $32mm to their aggregate $47mm debt and equity Series B for their solar-as-a-service offering.  Energy Investors Funds and existing investors Globespan and Silicon Valley Technology Group.  VentureWire reported that they are raising a project fund.

• PE Week Wire reported today that SolFocus has raised $19.28mm in additional Series C financing, bringing to total to nearly $67mm.  Investors include Apex Venture Partners, New Enterprise Associates and NGEN Partners.

• VentureWire reported last week that Seven Seas Water has taken in a $15mm insider round.

• PEWW (I guess soon to be called PE Hub Wire) also reported that EV and hybrid vehicle developer Bright Automotive has raised $11mm of a targeted $17mm Series A, with White Pines Partners and Duke Investments participating in the raise.  (I think VWire may have actually had the scoop here, I can’t keep track)

• VWire also reported that Pump Engineering, a desalination pumps/etc. vendor, took in an undisclosed amount of equity financing from Plymouth Management Co.

• Cleantech investors in the news:  An article on OVP’s ramped-up interest in cleantech...  VantagePoint wants to spend $1B on cleantech...  Masdar and SDI Holdings may increasingly target Japanese cleantech startups...  And Ant Global Partners wants to raise a $250mm fund to target Indonesian cleantech.

Other news and notes:  Here’s a good overview of the launch of REBN’s newest chapter, in Philly… A good profile of Reed Benet, the new head of the Austin Technology Incubator…  The New England Clean Energy Council’s very good Fellowship Program is rounding up new recruits—get your applications in!...  Cleantech at TED...  Go get’em, ultracap innovators!...  Steorn is back—with proof...  Carbon credits for buying biofuels...  Finally, get ready to hear me beat the drum again and again in favor of energy efficiency and smart grid in 2009 (as if I hadn’t been doing that already for the past 5 years or so).

Two great links

If you want to get a great download of data on water trends and challenges, it’s worth spending a few minutes watching Prof. Hermanowicz’s presentation here.

And if you want to understand why it’s a bit misguided to say that cleantech as a whole is unattractive in a low oil price environment, see the below oldie-but-a-goodie chart.  And notice how little oil goes into any energy consumption outside of transportation.  (It’s also always fun to note how much “Lost energy” there is in the system)  Yes, there are linkages to pricing throughout the system, but despite what the TV may tell you, oil isn’t the only price-setter in the energy world.

Energy Efficiency needs a better lobby

There are two critical roles for energy efficiency in upcoming 2009 federal legislation.  But you almost never hear about them.

First of all, energy efficiency is shovel-ready.  In other words, if you’re looking to have an immediate impact on both green-collar jobs creation and cost-effective carbon emissions reductions, you absolutely have to include energy efficiency retrofits into the equation.  For example, look at commercial building energy efficiency retrofits:  The technology is available already; The nature of the work is service-oriented and building controls and HVAC and lighting are readily “trainable” for new recruits; and the economics often make perfect sense, if only regulatory support would help address the upfront capital cost hurdle.

And yet what I hear from folks battling inside the Beltway right now is that energy efficiency support has been one of the items on the chopping block in all the Stimulus Package horsetrading.  Apparently the CBO came out with a report saying that much of the energy efficiency incentives put into the bill wouldn’t have an effect until 5 years out?  I haven’t had a chance to review the specifics, but I would find that hard to swallow if true.

And while I’m also a big supporter of renewables, it’s hard to make a case that regulatory support for solar panel manufacturing (for example) would be something that would have a 2009 jobs impact, and in fact much of that market will eventually go overseas.  I’m not arguing against support for solar panel manufacturing, we have technology leadership reasons for wanting to pursue that as well, and good green manufacturing jobs should be encouraged in any case.  But if your metric is jobs creation in 2009, it’s tough to make the argument that renewables should be prioritized over energy efficiency.  And yet, apparently, that’s what the pencil-pushers are doing.

Secondly, energy efficiency could play a critical role in any climate change regulation that comes out.

To begin with, from a “wedges” perspective we cannot afford to ignore the role energy efficiency must play in any comprehensive climate change effort.  It’s not sufficient, but it sure is necessary.

Also, from a timing perspective, once again energy efficiency shines versus alternatives like sequestration and renewables.  It’s reductions we can do immediately, not after further waited-for innovations.

Finally, and most tactically, energy efficiency based carbon offsets may be very powerful in bringing key Senators “onsides” with carbon cap-and-trade regulation.  As we all watch how critical it is to reach 60 votes in the Senate, it’s important to recognize that major regions of the country consider themselves to be at a severe disadvantage in a cap-and-trade scheme, because (rightly or wrongly) they feel they lack the renewable generation potential (solar, wind, geothermal, etc.) of other regions.  Specifically, the US southeast feels disadvantaged versus the west or northeast.  It would be very easy for regional blocks to stand in the way of effective cap-and-trade regulation.

But of course, one potential “resource” that the US southeast has is lots and lots of inefficient air conditioners.  It’s an easily mined source of offsets to help them meet their requirements—if energy efficiency-based offsets are included as a key source.

Energy efficiency does face some technical challenges (for example, establishing accurate baselines and proving “additionality”) if it’s to be included effectively in any scheme.  It gets complex quickly. We’ll talk another time about these complexities and possible ways to deal with them.

But it’s worth wrestling with these details, because otherwise it’s tough to see how we get to 60.  And without that, the political efforts of a lot of people who are currently ignoring energy efficiency may be wasted anyway.

A quick question about smart grid…

...What is it?

Now that the subsector of “smart grid” is getting more popular and thus getting talked about more and more, it seems a good time to point out a couple of quick things about the concept:

1.  “Grid automation” would be a better term for the category. Applying IT and communications to the electricity transmission and distribution system, for the purpose of automating functions like notifications, meter reading, and eventually automated demand response, energy efficiency and grid balancing.

2.  It doesn’t end at the meter. Calling it “smart grid” makes it sound like it’s really all about the transmission and distribution system only.  But given the list of applications from above, it’s pretty clear that any full smart grid perspective must include the systems on customer premises that allow for the curtailment of consumption when the utility needs to free up capacity.

3.  It doesn’t have to be capital-intensive. I’ve spoken to a few people recently who have the natural, initial impression that smart grid projects are necessarily massive in terms of scale and capital requirements.  Re-wiring long transmission lines, putting new smart meters on every home in a town, that kind of thing.  But a lot of what falls into the category is more software-related in nature.  Even when it’s a hardware/ software system that’s being deployed, it doesn’t have to be super-expensive, thanks to advancements in computing power and communications technologies.

That’s at least how one investor views “smart grid,” for what it’s worth.

Deals from the past couple of weeks:

• KLD Energy has raised a $1mm Series A from angel investors to develop advanced motor technology for electric vehicles (note: link opens pdf).

• EV charging station developer Columb Technologies has raised a $3.75mm Series A, led by Estag Capital.

• Wind turbine blade developer TPI Composites has raised a $20mm Series B from GE, Landmark Growth Capital Partners, NGP and Angeleno Group.

• Jiangyin Alcom Solar Equipments has taken in CNY78mm in venture capital from Jiangsu High-Tech Investment Group (Govtor).

• Online green guide GoodGuide has taken in a $3.73mm Series A from NEA and DFJ.

• Zinc-air battery developer Revolt Technologies AS has taken in a $13.1 round of funding including $7.35mm from RWE Innogy, as well as undisclosed amounts from NorthZone Ventures (Sweden), SINTEF (Norway), Sofinnova Partners (France), TVM Capital (Germany), Verdane Capital (Norway) and Viking Venture (Norway).  The company had last year reported aiming for a $30mm raise in 2009, so but this appears to just be a second tranche of a Series B that VentureWire reported on last year.

• VentureWire reported that organic farming technology vendor EvoOrganic has raised a $1mm Series A from iVisionary Ventures and angels.

• OLED developer Novaled has raised a EUR8.5mm 3rd round of financing from eCAPITAL,      TechnoStart, KfW, TUDAG, Credit Agricole     Private Equity, TechFund and CDC Innovation.

• Investors in the news:  VentureWire reports that Citi Sustainable Development Investments is looking to spin out from Citigroup…

Other news and notes:  More talk than deals right now, and a lot of that talk is about how investors are getting more conservative and hunkering down in this environment…  Meanwhile, McKinsey concludes that the climate problem isn’t getting any easier...   As promised, here starts the wave of “cleantech bubble has burst” headlines...   An update on Masdar...  An update on GE and cleantech...  An update on cleantech policy...  An update on Eric Wesoff’s list of solar startups...  An update on that canard about carbon emissions and Google searchers...  Finally, hey wait a minute, Martin LaMonica stole my literary reference—but I guess it was a pretty obvious one to begin with.

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In defense of Vinod

During several discussions I’ve had with industry observers and fellow venture investors over the past few weeks, the topic of biofuels have come up, and those I’ve spoken with have mentioned “Vinod’s bad bet” on ethanol.  Their point being that Khosla Ventures and Vinod Khosla himself placed a number of different ethanol bets and then publicly backed that sector, which is now seen as being somewhat out of favor.

But that conclusion is probably off-base, in my opinion.

First of all, most of Khosla Ventures’ biofuels investments haven’t been first-generation (ie: corn- and sugar-based) ethanol, which is the specific subsector that is out of favor right now.  The jury is still out on cellulosic ethanol—people have strongly-held views both ways on the technology, but in the meantime most startups in the cellulosic space are still waiting to find out if they’ll have a good path to market and exit, they haven’t had to put up or shut up yet.  And many of the other biofuels bets in the Khosla Ventures portfolio, like LS9 and Gevo, are even further out in terms of tech and market development.  So it’s a bit unfair to point at just the corn-based ethanol and other first-gen bets in that portfolio and say that the verdict on their biofuels strategy is in.

And it’s also not quite clear that even the first-gen biofuels bets by Khosla Ventures haven’t been smart ones, from a strategic perspective.  Regardless of what the individual investments themselves look like, it’s important to recognize that Khosla Ventures has taken a different strategic approach to their investment thesis around biofuels than most venture firms take.  Khosla’s been happy to place multiple bets across a single sector, whereas many firms prefer to only place a couple of bets in any given sector.  Why be different?  Because of the special advantages Khosla has.  He’s writing his own checks, not having to report to an investment committee.  He has been actively leveraging his own personal brand equity and political access to bring government dollars and private sector attention to the ethanol story.

Most venture firms don’t want to end up having their portfolio companies compete against each other.  But by taking more of a concentrated approach to ethanol, Khosla Ventures appears to be betting that they can take advantage of a rising tide raising all boats, when they own half the fleet in the harbor (I overstate, but you get the point), and being able to combine those efforts when opportune.  And also betting that they can make the tide rise faster than it would have otherwise.  It’s a very specialized strategy that only works when a very quick and flexible investor with a lot of political access and brand equity can identify an investment thesis ahead of the crowd and take a strong early position in that sector.  And then, as Vinod does, speak anywhere and everywhere, and visit D.C. regularly, to make the case for the sector.  Hard work, but something many other venture investors couldn’t duplicate.

Such an investment/political/PR strategy also only works, however, if there are near-term jobs and revenues to tout.  Politicians need to see jobs creation opportunities in order to do their part of this kind of sectoral strategy.  Revenues and exits need to be seen in the near term by the press and the private sector before they’ll play their roles in the development of the sector.  So to effectively pursue this strategy, it becomes necessary to make some investments in first-gen players that are relatively close to market.  These first-gen players then become key examples to point to.  And even more importantly, perhaps, they can provide an eventual platform for the second-generation technologies that end up working the best, accelerating the paths to market for cellulosic players that would otherwise have to build capacity that would potentially be redundant to whatever first-gen players were already in the market by that time.

Long story short, you don’t need to believe in sugar- and corn-based ethanol as a long-term story in order to want to make a couple of bets on such companies, if you’re Khosla Ventures.  You just have to believe that the first-gen bets you’re making will be a good bridge for your second-gen bets.

The problem?  The market turned against first-gen ethanol much quicker than anyone expected.  A controversy about food and energy balances arising at almost the same time that oil prices drop precipitously and corn markets go out of whack.  Many people predicted some or all of these things would come to pass eventually.  I don’t know anyone who thought all that would happen in 2008.

Does that mean it was a bad strategy?  Nope.  And by the way, as per the first point above, their overall biofuels strategy may still end up making great returns anyway.  Political support and incentives for biofuels don’t seem to be going away.  And the sector continues to develop even as first-gen players fall out.

Vinod and Khosla Ventures certainly don’t need the likes of me to defend their biofuels strategy.  Plus, I’ve probably gotten it all wrong from their perspective, I haven’t discussed the above with anyone on that team, so I’m likely guilty of projecting my own views more than reflecting theirs.  But I thought this might be a useful case study to point out a few unique things about the cleantech venture sector, and put down my two cents’ worth.