Viewing posts tagged "Carbon"

A quick update on carbon goings-on

One of the interesting things to come out of Obama’s new budget is the assumption in there of revenue from implementation of a cap-and-trade scheme for carbon emissions reductions.

First of all, here’s a quick but compelling analysis by Chaz Teplin who points out that the revenue assumptions point to assumptions of fairly low (<$15/tCO2) market prices for carbon credits.  Chaz then points to what that price level might mean in terms of costs more familiar to most of us.

Secondly, here on this site we’ve previously discussed the challenges of getting to 60 (as in, Senate votes) on a cap-and-trade bill.  Well, now the inclusion of these revenues in the budget may be a hint along the lines of what got reported a couple of days ago:  That the “budget reconciliation” process may be used to prevent a filibuster on any climate regulation. That would be an interesting twist, although I continue to believe c&t legislation won’t come down to a party-line vote…

Finally, while all this goes on inside the beltway, outside regional leadership continues to push the ball forward regardless.  The latest move is by the city of San Francisco, which is launching a Carbon Collaborative designed to help make the city a hub for carbon trading.  [Mandatory self-promotion alert: One of my portfolio companies, Carbonflow, is involved in this effort]  It’s a sign of things to come, as we’re witnessing the birth of a new, multi-billion dollar commodities market.  Different regions will be vying to grab part of that, undoubtedly.  But of course, what happens inside the beltway will make a big difference on whether the nascent U.S. carbon trading industry will flourish, or languish while Europe takes all the action.

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2009: The Year of the Carbon Market

Happy new year, everyone!

A big thank you to the few thousand of you who regularly read this column, and thanks for the kind words many of you have sent my way over the past few years.  I hope these rambling writings continue to be useful for you…

Everyone probably already has a lot of resolutions already in mind for the new year, but allow me to suggest a few additional ones (these are mostly easy, so you can quickly increase your “success rate” if you add them to your list):

• Spend 2 minutes reading this very good article on how 2009 is going to mean big things for carbon markets.

• Spend 3 minutes filling out the Cleantech Investing readers’ prediction questionnaire.

• 2009 will also be The Year for Cleantech Networking (tm)...  Spend 1 minute signing up for the Cleantech Investing group on Facebook, to connect with your fellow C.I. readers.

• Spend 1 minute signing up for the Renewable Energy Business Network (REBN) group on LinkedIn, to connect with fellow entrepreneurs, researchers, and businesspeople in cleantech.  Also, look for REBN events in your city in 2009, where you can network in that most antiquated of modes: Face-to-face.

• Spend 10 minutes adding your thoughts to the ongoing conversation around “What’s wrong with cleantech VC”...  Read the presentation here and add your thoughts in the comments section, or email me your thoughts.  Thanks to all of you who continue to contribute to the dialogue…

• If you haven’t already, spend 3 minutes adding the following sites to your RSS reader or other reading list:  Clean Break...  Cleantech Blog...  Two Steps Forward...  EcoGeek.org...  Switchboard...  and of course, Green Light.  (You can also find links to this column’s RSS feed, or to sign up for email delivery, in the sidebar to the right under “Admin”)

• Spend 5 minutes at the EERE’s Alternative Fueling Station Locator...  And ponder why, with the billions upon billions spent on producing biofuels, it’s so tough to find a convenient retail option near you where you can actually purchase the stuff for your vehicle—and even when you do find such fuels, how can you know how sustainably (or not) they were produced?

• Spend 5 minutes flipping through the early release ppt of the DOE’s 2009 Annual Energy Outlook... And ponder how we’re going to possibly address our looming climate change and energy supply challenges if fossil fuels are really going to remain 79% of the U.S.‘s energy supply mix by 2030.  Major systematic changes are clearly needed…

That’s it!  Just 30 minutes’ worth of to-dos over the holiday weekend, and you can cross 8 new year’s resolutions off of your list.  Best wishes for a safe and peaceful and prosperous 2009 all around…

The challenges and hopes for a U.S. carbon trading market

We’ve been digging even deeper into carbon trading topics lately, for obvious reasons (self-promotion alert).  And then I had the pleasure of participating on a “cap-and-trade vs. carbon tax” panel yesterday sponsored by the New England Clean Energy Council (and very well executed by Panel Intelligence).  So I thought it might be useful to put down a few thoughts on the subject.

Conventional wisdom says that we should be expecting a cap-and-trade scheme sometime during Obama’s first term in office.  We discussed this possibility in a post on Wednesday.

In thinking about how such a scheme might impact U.S. cleantech startups and investors, it’s important to look at the examples of existing trading markets:  EU ETS, US regional markets, and voluntary markets like the Chicago Climate Exchange (CCX).  The devil’s of course in the details, but if a U.S. federal cap and trade system is enacted we can draw a few operational conclusions:

1.  Any system is likely to overtly encourage energy efficiency adoption, but with unknown effectiveness. There is general agreement around the concept that encouraging energy efficiency is a good thing, naturally, and we’ve heard discussions about “carve-outs” for energy efficiency as a source of offsets in a U.S. cap and trade scheme (see Karla Bell’s great blog for good discussions on these and other related topics).  And even if it does, the administrative overhead associated with getting carbon credits validated and acknowledged as financial/ regulatory instruments can be quite costly, if not prohibitive.  At least the way it’s done right now, concerns about “additionality” (ie: was the energy efficiency improvement really in addition to what would have been done under “business as usual”) and the need to validate and verify actual carbon emissions reductions from a lot of small energy efficiency improvements is difficult even at the utility level.

That’s one of the reasons we like CarbonFlow, as they’re developing scalable solutions to this challenge, so that energy efficiency gains can more easily and cheaply be accredited for trading. As it stands right now, cleantech startups would really have to partner up with bigger players (ie: utilities, or oil refiners) in order to gain any advantages to their value proposition as a result of a high-level cap and trade scheme.  That’s somewhat daunting…

2.  Something’s gotta give in the current carbon offset accreditation process. In a system like RGGI where it’s basically just utilities trading emissions credits with utilities it’s less important.  But in Europe, the inclusion of carbon offsets from overseas ( for the most part, the so-called Clean Development Mechanism, or CDM) has allowed for very economic emissions reductions and significantly reduced the negative economic impacts associated with limiting carbon emissions.

So you want to include CDM-like elements into a U.S. system.  But then you’re bumping up against a very labor-intensive, expensive, and time-intensive process to get such projects approved.  A typical landfill gas capture project in an emerging economy, for instance, might take 7 months and $100k in fees (mostly to consultants, etc.) to gain validation as a “credit”—and only then can the project developer sell those credits.

There’s been an entire industry that has grown up around the creation and selling of these kinds of credits, whether into official systems like the EU ETS/ CDM, or just for voluntary markets.  Everything from growing trees to fuel-switching projects to growing plankton for deep ocean carbon sequestration is being planned with strong dependency, at some level, upon this value creation path.  I’ve seen numerous business plans where entrepreneurs are counting on gaining such credits as an important part of their future revenue streams.  But for this to be feasible, the bottlenecks and high transaction costs associated with accreditation have to be greatly alleviated.  That 7 months and $100k can be hard to make work for a number of these opportunities…  That’s another reason we like CarbonFlow, because they’re working directly with leading validators to come up with smart solutions to these challenges.

3.  In an ideal world, these carbon offsets become highly liquid, fungible commodities. If you’re an energy trader, you love the concept of trading carbon offsets, because they become another way to play around geographic inefficiencies.  Think about it—carbon is a global issue, not a local issue.  So a carbon offset from one place is the same as a carbon offset from another place.  But meanwhile, energy traders are used to working in a market where energy supplies are very geographically determined.  The interplay between, say, temporarily turning off a power plant in one place, getting carbon credits from that, and applying them toward turning on a peaker plant somewhere more capacity constrained, is just one example of how commodities traders might find a lot of arbitrage opportunities… if we can create a truly global carbon trading market.

However, for this to happen, for offsets to be readily traded multiple times per day, we need to have a strong understanding of where each credit came from.  After all, it’s not like other commodities—it’s the ABSENCE of a negative, so it’s tough to prove the asset is real unless there’s a lot of transparency around where it came from, how it was derived, how it’s being verified, etc.

And not all carbon offsets will be created equal.  To the consumer product company seeking “carbon neutrality” for marketing purposes, it might be worth paying more for a carbon offset created by protecting a wildlife preserve, than for a credit created by capturing previously released coolants at an obscure chemical plant somewhere unphotogenic.

In all these cases, we need a lot more information about the credits, and this information needs to follow the credits around as they change hands over and over again.  Industry participants like New Energy Finance will typically project a “churn” per offset of around 4x (meaning that each credit will change hands an additional 3 times per year after its initial sale), but I suspect that would really be on the low end if we can figure out answers to all of these challenges.

If we can figure out solutions and put in place a cap and trade system that encourages simplicity, transparency, and inclusiveness, then such a system could be very encouraging to the growth of the cleantech industry in the U.S. and elsewhere.  If we design it to be too onerous and limited, however, not only will we find the system to be costlier than hoped, we’ll also not see much positive impact for young startups and small businesses where most of the jobs growth is typically seen.

So get on it, Obama team!

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Squeegees and t-shirts and air-powered cars

Lots happened this past week:

• Sub-One Technology, an advanced coatings company that helps infrastructure resist corrosion and reduce friction, raised a $24mm Series C led by Nomura and including GE Energy Financial Services, Chevron, and ATV.  Perhaps the company’s products could be used on the proposed $3B ethanol pipeline that’s being talked about for bringing the fuel from Iowa to the Northeast.

• Solid state lighting startup Albeo raised a $1.5mm round of financing from Green Spark Ventures.

• At the GreenTech Media solar data day in NYC, there were several sobering opinions—including the consensus of a panel of investment analysts that the solar industry shakeout is now a question of when, not if.

• Tata Motors said they’re going to work on an air-powered car… sort of.

• GTM also came out with a report on solar PPA markets, and Arno had some must-read thoughts on it.

• I stumbled on this interesting article on the need (sometimes) for “patient capital” in cleantech.

• Clean Technology Investor had a very interesting column on how the lack of standards in the U.S. carbon credit market is hindering its growth, and thus hindering the ability of low carbon technology startups to monetize the additional potential value from offset sales.  “So, in the absence of national standards, regional authorities, an alliance of investment banks and even a voluntary marketplace - the Chicago Climate Exchange, or CCX - are attempting to develop them ad hoc. The process of setting up specific qualifications, trading rules and market operations is still in the embryonic stage.”  Track down a copy of the full article for an interesting read…

• “Hercules, Hercules, Hercules!”

• At the Piper cleantech conference in NYC, a representative from Ausra gave probably the world’s first investment presentation to ever combine a) a revenue forecast chart with the y-axis denominated in Billions; and b) the statement: “we have an army of squeegee men.”

• Finally, this fantastic site made the rounds among VCs…  Drop it like it’s hott, like cleantech hott.

European cleantech VCs see 50% IRRs?

That’s the conclusion of New Energy Finance in a new analysis they released today.  They studied 129 clean energy investments in Europe by 37 investors and found 15 IPOs, 10 trade sales, 21 up rounds, 19 down rounds or write-downs, and 10 liquidations.  All told, they estimated a 54.9% gross annualized return across the portfolio of 129 companies.  The study period covered 1998 to the present, and included an estimate of 1.2x valuation on unrealized gains on funds invested.

It’s a very positive study, certainly, and helps further illustrate why investors are so keen on this sector right now.  It’s also a very useful analysis—but it’s important to note a lot of caveats involved.  The methodology is hard to figure out from the press release alone, but it’s clear there’s a lot of potential for some data bias (while it’s impressive that 37 investors participated, it looks like the study only covered about half of relevant investments; and as well, it appears the study relies somewhat upon self-reported data from the investors).

I’d also like to see more information about the way that “unrealized holdings, calculated on an industry-standard, conservative basis, are valued at 1.2 times the total funds invested.”  It’s unclear, but in light of the statements that 35 exits have returned 1.4x the funds invested, and the total estimated gains are 2.6x (1.4x + 1.2x), it seems like there’s an implication that the ~75% of funds invested that have NOT led to exits may be assumed to have seen some pretty nice paper gains.  We may ask the good folks at NEF to write up their methodology for benefit of readers at some point…

Before we all pat ourselves on the back about the healthy returns in this sector, in any case, consider the following:

• Neal has some cautionary words about solar...
• These researchers have some cautionary words about cellulosic ethanol...
• Here’s a cautionary tale for anyone who’s planning on generating a lot of value out of carbon offsets, and planning on today’s carbon market pricing in their financial modeling…
• And here are some cautionary words about VCs stretching their investment approach to do quasi project finance (something we’ve discussed on this site a bit)

One funding announcement so far this week:  Pentadyne has closed on a $14mm round of financing, led by Loudwater Investment Partners.  GTM’s Rachel Barron reports that the capital will go toward sales channel and product development.  Jonathan Shieber at Dow Jones pointed out in CTI that the PR described it as a “recapitalization,” and wondered about the company’s previously-announced AIM IPO plans.  It’s unclear from the PR whether existing investors participated in the latest financing, which brought total investments in the company to about $60mm.

Other news and notes:  Cleantech is heating up in Australia, too…  And finally, it’s not cleantech, really, but how about $20mm to put a robot on the moon?