New Jersey's Public Service Electric & Gas Company, an investor owned utility, has filed a proposal with the state's Board of Public Utilities to launch a $45.9 million demand side management program. Demand side management (DSM) is a method utilities use to reduce consumer demand for electricity and gas through the introduction of efficiency measures and technologies. In regulatory environments where utilities are constrained by the amount of electricity they are allowed to produce, typically through mechanisms that determine ratemaking as a function of fixed asset investment alone and not through a combination of fixed asset investment and commodity sales, demand side management is used to curb consumer demand. Under the former regulatory mechanism, known commonly as decoupling, utilities are punished for exceeding their planned electricity production schedule. On the flip side, consumers - the ratepayers - are punished if utilities under produce and are unable to make a sufficient rate of return on their fixed asset investment. Such a regulatory mechanism requires a balance between consumer demand and utility supply, which can be accomplished through a combination of demand side management and integrated resource planning (IRP). DSM is the easier and less expensive of the two. While IRP may require the introduction of renewable generation capacity, DSM typically involves utilities helping consumers insulate home heating systems, passing out CFL bulbs, conducting home energy audits, or upgrading consumers to programmable thermostats. In other words, it targets the lowest of the low hanging fruit. And this is exactly what PSE&G is doing. What's interesting here is that New Jersey's utilities are regulated under the traditional regulatory design scheme, which was described in the early 1960s in a paper by Harvey Averch and Leland Johnson. The Averch-Johnson Hypothesis describes how utilities tend to overcapitalize due to incentives inherent in traditional rate of return regulation. Briefly, overcapitalization maximizes profits under rate of return regulation because the return on capital investment is linked to the amount of the commodity - electricity - that is produced and sold. More electricity requires more power plants. In unregulated environments, as any first year B-school could tell you, utilities would invest in and produce only what the market demanded. In other words, rate of return regulation distorts the supply market by encouraging over production. As a result, consumers tend to use more electricity than they would otherwise. Regulators encourage this activity by mandating rates remain low. So why would a utility in such a regulatory environment intentionally shoot its balance sheet in the foot? New Jersey is one of the signatories to the Regional Greenhouse Gas Initiative, a multi-state agreement that calls for a 10 percent reduction in greenhouse gas emissions below 1990 levels by 2018 for 10 New England and Mid Atlantic states. RGGI, at least initially, is targeted specifically at power utilities. To attain this goal, RGGI has introduced a cap-and-trade system that will have its first emissions permit auction in September 2008. While PSE&G has neglected to mention the motivation behind the DSM proposal, it is likely they are undertaking the program as a way of reducing its exposure to what may be a fairly pricey emissions trading market. By encouraging conservation and energy efficiency among its consumers, PSE&G will be able to produce less electricity, thus reducing their rate of carbon emissions and the number of permits they will need to buy. This effect is similar to what occurred in the early 1990s with the introduction of a cap-and-trade scheme aimed at mitigating acid rain, except those changes occurred on the supply side. Twenty years ago, utilities began using SOX and NOX scrubbing technology because it was cheaper than buying emissions permits. This is also the same, though again on the supply side, as the European utilities that have invested billions of euros in wind capacity. This leads to an interesting, though fairly obvious, conclusion. Utilities would rather make adjustments now that they know to be both cheaper and more controllable to their electricity production and greenhouse gas emissions rates than subject themselves later to a volatile and less certain market mechanism that they will be forced to compete in. Or at least introduce measures to hedge against potential future exposure. Though PSE&G's DSM proposal is fairly small scale it helps put in context actions undertaken by larger utilities - XCel's Smart Grid City in Colorado and Duke Energy's $100 million residential solar plan are both good examples, though these may also be viewed partly as measures aimed at complying with state-based renewable portfolio standards.

I'm out in San Francisco this week. As someone who grew up with the Internet, the Bay Area has always held some sort of mystical quality. I remember reading about how Yahoo (and later, Google) was to able to do search, and wondering whether the spiders were kept in big cages, or if they were allowed to roam around Silicon Valley eating cows and knocking over power lines. In my mind this was the place where cool stuff happened, though it wasn't until I came out here for the first time in college that I saw the Valley was less like a futuristic Lego land and more like the bland office parks my I-banker friends work in in Northern New Jersey. Except with better sushi. I knew then I had spent far too much time reading Douglas Coupland. The Internet is, to a large extent, intangible. So that feeling of "happening" comes from the flashy logos on office parks, the occasional McLaren F1 you see cruising through SoMa, or maybe an overheard conversation. I was over at the Googleplex the other day, for example, and if you've never heard of Google and didn't know what they did, you couldn't be faulted for thinking they were a plushy detention camp for under-25s, or one of those "future institutes" your rich friends are always going to for mind-clearing. One thing you would notice, however, are their solar panels. In fact, it seems like solar panels are all over the Bay Area - on houses, at highway maintenance stations, and on commercial buildings. Over the course of 30 minutes while walking down University Ave. in Palo Alto on Tuesday I saw two Solar City trucks, seven solar installations, and at least three (heard & saw) coffee shop business meetings involving a greentech business idea. Even in some of the meetings I've done this week at tech companies and VC firms, it's easy to get the sense that the greentech industry here is something tangible. Boston, by contrast, is the land of speaking in abstractions about greentech. So much energy there is put into declaring the vibrancy of the New England greentech cluster or trumpeting the winner of the latest MIT energy competition, with few obvious results. By way of comparison, I visited one VC this week who's building a portfolio that's heavy on capital efficient greentech - software, DR, materials, etc. He's also building a LEED platinum house with one of the highest ratings in the country, complete with electric vehicles, green materials, solar panels, etc. According this VC, a lot of the difference between the Bay Area and New England is attributable to risk acceptance. Both places have world class researchers and universities, both places have government backing - though California's and SF's approach to greentech is possibly more supportive, and both places have traditions of being technology leaders. But, at least in terms of venture investing, the Bay Area has a leg up in its approach to and acceptance of risky technologies. Perhaps this is unsurprising given that Boston prides itself on being the center of the one of the first tech booms in the New World - the great salted cod rush of 1675. One example the VC gave me was EnerNOC. EnerNOC was started at Dartmouth in the years when everyone thought Demand Response was just a fancy name for Marco Polo. After getting passed on by a number of Boston VCs Tim Healy came out to San Francisco and got funded. I get the sense that this has happened a few other times. The point is, according to this VC, is that New England's risk aversion will limit its success in the greentech game, and no amount of good will and government involvement in early stage research and entrepreneurship will be able to solve that. A good first step, I think, would be encouraging Deval Patrick to get behind a strong subsidy program aimed at creating a consumer market for greentech products. And this can move beyond solar panels. CARB's zero-emissions vehicles mandates, however emasculated they have become, are still encouraging the promotion and commercialization of ZEVs in Massachusetts. Several European countries offer subsidies in the thousands of Euros for driving an EV. Utilities re-regulation in Massachusetts is, in my mind, the best thing the state can do to jumpstart the industry. Still, the challenge of shedding risk aversion remains. And it is a daunting one that goes to the heart of whether the Boston VC community can fundamentally rethink its investment approach. This will go a long way toward making the greentech industry in Massachusetts seem tangible, instead of seeming like the vacuum I sometimes feel it is.

Babcock & Brown, an infrastructure investment holding company, endured a 50 percent blow to its stock price last week over fears of an unsustainable debt level. The company's debt stands at roughly A$2.8 billion, while its market cap is only about A$1.75 billion. B&B has received a lot of criticism for its company model, which involves buying fixed infrastructure assets and then reselling to its satellite funds. The parent company has also formed a number of JVs with its subsidiaries while also generating long-term fees from the asset sales, making the incestuous arrangement that much more worrisome. To stem the drop in its stock price, B&B has said it will begin receiving bids this week for one of its four satellite funds, Babcock & Brown Wind Partners. The wind fund holds close to 3 GW of generation capacity valued at A$2.5 billion. It is likely that the sale will be less than the value of the assets, however, as B&B's obvious cash needs have eroded a significant amount of its bargaining position. So why is any of this important? Going back a few months, B&B launched what it termed a "Strategic Initiative" to sell off some of its wind assets - specifically the 800 MW it has under management in Europe - to gain back some of its declining market capitalization. In a recent report from KPMG, B&B Wind Partner COO Geoff Dutaillis acknowledged that "BBW is undervalued given current security prices." Specifically, BBW's holdings cost the company $2.3 billion to develop or acquire, while their current value is closer to $2 billion. Part of this has to do with its European holdings, including the $750 million acquisition price it paid for Portugal's Enersis in 2005, which the subsidiary co-owns with its parent company. Initially, the Strategic Initiative sought to spin out the European components and move into the higher value North American and Asian wind markets. However, the company may have missed the boat on getting in. In the second half of 2007, it laid out A$1.78 billion to up its wind portfolio by 67 percent, mainly through acquisitions. B&B has the distinct honor of being the only major wind company to develop less than half of its capacity in house. But by how much did B&B overpay to get into the wind game? It's hard to know, though Dutaillis claims the company nabbed the going rate of $2.5 million per MW, while IPOs and acquisitions have seen prices at twice this level, according to the KPMG report. It's possible B&B got in at the back edge of a utility scale wind bubble in Europe and overpaid to compete. However, paying itself through its subsidiaries probably didn't help matters much either. Ultimately, B&B's trouble may signal the beginning of a renewable energy bubble, and one that may not be necessarily limited to the wind markets. When mid- or small-market players willingly take on debt to compete in new markets with big valuations based on large expected revenues, especially when that growth is based on acquisition and not development, its possible a bubble isn't too far off.

Plug Power, the best distributed fuel cell company you've never heard of, is firing 21 percent of its workforce. The company was spun out from Michigan utility DTE Energy a few years ago as a new entrant in the distributed fuel cell market. Unfortunately, that market failed to materialize. Plug Power has offered severance packages to 80 employees at its production facility in New York, and will change focus from research and development to sales and marketing in a bid to turn a profit. Because nothing spells success like an aborted R&D process. Is Plug Power the canary in the coal mine for other distributed fuel cell companies? Bloom Energy, a company Kleiner Perkins has dropped close to $200 million on in the last few years, has yet to show off its final product.  Though there is a rumor floating around they've set up a manufacturing facility in India. Still, the question of whether consumers will go for totally distributed systems in the form of basement fuel cells remains. The constant availability of hydrogen as a fuel input is another issue. Hydrogen production and distribution systems aren't exactly widespread - except in small parts of California, and those are controlled by  municipal governments with fuel cell buses.

Germany's Bosch, the world's largest automotive components supplier, has acquired 50.45 percent of ersol solar for $1.67 billion. The acquisition comes at a 63 percent premium on ersol's Friday closing share price at an increase of 21.4 percent of ersol's projected 2009 EPS. This is the largest pure play solar acquisition in the industry's history, trumping previous deals like First Solar's $34 million acquisition of Turner Renewables or SunPower's $332 million acquisition of PowerLight. The ersol acquisition is the first of what many have hoped is the beginning of convergence and consolidation in the solar industry. With over 150 solar startups funded within the last four years - 75 percent of which have the words "sun" or "sol" in their name - more than a few VC's have started to get a little nervous about potential exit strategies. The exits that do occur are more likely to come from acquisitions than from IPOs - it may never be possible to raise the capital necessary to overcome scale and commercialization costs. Of those, the trend of companies getting bought out by non-greentech industrials should continue. This may also be buoyed by vertical integration moves undertaken by large firms - Applied Materials is a good example of this. Q-Cells is as well, but to a lesser extent. Regardless of the trends, the ersol acquisition is big news. Over the last five years slightly more than 20 specifically venture-backed companies have been acquired, with average deal size of close to $31 million. This is less than stellar. As big industrials move into this space and begin buying up solar companies - specifically components manufactuers - like so many modem and switch makers during the late 1990s - we may begin to see a shift in the kinds of companies coming into the market. Remember, VCs are malleable when they're not stubborn or quiet. However, the opening ersol has created in the M&A market for pure-play solar companies may provide some light at the end of the tunnel. Hartmut Moers, an analyst at Oppenheim said, "there is speculation that we might see similar bids." To hear more about this, come check out my talk tomorrow at the Boston Cleantech 2008 Summit.

Stion, the stealthy startup that bills itself as developing 4th generation PV, will announce tomorrow two new hires focused on scaling up its production capacity. The company has picked up Dr. Steven Aragon as its new VP for Engineering. Aragon comes to Stion from Daystar Technologies and Advanced Energy Industries, where he lead both companies' work in developing their proprietary thin film production equipment and manufacturing lines. Stion's second pick is Dr. Robert Wieting, who will join the company as its new VP for Research and Development. At Shell Solar Wieting developed the world's first commercial manufacturing process for copper indium diselenide thin-film module. Wieting has also worked with a-Si and germanium while at Shell. Chet Farris, Stion's President and CEO was previously at Shell Solar as well. While its unclear entirely what kind of materials Stion is using in its cells, its likely the company is developing a multi-junction, multi-substrate thin film combined with an integrated concentrating layer based on quantum dot technology. Stion has claimed its cells can achieve theoretical conversion efficiencies of between 33 percent and 50 percent, far higher than even the most efficient c-Si production modules. What's interesting about these acquisitions is Stion's insistence that it will not focus on developing proprietary production equipment, instead relying on existing deposition production technologies. However, both Wieting and Aragon have developed proprietary lines in the past, and Stion's continued development may end up requiring some interesting fixes or additions to any turnkey lines it purchases. Stion's VP for Biz Dev, Frank Yang, recently told GTM's Jenn Kho the company is looking to raise a C round to continue product development as it moves into building a 5 MW production facility in 2009 and a 25 MW pilot plant in 2010.

Phil Giudice, Commissioner of the Massachusetts Department of Energy Resources, spoke today at Greentech Media's PV Annual 2008 on the Commonwealth's plan to hit grid parity with PV in the near future. The Commish took an interesting tack, though. Instead of waiting for module and installed costs to come down, he's going to wait for retail electricity prices to go up. Massachusetts has one of the highest retail electricity rates in the country - about $0.15/kWh, putting it up there with Hawaii, New York and California. According to Giudice, rising natural gas prices will push this price up to (and past) $0.20/kWh. Wholesale natural gas prices have risen close to 40 percent in the last few years, which has had a drastic effect on the cost of electricity generation in the Commonwealth. But how will this affect PV prices? Most analysts have pointed to $4.00 per watt as the tipping for explosive demand growth in the PV market. However, given the still unpredictable polysilicon supply market, the inability of a-Si and CIGS manufacturers to ramp up volume production to meet demand, and the likely failure of production tax credits in the U.S., it is unlikely the installed system cost will drop to this level until 2012 at the earliest. Giudice thinks this is relatively unimportant. Backed by the right policy-based incentives, like Massachusetts's Commonwealth Solar Initiative - a $68 million plan to increase PV capacity in the state to 250 MW by 2017, pushing PV on the market at prices above $4.00 per watt will work as long as the natural gas-based retail electricity rates continue growing at their precipitous rate. Hearing this argument, Prometheus Institute President Travis Bradford put his head in his hands and exclaimed, "That's good. I was right. That was lucky." Travis has long predicted possible tipping points occurring before the $4.00 per watt price mark. The Commonwealth Solar Initiative, combined with Massachusetts's participation in the Regional Greenhouse Gas Initiative, as well as Giudice's work promoting the expansion of net metering and RPS caps, means the PV market in Massachusetts has the potential to exhibit a 40 percent cumulative annual growth rate. Based on this, Giudice thinks it may be possible to generate between 20 percent and 40 percent of the state's electricity from PV if retail electricity rates remain at the $0.20/kWh level - or maybe more if they go higher. This is equivalent to 2.5 GW to 5 GW of installed PV capacity. With global installed levels hovering around 7 GW, and with projections for 10 GW to 12 GW by 2011, Giudice's goal is nothing but ambitious. However, countered against rising electricity prices, Giudice argues PV is the most "effective hedge against a rising fossil fueled future." Proposals to resurrect the state's whale oil industry failed to gain the necessary votes in the State House. Something about the smell.