Recent Posts:

So… where is the money going to go?

Rob Day: March 31, 2005, 8:03 PM
"[Venture] funds raised three years ago still have a significant amount set aside for new investments. According to the survey, 15% of 2001 funds remain set aside for new investments compared to 50% of 2002 funds, 60% of 2003 funds and 85% of 2004 funds." Hence the $53.6B overhang.

This from an article titled, "Venture Capital Fund Raising Doubles in 2004." And echoed in this Economist article.

Cleantech, according to many, is in the fortunate position of remaining underinvested even in the midst of such well-capitalized "optimism," as a quote in the article terms it.

The real renewable energy opportunity: Transmission?

Rob Day: March 31, 2005, 12:24 PM
Received an interesting UtiliPoint Issues Alert email today from Ken Silverstein (unfortunately, it's not posted yet on their website, but I will link to it when it's available).

Silverstein's message is that utilities are increasingly backing renewable energy, driven in no small part by Renewable Portfolio Standards (RPS) which are now in effect in 19 states. While the aggregate non-hydro renewable energy supply remains less than 2% of the US's 770,000MW overall generation capacity, he reports that some experts think that share might triple within four years.

One thing to note, however, is that what this really comes down to is wind and geothermal power. While solar power is coming along, waste-to-energy continues to make some noise, and some still hold out hope for microgen fuel cells to play a part, wind and geothermal are already the renewable energy of choice for most utility or renewable energy certificate (REC) programs. And when you consider that there are few venture-backable deals to be found in wind and geothermal now, as those industries have matured, then it isn't clear how a venture-stage investor can take part in the emergence of renewable energy by utilities.

Something else that Ken reports, however, is also notable: Transmission is the key constraint for many of these projects. Wind and geothermal power resources are often found inconveniently far away from existing transmission lines. For that power to be useful, there's got to be a connection made to get that power to where it will be used.

This can be a significant obstacle -- at the recent PowerGen Renewable Energy Conference in Las Vegas, one presenter I saw showed that it made more sense to place a new renewable energy project in a certain location in New Mexico that wasn't as good in terms of the efficiency of the local resources, but was more conveniently sited to the best transmission resources.

Ken points out that the transmission grid in the Midwest is already overloaded, making it difficult to harvest that region's significant wind power potential. Also, he notes that in Texas it has been estimated that new transmission costs up to $1m per mile, and that bringing 10,000MW of renewable power to market would require an additional investment of $2B.

Thus, the market opportunity for new technologies that enable lower-cost, reliable, higher-throughput power transmission could be huge, and near-term...

Millennium Ecosystem Assessment

Rob Day: March 30, 2005, 2:00 PM
Here is a sobering story on the state of the world's natural resources.

Whether one is a pessimist or an optimist about the future of global resources, it's worth noting that every time a story like this comes out, it simply bolsters the argument that clean technologies will be increasingly advantaged over the long run. The trick is to find such technologies that are also money-makers over the short term...

Demand response/ load management is a $1.3B industry in the U.S.

Rob Day: March 29, 2005, 9:53 PM
ACEEE today released a useful primer [note: link opens a large pdf file] on the practice and current status of demand response/ demand side management/ load management in the U.S.

In light of the data released today by Nth Power that showed significant and growing interest by VCs in the generation side of energy tech, it's interesting to note that centralized utility-led efforts to reduce demand for electricity in the first place remains a vibrant market.

Such programs apparently saved 22,904 MW of peak-load power in 2003. According to my amateur calculations, that's the equivalent of obviating the need for:
  • Approx. 100 large coal fired plants; or
  • 270 GE Frame 7 natural-gas-fired turbines; or
  • 2,290 Bavaria Solarparks (currently the largest photovoltaic project in the world); or
  • 90,000 Siemens Westinghouse solid oxide fuel cells; or
  • 382,000 Capstone 60 microturbines
... Just to put things in perspective.

Clean energy investments continue to be strong

Rob Day: March 29, 2005, 9:34 PM
Nth Power today released the results of their annual survey of "energy tech" venture investing.

The bottom line is the headline -- such investments totalled $520m in the US in 2004, up slightly from 2003's $509m.

But some of the more interesting bits are in the details.
  • The firm's data tracked 69 applicable transactions, for an average deal size of $7.5m. That average is up a bit from 2003, but there were more deals done in that year (84).
  • 40% of all funding went to companies in California. What does this mean? Are 40% of the investable energy tech startups located in California? An argument could be made that this shows there are as yet untapped investment opportunities in energy tech outside of the west coast...
  • The data shows that funders' interest was largely captured by generation-related technologies -- "distributed generation" investments rose 34%, fuel cell deals rose by 40% (although this was also driven by "battery replacement" applications), and solar investments jumped by 62%.
Fine work by Rodrigo Prudencio and the rest of the Nth Power team.

GE Commercial Finance provides capital for residential solar systems

Rob Day: March 28, 2005, 8:48 AM
While venture capital is increasingly turning to cleantech, a major gap in project financing still exists.

For many clean technologies, the reality on the ground is that even the best solution can be hard for customers to pay for with cash -- the systems being sold are large and expensive. What consumer is going to pay $30k in cash to put a solar system on their roof, whether or not it makes sense financially? What budget-strapped facilities manager for a large company is going to install a superior HVAC system, if it means he goes over his budget this year, even if it saves money in the long run?

These are on the end user side, but other project financing needs are seen on the vendor side -- who is going to give a startup the money to build the first few plants for their breakthrough technology? Thus, we see a lot of business plans where the company is looking to use cash from VCs to build out a plant, or to pay for equipment to be leased to customers, and they are difficult to fund. VCs prefer not to provide capital for "steel in the ground," if possible -- traditional venture capital is often too expensive to be put into such hard assets.

But the need is real nonetheless, and a failure to get project financing can kill even the best-funded of technologies and business plans.

This gap appears to be being filled, fortunately, as other entities are also now recognizing the need. For example, GE Commercial Finance is now funding rooftop solar systems. And other venture debt groups are now starting to provide early funding for some of the needs described above -- it's still expensive capital, but it's not as expensive as venture capital. You are going to see more of these project finance companies focusing on cleantech, since the markets for these technologies are real and fast-growing, and such financiers can find attractive opportunities with little competition for their services.

Over time, as such capital becomes more readily available, technologies such as distributed generation, building automation, and industrial water/ wastewater treatment are going to see very rapid demand growth. If the vendors of these technologies can arrange for the capex up front via such financing, then all the customer sees is an annual expense that is lower than the annual savings they enjoy from the system -- and that's an easy decision for the customer to make.

Is carry on the rise?

Rob Day: March 27, 2005, 9:22 PM
According to this column from, some top VC funds are seeking, and getting, higher carry -- to 25% and even 30% ("carry" or "carried interest" is the share of a fund's profits that the fund's managers receive).

It is especially interesting in light of the news I noted earlier that there is a $53.6B capital overhang in the industry.

Clearly there is no shortage of capital seeking action in the venture sector right now -- why else would investors be willing to pay such high carry to get into top funds. And perhaps there is more capital than can easily be spent. An interesting problem. It suggests deal valuations will continue to be driven up, which as this Red Herring article notes, seems to be happening already, and is not very good for returns.

But as noted previously, there are good reasons to believe that cleantech remains underinvested. I can tell you that my firm (Expansion Capital Partners) is seeing no shortage of intriguing deals at attractive valuations. It will be fascinating to watch how this develops over time...