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“Micro-generation technologies are the wave of the future”

Rob Day: February 24, 2010, 4:43 PM

For some reason, I started looking over an experienced cleantech investor's presentation on distributed generation today.  It's pretty fascinating.  I'll pull out a few notable quotes and points:

  • "Micro-generation technologies are the wave of the future"
  • "No technology breakthroughs are needed.  It's a manufacturing challenge."
  • "Micro-generators and micro-grids will 'strand' T&D assets"
  • "The costs are already in the range."
    • "Conventional systems: 100kw power master is $1500/mo full maintenance lease (~2 cents / kwh); $0.05-0.06 / kwh depending upon load factor at $4.00/mmbtu natural gas"
  • "Wall Street is getting the message"
  • And then this quote from an analyst at Morgan Stanley / Dean Witter: "...distributed or micro-generation... will have decimated the electricity distribution monopoly by the middle of the next decade."

Did that last, pretty dated citation give away the punchline?  The presentation I'm looking at has nothing to do with this week's breathless news coverage of a certain natgas-fired distributed generation technology... It's a presentation by Bob Shaw of Arete Corporation from the 1998 Aspen Energy Forum.  (I apologize, I can't provide a link to the full presentation, I've been holding onto a hard copy for about a decade now and can't find it online.)

I just think this presentation provides a very welcome reminder of a few important facts cleantech investors always have to keep in mind:


1. To a certain extent, we've been here before. 

In the late 1990s, there was a wave of energytech IPOs, many including distributed power generation technologies such as microturbines and fuel cells.  There was an incredible hype cycle that, in conjunction with a generally bubbly tech stock market, allowed a lot of companies to IPO even with negative margins and relatively low revenues.  With perhaps a couple of exceptions, many of those stocks later cratered.  Some of the companies are still around, but have been through a lot of retrenchment. 

I don't want to feed too much negativity here, I'm personally more optimistic about the state of today's energytech community in terms of economic value propositions, etc., than the maturation level of companies in the 1990s look in retrospect.  I believe Bob wasn't wrong, just visionary / early.  But those who ignore history truly are doomed to repeat it, and flame-out IPOs don't do any favors to anyone except potentially the early investors who got to exit quickly. 

Let's hope today's cleantech investors remember the lessons from a decade ago.


2. Overhyping any company does the entire cleantech sector a disfavor. 

"Hey, look at the attention that company's getting from the media for making bold claims.  We should do the same thing with OUR company!  And so we need to move more quickly!"  Overhype thus feeds a boom and bust cycle that encourages VCs to push their portfolio companies into high-risk, high-profile, high-valuation, high-cashburn trajectories that sometimes work out but often take otherwise promising companies and push them so far that they break.   

It can also redirect government funding and corporate partnerships away from alternative, deserving solutions.  Often solutions that exist elsewhere in the same investors' portfolios...

And what's more, when that single company's overhype doesn't pan out quickly enough, it turns opinion actively against support for the entire sector

So overhyping a company may get everyone all excited, but it easily backfires, and when it blows up it hurts everyone in the sector, not just that one company and their investors. 

PR is an important tool for VCs and for startups, but how do you decide when it goes too far?  It's an open question, one I don't know the answer to, but it feels like cleantech investors and startups are pushing the boundaries of it right now.


3. At the end of the day, we are investing in technologies that produce commodities. 

It's not enough to just find the very best solid oxide fuel cell distributed generation system, of which there are actually many to choose from already, which some journalists appear to have forgotten this week.  It's not about the best SOFC technology, it's about supplying kilowatt-hours (or joules of energy, or liters of clean water, etc.) at the right price and in the right way for each application.  And there are often many different ways to supply these commodities. 

Let's take a 100kw SOFC-based natgas-fired powergen unit designed for distributed generation, to pick a random example.  Well, that application's been around for a while, actually, it's the microturbine I mentioned above.  And the application is also supplied by distributed solar.  And small wind.  And diesel gensets.  And, unless you're truly off the grid for some reason, yes it also competes with centralized grid-supplied power production.  Not to mention negawatts in the forms of demand response and energy efficiency retrofits.  Any given technology solution for this application is going to have to compete with ALL of these other alternatives, not just within their own category.

So in that light, take a look at this analysis by Lux Research, and then take a look at the specs for microturbines on this page.  Looks to me like the new-new thing everyone is all excited about this week is happily about twice as efficient as the status quo natgas microturbine tech (at least when CHP isn't an option, whereupon the efficiencies would be much more comparable), but also costs about 10x as much in upfront costs.  If this comparison is correct, that's great progress, but hardly a panacea. It's not a miracle, it's not even the assured wave of the future, because there are plenty of other ways to supply kilowatt-hours where the costs are comparable and going down quickly.

Let's celebrate progress as a very good thing in general.  Thus, the progess getting so much attention right now is indeed encouraging.  Especially since I am indeed a believer in the vision of natgas-fired distributed generation, including SOFCs, as an important part of the future solution.

But I've seen where the vision of a DG-driven electrical grid has already taken a lot longer than very smart investors once thought it would, and I've also seen where overhype can be pretty damaging to our sector.  So please forgive a pretty jaded post on the hot topic du jour...


“Utility Time”

Rob Day: February 22, 2010, 12:40 AM

I've heard many cleantech investors say some version of the following:  "Don't invest in any company that's totally dependent upon utilities as its customers."

The admonishment reflects a basic fact -- utilities move slowly.  Terribly slowly.  They move in "utility time", where purchasing decisions are made slowly, if at all.

I spoke with one entrepreneur lately who had been working with a utility to be included in a rebate system, and now looked to be locked out.  When the entrepreneur spoke with a sympathetic exec at the utility, the answer was "oh, we know you should be included, but that's okay, you can just re-apply in six months."

Six months is an eternity to a startup.  That delay could be deadly.

When I talk with entrepreneurs who are looking to work with utilities as a customer or as a channel, I urge them to look at other models.  I see entrepreneurs get very excited about being included in a beta installation -- a few homes or a subdivision.  The entrepreneur is often viewing this as a two-step process: If we prove ourselves out in the beta, then we get a big rollout opportunity.  But what they don't know is that the beta will be done on Utility Time, and thus it'll be a couple of years before it is deemed a success or not.  And even then, the response might be "Great, we'd now like to include you in a slightly larger trial project."

The cleantech startup landscape is littered with the carcasses of cleantech startups who had been successful at landing utility betas...  and then ran out of cash while waiting for the promised large-scale rollout.

Thus, many cleantech investors learn to avoid investing in startups that are directly dependent upon utilities for success.  But insidiously, the government dollars flowing in the sector are having the effect of EXPANDING the influence of utilities upon startups.  These dollars often go into rebate programs and demonstration projects, which are basically expanding Utility Time to cover even more of the sector.

If a rebate program or a demonstration project is given federal dollars, the utilities are going to be a critical decision-maker, and often THE critical decision-maker, in determining who gets to be included.  And they make their decisions in Utility Time.  And they don't always make the right decisions to begin with.

There's an institutional bias at utilities against emerging technologies, for example.  In an earlier part of my career, I was a consultant for electric utilities, and worked closely with senior execs in that industry.  Good folks, well-meaning folks, often very dedicated individuals.  But totally disincented to put their careers on the line by trying anything new.  Even if "new" wasn't really that new.  Cost savings are nice, but keeping the lights on and avoiding customer complaints were more important.

Let's see how this might play out:  The cleantech VC puts in an investment into a company that isn't going to be selling to utilities.  Let's say it's an energy efficiency technology sold to industrial customers.  The economics are compelling.  And then the local utilities are given significant rebates to encourage energy efficiency.  Great, right?  Not unless the VC-backed company is quickly included in the program.  Otherwise, there's the scenario where someone at the utility decides that alternative approaches are given rebates, but the new tech isn't included in the rebate program.  All of a sudden, the startups' compelling economics don't look so compelling when a lesser technology is granted rebates but the startup isn't. 

Yes, this is suboptimal -- the utility sees less energy savings when lesser technologies are encouraged by selective handouts, and ratepayers therefore see higher costs.  But that's not an unusual scenario, it happens all the time.

Or take another scenario, where the startup is happily included in the rebate program -- but the program isn't actually started for several months while the utility coordinates with other utilities or perhaps works through a regulatory approval process.  Well, in that case, why would potential customers sign up for the startup's products or services before the rebate program kicks in?  And so the startup experiences months of delay, thanks to the "good news" of being included in the program.

Again, delays can be deadly for startups.

Cleantech investors need to be aware of these and other ways that utilities insinuate themselves into the day to day operations of cleantech startups.

And utility execs need to understand this dynamic, and need to engage cleantech investors and startups to make sure that these obstacles aren't standing in the way of their corporate progress.  Because at the end of the day, state public utility commissions are going to be asking "why did our ratepayers end up not seeing the energy savings they could have, and was it because of delays caused by utilities?"  And "We tried, but we were too slow" isn't going to be an acceptable answer.

Utility execs need to talk with cleantech investors often.  Otherwise, the road to energy hell will be paved with good intentions.


Don’t read this post

Rob Day: February 16, 2010, 10:12 AM

Totally whimsical thought of no value this morning:

At what point will we start seeing a wave of cleantech startups named with the same kind of randomness as Web2.0 startups appear to be?

Mint, Foursquare, Meebo, Swivel, PopJam, StuffBuff, etc. These are the kinds of company names you see in just a cursory glance at TechCrunch, one of the websites chronicling the rise of Web2.0 startups.  The names appear to have little to no actual meaning, they're just intended to be different-sounding and memorable and have easy-to-find URLs.

Meanwhile in just the solar space alone, cleantech has so many company names that just confusingly run together.  SolFocus, Solar Power Partners, Solar Century, Solar City, Soltage, SunEdison, GroSolar, Calisolar, Solaicx, Solyndra, NanoSolar, Sierra Solar, SoloPower, Solexant, etc.  Every once in a while a name that's a head-scratcher (MiaSole? Day4?), but typically names that are intended to be more descriptive than creative.  And the advanced lighting space is no different.  How many different ways can you use "LED" in a company name?  Or what about 'A123'?  I mean, c'mon...

It's already near-impossible for anyone outside of the cleantech VC echo chamber to tell all these companies apart by name.  Pretty sure even most insiders get confused often, although none of us would ever admit it (okay, I admit it).

So when will we see a wave of cleantech startup names that are intended to be catchy and have a short URL, and have little to no relationship to the technology itself?  Is it an indictment of, or to the credit of, the marketing skills of your average cleantech startup team? And what will the emergence of names like Brightboy and Flurby and SolFood and such in cleantech tell us about the mainstreaming of cleantech, when it happens?  Will it be a sign that cleantech investing has truly jumped the shark? 

Random questions on a snowy Tuesday.  If you read this far, don't say you weren't warned.



A valuable reminder on green building materials

Rob Day: February 15, 2010, 1:32 PM

Like many of my cleantech investor colleagues, at one time or another I've ended up spending some significant time on opportunities in the green building materials space.  Green building markets in the U.S. are expected to triple by 2013, LEED certification is becoming a de facto requirement in some sectors and regions, and since buildings are responsible for something like 39% of all energy consumption in the U.S. any materials that can impact that have a big potential economic opportunity.

I was having a conversation with an experienced realtor this weekend, and mentioned green buildings to her.  "Oh, I worry about those," was her response.

First of all, she worries about untested materials having some kind of unforeseen unhealthy effect, like releasing formaldehyde.  She brought up asbestos type fears. 

Secondly, she described how when she had bought a house some years back, it had some kind of advanced siding material (I'm not even sure if it had any green attributes at all).  The material worked as advertised -- it held the paint well, she never had to repaint the house, and she thought the siding did protect the house from any interior damage.  But unfortunately, the material developed small (sounds like superficial) cracks, so she ended up replacing all of it.

But most importantly, to the realtor this all came down to impacts on price.  Impacts on price from perceptions that may or may not have a real basis in fact (ie: the formaldehyde fears from above).  And in the case of the house she bought with the new siding material, she described how she drove down the price of the home when negotiating with the seller, because "this stuff is horrible!"  The advanced materials didn't add to the home's value, they detracted from it.  Because of flaws that sound like they were more superficial than real.

I think VCs sometimes have a tendency to become convinced that early adopters of a new technology presage mass adoption in short order.  Certainly in some high-end residential and commercial markets, new green building materials are seeing really good adoption even in a down market.  And I do think the long-term market opportunity for green building technologies is strong. 

But my conversation over the weekend was a good reminder that there are some serious challenges in getting the main body of the market comfortable with any new tech or materials, green or no.  And that if there's a chance it'll negatively impact pricing, most developers won't want to touch it. 

VCs investing in green building techs and materials will therefore need to take special care to make sure they're not just investing in something that will be simply a high-end niche product.  That means not just validating the economic value proposition.  And it means not just double-checking that there's nothing unsafe about the materials.  It means also working hard to evaluate the market's perception of and openness to the product, to understand just how difficult it will be to introduce the new product to the channel.  Even if it's cheaper and works better and has a few early "wins", it still may see very slow adoption.

“Revenue-neutral”: The last hope for climate change legislation?

Rob Day: February 8, 2010, 2:43 PM

I've picked up on a couple of mentions lately of Senators on both sides of the aisle starting to work on revenue-neutral alternatives to the Waxman-Markey type of cap and trade climate legislation that has been the focus of attention ever since Obama came into office.

There's been talk of the GOP staff on the Energy and Natural Resources Committee, reporting to Sen. Murkowski of Alaska, possibly working on a revenue-neutral carbon tax proposal.

And Cantwell and Collins are proposing a "cap and dividend" plan, also to be revenue-neutral.

Gee, sounds familiar.

Frustratingly, I could probably have just cut-and-pasted my entire May 2009 column on this topic into a new post with no changes, and none of you would have realized it.  Because that's how little things have moved forward over the past nine months.

Hopefully by now, however, it's becoming more clear to politicians that any climate change legislation, if it's to have a chance of passage at all, must be perceived as something other than just another tax-and-spend proposal. It has to be simple, and it should be tanglibly revenue-neutral. 

Leaders of the U.S. cleantech industry always claim they need a national price on carbon, first and foremost, so it's nice to see some legislative efforts refocusing on just that.  Even if they're not centerpiece efforts quite yet... 


Trouble brewing?

Rob Day: February 4, 2010, 11:21 PM

Haven't had much time to go through the various recent cleantech IPO filings, and so haven't talked about them much.  Also just generally hoping they do well, for the sake of the overall industry.

But in a meeting today someone put up some stats that were pretty sobering.

Taking a basket of 4 high profile recent IPOs and filings, the total across the four companies was:

- Trailing twelve month revenues = $319M

- Trailing twelve month EBITDA = -($343M)

- Total venture dollars put into all four companies to date = approximately $1.5B

Like I said, I hope all of these companies do well and grow into great companies.  But this type of profile for IPO isn't the norm.  So you have to wonder about it. 

Someone today mentioned that they think these companies have to IPO now because they need yet more capital and the private equity world is tapped out.  I disagree, I think companies with prospects like these would be able to raise more capital, if not from traditional VCs, then from non-traditional private equity players.  Cleantech private equity is down, but far from tapped out.

Instead, I believe these companies are IPOing now because they raised their LAST money under the argument that it would be the "last money before the IPO", and now that the window for IPOs has opened even just a slight bit, they feel compelled to race out there and make it happen.  Come hell or high water, this is the promise they've made.  And it's a reasonable guess that there are public equities investors out there who do want to back good stories in cleantech -- stories which these companies can indeed tell.

Fingers crossed.  But my worry is that, if these IPOs are perceived later on this year as having been unsuccessful, it'll once again set back the entire cleantech venture industry, because of the example it sets in terms of lack of exits.  In reality, these companies really don't epitomize cleantech venture capital, they're special cases.  But to a journalist, it's all just one broad category, and to their editors, nuances never make the headline sing... 

(PS: I haven't verified the above stats, so treat accordingly...)