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...