Efficiency, King of Power

A recent panel discussion with John Doerr (KPCB), Vinod Khosla (Khosla Ventures) and John Holland (Foundation Capital) in the WSJ caught my attention. The lesser known of the three panelists, John Holland, had a quote I felt trumped his two better known colleagues when asked what is “hot” in the CleanTech sector.

Mr. Holland:  “We’ve focused our efforts around the demand side, around energy efficiency, smart grid, smart materials and so forth. I’m disappointed in, but I’m not surprised by, some of the things that we’ve seen—you know, technology’s trying to drive to sort of a lower cost per watt. That’s just a very, very difficult place to play. You’re making a bet that your set of scientists is going to beat the other 500 sets of scientists that are working on that one particular piece. And then how long is that competitive advantage going to last?”

This quote I believes sums up a remarkable albeit less discussed facet of the CleanTech sector which is that a  efficiency company can trump an energy supply side company anyday, anywhere. Here is why:

Supply side technologies face replacement risk. E.g. a competing solar or wind technology may out engineer or innovate your firm’s basis for existence whereas a consumer will always have a need for a device or system that reduces the need to spend money on electricity so long as the economics are favorable. For example, I can and would purchase multiple technologies such as a smart grid technology, more efficient lighting, windows, and insulation for one place even though some of these products offer better economics than the others. If a newer and more efficient version of these demand reduction products arrives, my existing products are still viable and offer cost savings to me, the consumer.  Contrast this to selling solar panels, where a competitor’s improvement notches you further back on the supply curve if you have higher capital costs or a less productive panel. A consumer has no incentive to buy a less efficient producer of electricity, all else equal, whereas the same is not true for products that reduce consumption/save money.

Consumers seek efficiency even if it is not a market leader, perhaps seeking it at a lower price but still desire the cost savings offered whereas an outdated energy producer might be used until it no longer functions and then scrapped. From the investor’s perspective, you want your investment’s product to be as relevant and attractive as long as possible despite competitive entrants to the market.

The Asymmetry Principle: Reducing consumption of one watt of energy, saves the production of 50 watts of energy. Accounting for the inefficiencies of electricity production, transmission and conversion to light, in this example, it takes 50 watts to receive one watt of work (light.) Thus, reducing the consumption of watts is a much more efficient product than attempting to marginally improve production of watts. For a lightbulb this ratio is 50:1 as noted, for a car it is 6:1 and for many common household products this ratio is somewhere between these two examples.  The Asymmetry Principle heavily weighs the odds in favor of efficiency over production in both cost savings and efficient use of resources. (Credit to Peter Tertzakian, The End of Energy Obesity.)

Credit: Peter Tertzakian

An advantage in efficiency is why it is inevitable that one day electric cars will replace the internal combustion engine as we note here. An improvement in efficiency for existing technologies is easily the most cost “efficient” way to lessen electricity demand and consequently lower emissions as we note here.

With this in mind, no improvements in efficiency will ever wipe out all demand, only lessen it of course. There is and always will clearly be an enormous market for innovation in the power markets (“supply side.”) John Holland’s quote merely helps point out that when comparing the two, one side of the fence is safer, more economic, readily distributed and likely a safer, long term investment.

If you live in the US, check here to see if you are eligible for financing assistance to improve the efficiency of your home or business here. Link to DOE. List of Programs.

Silicon and the Solar industry – a Boston Consulting Group assessment

Phillip Gerbert and Holger Rubel (both Boston Consulting Group) published an interesting review of the Solar sector and its strategic position both in the pre-2009 years and its outlook for the next decade. A research piece by JPMorgan‘s Gokul Hariharan, Shoji Sato and Carrie Liu comes to their support although takes a more holistic, if not biased view.

The key observation remains: despite the phenomenal energy we could generate on the back of the sun, the costs to do so remains restrictive. Today, the authors claim, only 0.1% of the energy mix comes from solar; by 2020 it may be as ‘high’ as 2%. There is the issue of moving variables, Phillip and Holger elude to, but not explore further. Anxillary industries such as the electric vehicle and smart grid companies, may come as helpful support. Ceteris paribus, and if all parts move in the right direction, the path to solar may be faster then expected as the perceived benefits to both companies and society starts to accelerate in the eye of the beholders.

The Venture Capital industry is pumping significant amounts of capital into the solar sector (in fact, the bulk of all renewable investments goes towards solars technologies) which should reap some rewards in the next 3-7 years, subject to vintage years.

Source: The Boston Consulting Group

Focusing on the supply side constrains, the silicon spot price reached a peak at $400 whilst long-term contract deals were struck at a fraction of the price. However, whenever the economic rent is too good to be true, entrepreneurs as well as corporates enter the market and ramp up capacity. Sounds like a typical China-syndrome: becoming a market leader irrespective of the long-term implications whether the supply-demand balance is sustainable. The consequence, margins drop off and firms struggle to survive.

The McKinsey chart below shows that Chinese corporates are significantly ramping up the capabilities in the silicon supply chain. Again, the credo of ‘lets become world leader’ is an interesting one. We had a meeting with a CEO of a Chinese company who proudly presented to us that they had a achieved their goal of being #1 in their industry. He could not answer the question what vision and objectives the firm would focus on from now on. Equally he did not see the issue of now being the one to chase and he did not yet know what industry leadership abilities he had to prove. The silicon industry may walk down a similar path.

An interesting presentation on the silicon industry put together by Wacker Chemie can be found here. Wacker Chemie is one of the leading suppliers of silicon and they have a number of business units that deliver products to the solar industry.

Todays news on MEMC (dropping 17% in intra-day trading) may be a sign for significant struggles ahead. The jury is out when the solar market will take a turn. Meanwhile, we continue to think that investors struggle to extract sustainable returns of the sector. A possible route to see significant total returns may be to back leading VC players who are able to spend significant resources filtering through the many start-ups that are trying to commercialize low-cost solutions. However, patience may be key at this stage.

Joule Biotechnologies

Joule Biotechnologies, based in Cambridge, Massachusetts, is a novel and more efficient technology to produce either ethanol or diesel, using the sun, recycled water and their patented photosynthetic organisms. These organisms, mixed with solar energy and CO2, produce the desired biofuels in a game changing, highly productive manner. The firm refers to the end product as “SolarFuels”- not biofuels.

Product: Unlike existing approaches to producing renewable fuel, Joule’s process achieves a high net energy balance while avoiding the harmful depletion of arable land, fresh water or crops. This is made possible by the company’s technology which leverages solar energy and genome-engineered organisms to convert waste CO2 directly into multiple solar fuels and chemicals. The continuous production process requires no biomass intermediates, removing resource limitations and costly processing from the equation. This process can use recycled wastewater.

Joule has successfully achieved the production of both ethanol and diesel at lab scale, with the former already reaching productivity rates exceeding 6,000 gallons/acre/year. At full-scale production, via future commercial sites, the company estimates the potential to deliver 25,000 gallons/acre/year of ethanol and 15,000 gallons/acre/year of diesel. Cellulosic ethanol typically produces 2,000 gallons/acre/year- therefore you can easily see the level of technological advancement possible!

This process avoids the depletion of precious natural resources, with no dependency on agricultural land, crops or fresh water. Joule expects to deliver ethanol and diesel at the energy equivalent of as little as $50 and $40 per barrel respectively.

Competition: Solazyme, Poet, Amyris, BP Biofuels, Coskata, Sapphire Energy, LS9 and many more.

Funding: Flagship Ventures founded and funded this company in 2007 which was under stealth mode until August 2009.

Management: William Sims, President & CEO: While his career is that of a proven leader of start up firms- much of this experience involved electronic technology plays such as Color Kinetics, Zenith, JVC and e-SIM. While at Color Kinetics he did help the firm grow 30% annually, IPO and sale to Phillips for $800MM in 2007. He does have an educational background however in Biological Sciences from Cal State Fullerton.

Recent News: Today announced the signing of a lease agreement to build its first pilot plant in Leander, Texas, where the company will further develop and test its transformative system for the production of renewable solar fuels. The plant will be operational within the first half of 2010.

Comment: As noted in the product section, Joule presents the possibility of a game changing biofuels technology that can use recycled water and improve productivity by a factor of about 10. (Much like EEStor teases people with for batteries!) We bring this firm to our readers’ attention as it is likely to garner much focus from investors and enthusiasts in the next few years while moving forward through both funding rounds and technology tests. Oh yes, and the technology needs to work economically for all of this to matter!

CleanTech Genius

Dr. Yi Cui is a genius.  Learning a little about this modest Materials Science assistant professor from Stanford University gives one an insight to how and why the CleanTech sector is the most relevant in the world, and how significantly our lives can and will change in the near future. CT Genious

Take a look at some of the more notable developments to come from Dr. Cui’s laboratory in the last two years alone:

1)      Store bought paper can be turned into a battery electrode simply by dipping it into carbon-nanotube inks that Dr. Cui developed. The coated paper and its electrodes, which are highly conductive and folds like all paper does, is now able to be used as a storage device for a variety of applications including portable electronics such as laptops or for grid storage applications. While the idea is not for people to create their own batteries with their home paper, commercial applications of this development would take advantage of the much cheaper input costs.  See video here:

2)      A paper released by Dr. Cui in December, 2007, describing a lab development using silicon nanowires to increase the charge capacity of lithium ion batteries by 10 times. This novel application of nanowires and the corresponding application of the increased storage are remarkable to say the least. It was this paper that gave Dr. Cui the notoriety, awards and funding he has today. See his Stanford website for more on this.

3)      Building on the Dec. 2007 study, a new study released in January 2009 continues forward by demonstrating a Si crystalline-amorphous (c-a) core-shell NW design resulting in significant improvement over power rate and cycling life. This essentially improved the toughness and durability of the electrodes in the original study, giving them higher commercialization applicability. (90% capacity retention over 100 cycles)

4)      Cui improved the efficiency of thin film solar cells by demonstrating that solar cells patterned at the nanoscale with domed structures absorb more light and, as a bonus, are self-cleaning. “These nanodome structures not only repel water, but help trap light. Because they’re so small–about 500 nanometers in diameter–the nanodomes interact with light in a cool way, absorbing 94 percent of all light from the infrared to the ultraviolet. A flat solar cell made from the same materials absorbs only 65 percent of light in the same broad spectrum. So far the overall power conversion efficiency of the cells is 5.9 percent. Dr. Cui says these patterning techniques could be applied to other solar materials. This work is described online in the journal Nano Letters.”

Dr. Cui already has an agreement with investors to commercialize his laboratory work and is currently doing so. It would take days and several other blogs to fully discuss the implications of the 4 developments above, as well as many others not shown here by Dr. Cui. While there are very few people as talented and brilliant as this professor, there are an army of people tackling the issues we discuss regularly on the blog- giving us the bullish and optimistic beliefs we have in the sector. The professor could easily leave Stanford and focus on commercialization of his work however his true passion is teaching- which is why he currently has no plans to leave Stanford University.

Denmark leads the world in CleanTech

Using both wind and efficiency plays, Denmark leads the world in CleanTech on a GDP weighted ranking according to a recent report commissioned from the World Wildlife Fund and written by Roland Berger.  The ability to produce and sell products and services that reduce CO2 emissions is the key metric used to rank all 27 EU member states, BRIC and G7 countries.

Clean Technology recently passed pharmaceuticals for industry size, and is expected to be the third largest in the world by 2020 at (EUR 1,600 billion.) Between 2000 and 2008, wind grew at 24% and solar at 53%. It is this growth rate, and related demographic factors that form the backbone of the CleanTech investment thesis that this blog strongly supports.

Other notables: 2nd Brazil, 3rd Germany, 6th China, 10th Israel, 19th USA, 20th UK

Desertec moving closer to Europe

For many years the Middle East has shipped carbon based fuels to Europe- now a plan to ship clean electrons on this same route has just moved one step forward. A group of 12 European companies is moving forward with the signing of contracts last week to form an LLC called Desertec Industrial Initiative (DII.)  This project is likely the most ambitious power project ever created and aims to power up to 15% of Europe’s electricity needs (100 GW) using massive solar thermal farms in the sunny, desolate Middle Eastern/North African deserts and transmitting these electrons North to Europe.

This Munich based consortium hopes to begin transmission by 2015, finish by 2050 and cost around $400 billion. The project, if successful, will help alleviate dependence on Russian gas as well as power some North African communities. Newly designed transmission technologies aim to reduce transmission load loss typically observed over high distance transmission. Some of the many risks the project will need to overcome are: geopolitical issues, international cooperation amongst many non-neighboring countries, transmission challenges, solar thermal technology risk, capital constraints, and project/transmission location needs. Desertec certainly could prove to be a profitable and high profile success story however if these challenges are all managed well.

The list of companies penned to benefit from this massive deal is: ABB, Abengoa Solar, Cevital, Deutsche Bank, E.ON, HSH Nordbank, MAN Solar Milenium, Munich Re, M+W Zander, RWE, Schott Solar and Siemens.


Map of DII

Sources:  1)  http://news.bbc.co.uk/2/hi/africa/8337735.stm

2) http://www.environmental-expert.com/resultEachPressRelease.aspx?cid=32611&codi=74160&lr=1

3) http://www.forbes.com/feeds/ap/2009/10/30/business-mobile-telecommunications-eu-germany-desertec_7067779.html

Anything is possible (in some places)

The Institute for Local Self Reliance based in Minneapolis, USA has just produced an interesting map of the United States suggesting that 31 of the 50 states can be self sufficient for electricity if using only in state, renewable resources. Only 5 states were at 30% or less. The map makes an interesting point- while not likely, or in some occasions the best, overall economic solution, it is feasible for most US States to be able to adhere to more modest renewable energy portfolio requirements. If technology continues to improve the economics in the future, this percent of renewable requirements could increase to satisfy energy loads.

Non-Americans may find this interesting as the geography of the US is almost as varied as that of the world. The map also suggests that some areas are renewable resource poor, and will need alternative plans if they intend to clean up generation. See the link to read about the study and its assumptions.

RE Map

RE Potential for the US

Source: http://www.newrules.org/sites/newrules.org/files/ESRS.pdf