Capturing the value in Efficiency

Reducing energy use through improved efficiency measures is often a better investment when compared to investing in cleaner energy generation sources as we have noted on this blog. While the returns to the consumer are documented well in our previous posts (3.0x-4.0x ROI)- how do investors capture these excellent returns?

Let’s first identify the business. A company seeks residential and/or commercial clients who need to retrofit an existing building. The firm may implement measures such as: improved insulation, replace lighting, replace roofing materials, install energy usage monitoring equipment and replace some appliances for more efficient versions. On some occasions these firms may offer to install solar panels or micro turbines.  For discussion’s sake- let’s focus on the efficiency side and ignore the generation component.

The question I pose to our readers is this: With such an excellent return profile for the clients, how can the firms delivering the value from efficiency also earn a good return?

Installing equipment is not very “value added” and does not differ much from any typical contractor who could also be installing a new pool or painting a house for example. The returns on these labor services are small and also very competitive in most markets. The value added, in my opinion, comes from the expertise of the efficiency firm in determining how to best maximize returns for the client when deciding where and how to invest the capital. The experts can best procure products and customize solutions for the individual needs of each building and house. Labor can be outsourced or done in house.

So, does a firm simply charge a fee to the client for their expertise? Again, margins on re-selling equipment and labor are not likely to be very productive. In this entire value chain, it seems like the biggest value is delivered to the end-client who will then save money once their return on investment is received. Perhaps efficiency firms could negotiate to capture a percentage of the energy savings until a target is met, using historical energy use and cost as a baseline model? It would be an ‘incentive’ payment of sorts- of course with many caveats.

What do you think? Your comments below are highly suggested.

PS. Check out two firms I’m currently reading about in the sector: OPower and GridPoint (who just bought Standard Renewable Energy)

Advertisements

Batteries, Lithium Ion and the Automotive Industry

MEET (Muenster Electrochemical Energy Technology), Germany is getting ready to launch a new 2000sqm research hub focusing on battery technology, most likely a significant effort will go into lithium-ion.

Prof Winter, MEET (University of Muenster, Germany)Professor Winter (recently at Graz, Austria) will chair the workgroup at MEET (homepage). Research-in-Germany.Org gives a summary of the plans and objective proposed by MEET. We note that the commitment by the regional government, the University and the private sector (including Volkswagen, Evonik and Chemetall) is impressive, on a regional scale: “The Ministry of Innovation, Science, Research and Technology of the state of North Rhine-Westphalia is funding the project to the amount of €5.5 million for the coming three years. Münster University is contributing €7.5 million. Further funding is coming from the North Rhine-Westphalian Ministry of Economic Affairs and Energy as well as the German Federal Ministry of Economics and Technology.” The private sector is financing the chair at the University with some €2.25m which is certainly impressive given the economic climate we are in.

We wrote about Evonik previously and consider it a very interesting company that may be in the position to shape the future of lithium-ion batteries. Naturally, since Volkswagen is one of the key sponsors of the centre we must assume that they have a commercial interest to link themselves with Professor Winter and his battery research team. The automotive industry is bound to change forever, no doubt. My colleagues focused on the supply side of the lithium-ion market and whether, subject to a successful scale of electric vehicles, the supply chain is secure. In his piece “The Great, Fake Lithium Supply Scare” Brett draws the conclusion that we should not worry. Although the market is too young to make credible predictions the debate is certainly worth watching. Arguably we need to better understand whether lower grade lithium-ion can be used as an input into a high-end technology process.

Autocluster, NRW (http://autocluster.nrw.de/)

Autocluster, NRW (http://autocluster.nrw.de/)

We wrote about the need to direct further money into research for energy storage and continue to see this as one of the most important research and investment themes for any serious cleantech venture investor. It is interesting that governments can play a significant role in kick-starting a debate as well as put money into the area with a targeted approach. Autocluster.NRW gives a strong, systematic approach how to create a new hub/ cluster that can concentrate core capabilities in a region. We would like to draw readers of the report to page 58ff (‘Screening of R&D project in NRW’). It highlights the efforts of various academic institutions and how their co-ordinate their efforts to maximize their combined research capabilities. The report highlighs efforts currently made by industry to drive battery technology forward. ‘According to the German government, the number of electric vehicles on the road will be 1 million by 2020’ and ‘[a]ccordingly, the resultant higher electricity needs for 1 million vehicles in 2020 must be addressed’. The authors deduct that this would require some 5 power plant blocks of 600 megawatts each (~total need about 3TWh).

To contrast the recent UK initiative of a Green Investment Bank, Autocluster’s core competence building based on a regional level sounds proactive, constructive and combines both a coordinated effort made by governments and the private sector. Can the UK mirror the effort and come up with a strategy that is as visible? Bob Wigley, good luck!

Incandescent lights to start dimming

On the continued theme of the superior value of efficiency plays, news breaks out just this week that Toshiba will halt production of their incandescent lighting business, a product they have sold since 1890. The company will now focus on LED lights instead. For reasons of: consumer preferences, government legislation and frankly, common sense, the incandescent light bulb is being replaced by both CFL lights and eventually LED. See Toshiba’s own sales chart of incandescents and CFLs here:

Toshiba Light Sales (Credit: Toshiba & CNET News)

Select Govt Incandescent laws:

US: A 30% increase in efficiency in selected light bulbs which is an effective phase out of incandescents from 2012-2014.
UK: Ban, beginning 1/1/2011
Canada: Ban, beginning 1/1/2012
European Union: Ban, beginning 1/1/2010
Argentina:
Ban, beginning 1/1/2011.
Australia
: Ban, beginning 1/1/2010.
Others include: Philippines, Malaysia, Ireland, New Zealand, Venezuela & Cuba.

Lumens Produced per each Watt of electricity:
Incandescent: 10-18 lumens
CFL: 35-60 lumens
LED (cool white, 5000k): 47-64 lumens

Thus, for equal lighting needs we can see an instant 2-4x reduction in electricity consumption when using advanced light technologies.

Challenges: Like many clean tech products, consumer acceptance is a key challenge. Convincing consumers of another generation that advanced lighting will produce the same amount of light and justify a small upfront premium is a challenge I experienced personally when family helped me move to a new house this month. Additionally, finding CFL light bulbs that will fit into your “dimmer” light sockets is very difficult at the moment which can leave consumers with only an incandescent option (until selection improves.) Other, specialized lighting needs are also difficult to satisfy with the current CFL/LED selection in stores however this flaw is expected to improve. CFL lights contain a small amount of mercury. Care is needed should a CFL break, or you can purchase this CFL with a safety skin.

Advanced Light Firms: Toshiba, GE, Phillips plus many start up firms likely with goals to be purchased by one of the larger OEMs such as: ClearLite, Luminus Devices, YLX, Cree, Neo-Neon, & Seoul Semiconductor.

Fun Fact: “Toshiba estimates that switching 60 percent of the world’s incandescent lights with LED lights would reduce greenhouse gas emissions by 125.5 million tons in 2025, compared to 2000.”

Porsche 918 Spyder vs Tesla Motors

Source: Porsche, Spiegel.de

Source: Porsche, Spiegel.de

Lets be humble: the Porsche 918 Spyder is a sexy car. Don’t get me wrong, we have favoured Tesla for a long time due to its economics and IPO outlook.

But now, Porsche is putting its cards on the table. Yes, the Spyder still uses a 3.4litre V8 engine with some 500bhp so it may not be entirely ‘fair’ to compare the two.  But take this: the two electric engines contribute some 218bhp. The Lithium-Ion batteries have 5.1kwh capacity; and the battery pack weighs less than 100kg. With the total car weight of less than 1500kg, the power-to-weight ratio is impressive.

Using the car as a plug-in hybrid only is probably not advisable as the batteries would only last for about 25km. However, Porsche promises the car will use 3.0 liters/100km or only 70g/CO2. The acceleration from a standstill to 100 km/h the Porsche does in just under 3.2 seconds, with top speed of 320 km/h (198 mph).

We wrote about energy storage previously. With the sports car industry making a move into the electric vehicle/plug-in hybrid market, it is only a matter of time before the application will become mass market. In a previous post we asked the question whether the time for batteries is now?

Whatever the race: both Tesla and Porsche are likely to compete in the affluent segment of the market. With Porsche’s dealer network and global Brand, we think that Tesla has to step up to the plate and we question whether the support from the US Government and a looming IPO are enough to put the firm head-to-head with a giant like Porsche. The financial backing of Porsche, now essentially being a Volkswagen brand, allows it to roll-out quickly and enter ‘mass’ production. Let’s not forget that Porsche has prominent manufacturing capabilities which may be enough to take market share in this new segment.

The question is whether the race may become a competition essentially between two major automotive manufactures? Daimler is heavily invested and committed to Tesla and has shared part of its ownership with its own major investor: Aabar Investments PJSC. The Venture community has been extremely supportive of the Tesla technology. We wrote about Draper Fisher Jurvetson’s portfolio previously. Other investors in Tesla include The Westly Group (Steve Westly), Technology Partners (Ira Ehrenpreis), Valor Equity Partners, and DBL.

Start Ups vs. Large OEMs

Before one can invest in a technology or firm, an investor must first believe in the relevant sector. If this prerequisite is satisfied to a high degree, the next logical step is to decide how to best capture the upside of the sector. In Clean Technology many start up firms hope to be bought out by larger, more established firms. Very few firms will be lucky enough to IPO and establish themselves as an independent player in the market, while many other start ups will unfortunately die a slow, financial bleeding death.

Several years ago I spoke to a Senior Executive for Exxon Corporation. The gentleman I spoke with, while agreeing with much of what I said about the need for Exxon to hedge its position in oil with at least a few of the upcoming alternatives told me that Exxon, in 2003 anyways, had absolutely no desire nor immediate plans to get involved with Clean Technology. After an awkward pause on the call he said, “Why should we risk money and waste time developing something when we have enough cash to just buy whatever we want once it becomes established?” Wow, how could I argue with that- he did have a valid point. Which brings us to 2010:

This blog often profiles technology developments from the investor’s perspective. Many of the VC firms we discuss invest in small start ups in sectors like biofuels, solar, wind and energy storage. But there’s another way to capture these sectors if you want to participate- investing in the large OEM. In fact, Exxon later on did invest $600MM in a biofuel firm called Synthetic Genomics and is “prepared to invest billions more to scale up the technology.”

While we won’t perform an individual investment analysis of each sector and firm here, we can highlight some key options as well as investment pros and risks.

Investing in the large, diversified OEM Pros:
Limited Downside, Economies of Scale/Faster route to mass market, more established vertical infrastructure and brand name recognition
Cons: Limited Upside/No IPO potential, less nimble & dynamic management team & the fact that you are also investing in many other sectors or technologies you may like/dislike.

Flip all of the above pros/cons when investing in the Start Up Firm. Now- a brief look at investment options:

The Start Up vs. the Large, Diversified OEMs!

Energy Storage
A123, Ener1, EEStor, PowerGenix Panasonic Sanyo, Bosch, Samsung, LG Chem

Wind

Vestas, FloDesign, Ramco GE Wind, Samsung, FPL

Water

Statkraft, Saltworks, Pentair, Israeli Start Ups Zenon (GE Water)

Biofuels

Joule, Cereplast Exxon, BP, Shell

The Great, Fake Lithium Supply Scare

“But there’s not enough lithium for all those batteries- and now you’ll switch dependency to a few lithium supplier countries!” That is the claim less informed journalists and hacks often make when they need a counter point to balance their first article on the emerging, electrified transportation sector. Why do we care? Because if true would significantly affect the battery, transportation, grid storage and electronic appliance sectors. Let’s try a fact check:

1) Claim: Dependency on 2-3 countries for lithium (similar to oil dependency)
Fact:
False. This table from the USGS best answers this claim:

Country Reserves (000’s ton Li) Reserves Base(000’s ton Li)
Argentina 2,000 2,000
Australia 170 220
Bolivia NA 5,400
Brazil 190 910
Canada 180 360
Chile 3,000 3,000
China 540 1,100
Portugal NA NA
USA 38 410
Zimbabwe 23 27

Plus, ore deposits in these plus other countries bring the total to over 17.1 million tons of reserves.

2) Claim: Lithium is the sole material these sectors must have to advance.
Fact:
Yes and no. Shorter term most known batteries for next gen autos and electronics will use lithium (bar the also popular nickel metal hydrides.) Longer term- let us not ignore 15 start ups that are readying ultracapacitor break throughs, 27 manufacturers and 29 other companies that have recently developed ultracapacitor technologies plus 52 research institutions working on advancing ultracapacitor technology. We do concede however that lithium will play by far the largest role for at least the next 15 years.

3) Claim: All of the suppliers in the world won’t be able to keep pace with demand & thus prices will skyrocket.
Fact:
There are an estimated 17.1 million tons of contained Li in reserves worldwide. In 2008, total global demand was 100,000 tons and of course projected to grow significantly. Lithium can be recycled. Do the math with your own assumptions and it appears we have a few years before supply concerns arise. One may even want to account for new, future reserves of Li to be discovered.

Additionally- advances in nanotechnology as noted here, here and here are making the current battery chemistries that do incorporate lithium much more powerful, economic and robust.

Let’s make money: 77% of lithium carbonate currently comes from 3 companies which are SQM of Chile, Germany’s Chemetall and FMC of the USA. Talison Minerals, a private Australian firm, is the largest spodumene producer and accounts for about 23% of global contained lithium. However, only 15% of this production is sold into the lithium chemical markets via Chinese lithium carbonate converters. (Special thanks to Dundee Capital Markets for the above research, “Lithium- Hype or Substance?” October, 2009. )

Conclusion: If you are bullish on the technology advancing, you likely believe the improved economics offered by advanced lithium batteries will enable stronger investments in the related sectors of grid storage, consumer electronics, military applications and of course transportation. The sky is falling claims should not play a role in any related investment decisions.

Clean Invest Poll

(Check all that apply)