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
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Breaking new wind

An expert in the aeronautics industry during World War 2 probably could be forgiven if they believed that fighters such as the P-51 Mustang or an RAF Spitfire were close to being the fastest and most advanced planes technologically possible. That is, until the Luftwaffe introduced the world to the jet engine turbine system. Similarly for Wind Energy- how else can the basic 3 blade turbine be engineered to improve on cost and performance? Isn’t there only so much you can do to a technology that is relatively basic?

Well- much like the WW2 Fighter plane analogy- wind energy is now entering the jet engine age.  Welcome FloDesign Wind Turbine. The Massachusetts based start up firm has recently emerged onto the public eye with their patented technology that allegedly is 3-4 times more efficient than traditional wind turbines. See informational video here:

Traditional blades tend to push wind away and cause a complex turbulence condition- which consequently demands strict attention to the layout of any wind farm. Alternatively, the FloDesign wind turbine uses a shroud around the turbine blades to funnel wind into the turbine. See above video for best explanation and illustration.

Wind Cost Curve (cents/kWH) from NREL

The cost curve to the right shows why this technology is such a disruptive technology. Clearly advancements in wind energy are improving yet at a decreasing rate (a negative double derivative). Thus- the jump to jet engine design turbines could push wind costs in cents/kWH down much further than anticipated by most experts analyzing traditional wind. What this implies is wind energy that is competitive or cheaper than fossil fuels in many more locations than previously available.

On the business side, FloDesign recently secured $34.5MM of funding from investors led by Kleiner Perkins and joined by Technology Partners and VantagePoint Venture Partners. Additionally, Lars Andersen, former President of Vestas China, signed on as CEO. The funding is intended to begin commercial production of the turbines. IPO in 3-4 years?

FloDesign Turbine, Courtesy Mass. Clean Energy Center

Ok so what is the Achilles heel of the FloDesign? It’s ugly! (Zoning challenges) Personally I find traditional wind turbines to be beautiful- especially when you consider it is providing clean and renewable energy and replacing a fossil fuel generator. Fans of wind energy realize not every land owner shares these views and some find the light humming noise and gentle roll of the blades to be very unsightly. Well- if folks object to a beautiful, white, 3-bladed turbine- how would they ever accept essentially a jet engine hanging out by itself somewhere? Somehow I am skeptical the FloDesign turbine could dot the countryside and farming communities as well as a giant 1.5MW turbine. Perhaps the FloDesign turbine could find greater acceptance in industrial zones atop existing buildings or nearby towers. Or, maybe FloDesign will design a more aesthetically appealing cover that does not affect turbine performance.   Debates on appearance aside- the company truly has a remarkable, ground breaking technology which no doubt will help foster a giant leap forward for the wind sector.

Goldwind rushes to list in HK

China’s largest maker of wind turbines, Xinjiang Goldwind Science & Technology Co, has announced plans on 2 Sep 2009 to float shares worth about $1 billion on Hong Kong’s main board. Goldwind joins more than 30 companies announced in Hong Kong in the past month to raise estimated $25 billion in the coming months in the territory and on the mainland.

Goldwind will issue shares no more than 15% of its enlarged equity capital after the HK share offer to overseas institutions, corporate and individual investors. Goldwind has total capital of 1.4 billion outstanding shares now. Proceeds would be used to fund 3 wind power projects in the country and supplement the firm’s working capital.

In Dec 2007, Goldwind launched its $244 million IPO on Shenzhen Stock Exchange.

Comment: As the equities market look favourable to raise funds, Goldwind will be able to tap the markets for its aggressive expansion especially after the Chinese government’s pledge to fight climate change and look to increase its renewable energy sources. Watch out Vestas, Goldwind may strike the golden No. 1 spot within a decade.

Sources:
China’s Goldwind plans to list in HK’s main board
Xinjiang joins rush to list in HK

Top wind companies

This website provided the top 10 largest wind power companies sorted by MW installed in 2007:
1. Vestas (Denmark) 4,500 MW
2. GE Energy (United States) 3,300 MW
3. Gamesa (Spain) 3,050 MW
4. Enercon (Germany) 2,700 MW
5. Suzlon (India) 2,000 MW
6. Siemens (Denmark / Germany) 1,400 MW
7. Acciona (Spain) 870 MW
8. Goldwind (China – PRC) 830 MW
9. Nordex (Germany) 670 MW
10. Sinovel (China – PRC) 670 MW

The following figure is taken from Enercon’s presentation:
wind 2008

The following figure is taken from Vestas’s presentation:
wind 2006

Combining the figures above which has the same source from BTM Consult:
Companies                 2008              2007             2006
1. Vestas                      19.8%         22.8%            28%
2. GE Wind                   18.6%         16.6%            16%
3. Gamesa                    12.0%         15.4%            16%
4. Enercon                    10.0%         14.0%            15%
5. Suzlon                       9.0%          10.5%             8%
6. Siemens                    6.9%            7.1%             7%
7. Sinovel                      5.0%            3.4%               –
8. Acciona                      4.6%            4.4%             3%
9. Goldwind                   4.0%            4.2%             3%
10. Nordex                    3.8%            3.4%             3%
11. Others                   17.6%          10.5%             5%
12. REpower                  –                    –                   3%

From the data above, the top European’s market share has shrink from 75% to 57% over 3 years. Watch out for the rising Chinese companies (Sinovel and Goldwind)! See the Reuters news on “China seen surging to top wind turbine maker in 09“.

Kenya to build Africa’s largest windfarm

On 27 Jul 2009, the Guardian reported that Kenya is set to build Africa’s largest windfarm as rains fail and hydropower falters in the country.

Summary of the article:

1. 365 wind turbines to be installed in desert around Lake Turkana in northern Kenya. When complete in 2012, the £533m project will have a capacity of 300MW, a quarter of Kenya’s current installed power and one of the highest proportions of wind energy to be fed in a national grid anywhere in the world.

2. Until now, only north African countries such as Morocco and Egypt have harnessed wind power for commercial purposes on any real scale on the continent. But projects are now beginning to bloom south of the Sahara as governments realise that harnessing the vast wind potential can efficiently meet a surging demand for electricity and ending blackouts. Ethiopia has commissioned a £190m, 120MW farm in Tigray region, representing 15% of the current electricity capacity, and intends to build several more. Tanzania plans to generate at least 100MW of power from two projects in the central Singida region, more than 10% of the country’s current supply. In March, South Africa, whose heavy reliance on coal makes its electricity the second most greenhouse-gas intensive in the world, became the first African country to announce a feed-in tariff for wind power, whereby customers generating electricity receive a cash payment for selling that power to the grid.

3. Kenya is trying to lead the way. Besides the Lake Turkana Wind Power (LTWP) project, which is backed by the African Development Bank, private investors have proposed a second windfarm near Naivasha, the well-known tourist town. And in the Ngong hills near Nairobi, six 50m turbines from Vestas were erected in June and will add 5.1MW to the national grid from August. Another dozen turbines will be added at the site in the next few years.

4. Kenya’s electricity is already very green by global standards. Nearly three-quarters of the state power company KenGen’s installed capacity comes from hydropower, and a further 11% from geothermal plants, which tap into the hot rocks a mile beneath the Rift Valley to release steam to power turbines. However, increasingly erratic rainfall patterns and the destruction of key water catchment areas have affected hydroelectricity output. Low water levels caused the country’s largest hydropower dam to be shut down last month.

5. As a short-term measure KenGen is relying on imported fossil fuels, such as coal and diesel. But within 5 years the government wants to drastically reduce the reliance on hydro by adding 500MW of geothermal power and 800MW of wind energy to the grid. Not only are they far greener options than coal or diesel, but the country’s favourable geology and meteorology make them cheaper alternatives over time. The possibility of selling carbon credits to companies in the industrialised world is an added financial advantage. “Kenya’s natural fuel should come from the wind, hot underground rock and the sun, whose potential has barely even been considered,” said Nick Nuttall, spokesman for the United Nations Environment Programme. “After the initial capital costs this energy is free.”

The greening of Africa

At the end of 2008, Africa’s installed wind power capacity was only 593MW. But that is set to change fast. Egypt has declared plans to have 7,200MW of wind electricity by 2020, meeting 12% of the country’s energy needs. Morocco has a 15% target over the same period. South Africa and Kenya have not announced such long-term goals, but with power shortages and wind potential of up to 60GW and 30GW respectively, local projects are expected to boom. With the carbon credit market proving strong incentives for investment other types of renewable energy are also set to take off. Kenya is planning to quickly expanding its geothermal capacity, and neighbouring Rift Valley countries up to Djibouti are examining their own potential. As technology improves and costs fall, solar will also enter the mix. Germany has already publicised plans to develop a €400bn solar park in the Sahara. “Ultimately for Africa solar is the answer, although [costs mean] we may still be decades away,” said Herman Oelsner, president of the African Wind Energy Association.