Daniel Englander
Winds of Change May 26, 2008 at 1:55 PM
A colleague of mine recently told me of a conversation he had with a friend of his in the investment community. Greentech is more concept than reality, the investor said, and the market is bound for a drastic shift once investors figure that out. A lot of the focus in the greentech market is on startups and hot technologies and innovations that drive comparisons between greentech and the Internet and, to a lesser extent, telecom. This emphasis has, in a lot of ways, skewed our understanding of what the greentech market really is and what it seeks to accomplish. For example, the rush of IT entrepreneurs into the greentech space leads many to the conclusion that technologies developed in this market may scale as cheaply and easily as, say, the latest Facebook widget or may be as highly targeted for a buyout as the fastest optical switch. Such an understanding creates the impression that greentech appeared out of nowhere as a series of disruptive innovations that created a market where none previously existed.
This impression is false. Instead, it’s possible to think about greentech as part of the world’s third oldest profession - after prostitution and espionage. Since Mel Brooks invented fire, humans have worked tirelessly to make energy scalable, cheap and efficient. The energy industry is one of the world’s largest and, while it may seem uncool to lump A123 or First Solar together with ExxonMobil or Chevron, such a classification is not only apt, it is essential. The task greentech companies face is not the one that makes day traders squirm over short-selling on the pink sheets and tech bloggers gush about the latest personal carbon footprint monitor. Soy-based foam and zero carbon drywall aside, the name of the game in greentech is energy portfolio diversification. This is the same strategy major energy companies have focused on for years - the switch from whale oil to kerosene in the United States, the move from coal to natural gas in the United Kingdom, and the dominance of nuclear power over égalité and fraternité in France are all good examples.
But don’t get me wrong here. Innovation is a prime mover in this industry. Consider the current bidding war between Halliburton and Candover Partners for Expro International. Expro is a leader in deep water drilling, and has developed an innovative technology for improving the flow and control of oil from deep water wells. Over the weekend Candover announced a new bid that values Expro at $3.4 billion, an eight percent premium on the company’s valuation. As easily available oil runs out, deep water exploration and production will prove to be among the most lucrative aspects of the energy industry. Tristone Capital energy analyst Waqar Syed hit the nail on the head, saying “any ways you can find to cut costs through technology are successful.” If Bloom Energy or Ausra could figure out a way to produce that much energy for a smaller amount of risk or cost than the deep water drillers, we wouldn’t be having this conversation.
This brings me back to the prescient investor discussed in the first paragraph. By thinking about greentech companies in isolation or as part of a distinct market, we run the risk of failing to accomplish our overall goal. In 2007, we achieved 2.3 GW of installed solar capacity, representing decades of hard work and billions of dollars in investments. One $4.2 billion, 4 GW coal plant under construction in India will trump this number when it comes online in 2011. As yet, only one sector of the greentech market has the potential to make a dent in the global energy infrastructure, but because of its relatively low level of startup buzz and VC activity it has escaped the attention of those that cover this market. The wind power industry straddles the divide between greentech and industrial energy and provides a glimpse into greentech’s possible future.
Take for example the recent $473 million deal Iberdrola, a Spanish utility, signed with Alstom to buy wind turbines capable of producing a combined 300 MW, General Electric’s $12 billion order backlog for wind turbines that was recently buttressed by a 667 turbine order from T. Boone Pickens, or the $1.8 billion deal Fluor and Siemens signed with Scottish and Southern Energy to develop a 504 MW wind farm in the United Kingdom. The companies involved in these deals are all old school industrial conglomerates, not startups coming off their A round. Believe it or not, this is the future of greentech. These are companies that are used to thinking big: big capital, big projects, big output. As such, even if the future of greentech is a distributed one, it will follow the model of GE light bulbs, not Nokia cell phones. The big energy companies are pros at producing energy that is scalable, cheap, and efficient. If the goal of the greentech market is to put a solar panel on every roof and an LED in every socket, we cannot be afraid to work with these companies, we cannot dismiss them because they represent an outdated energy paradigm, and we cannot ignore them because their money is coated with the blood of a thousand baby seals.
This is not to say that greentech companies should accept the dominant global energy infrastructure. Indeed, this market came about to challenge that paradigm. In terms of investor focus, however, it is important to always consider how funding a given company or technology will add to the potential for changing the global energy infrastructure for the better. Backing companies just because their technology is innovative or cool does little to promote change. And it does little to drive the energy industry forward.
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Daniel, are you suggesting nobody but perhaps you understand the cost/profit metrics of producing renewable power vs coal power? I would like to point out, renewable energy is approaching grid parity with coal — or in some cases, cheaper than coal power.
I find very few investors and fewer sarcastic journalists know the current cost metrics of [for example] PV produced solar power — so they missed a key tipping point.
CURRENT REAL LIFE First Solar installed costs are between $3.50-3.75/watt. This is based on sales price of approximately $2.40/watt for the PV, — PV that cost $1.25ish/watt to produce.
AMAT a-si plants produce PV at about $1.25/watt currently, while Nanosolar claims costs of sub $1. As product from AMAT plants, First Solar and CIGS companies [Nanosolar, Global Solar, Ascent Solar, Heliovolt and others] come to market, thin film PV average sales price will drop to 1.50-$2/watt, reducing installed costs to $2.50-3.00 before 2010. First Solar sales contacts have this price drop already built-in.
Without subsidies, PV installed at these prices is competitive with grid power produced from coal power plants. Given the fact that AMAT is selling turnkey production plants that produce a grid parity power product, and a slew of other manufacturers are scaling commercial thin film production lines with production costs of approximately $1/watt, and the likelyhood electricity will become the key transportation replacement fuel, I think you can expect “greentech” thinfilm PV to become the energy technology that is NOW and going forward will meet all the greentech hype.