Clean Energy Study Tour

Private companies in clean tech industry

Private companies play a crucial role in the clean energy industry, usually as a technology incubator, strategic partner, or competitors for the current public listed companies. This month Goldman Sachs Global Clean Energy Team has published a detailed reports analyzed the results of its recent research and conversation with a group of investors and venture capital firms in San Francisco/Menlo Park area. Since the information access of private companies is relatively limited for general public, I view it would be good if I can summarize Goldman’s key VC meeting takeaways in this study and share to the all the clean energy enthusiasts. Here are the ket takeaways.

1.   Large corporations expressing increased level of strategic interest in clean energy.

A.   New growth opportunities and a diversified business mix.

Companies such as Google, Walmart, P&G, Ikea, Conoca, NRG, and GE has started the strategic action either in the renewable project development or supply chain renewable sourcing management, or renewable technology development.

B.   Investing in early-stage companies as a form of outsourced R&D. 

Since in many field of the clean energy sub-category, the main technology has not been standardized yet, therefore, many companies view the establishment of venture portfolios in the early stage private companies would be a cost-effective way for the R&D.

C.   Leveraging scale and expertise to capture share in emerging industries.

Companies such as GE, Cisco, and Samsung with strong balance sheets, large-scale industrial process/engineering expertise and established sales channels are seeking to integrate these strengths with the emerging new clean tech solutions.

2.   The field of VCs investing in clean energy has winnowed, leaving a select group with deep involvement.

The recent financial crisis has reshaped the clean tech venture capital industry, making lots of the VC firms exit this field of investment market, and creating the significant chance for the premier VC firms with strong and deep clean tech industry expertise to capitalize the market opportunity.

3.   VCs aiming to reduce binary technology risk and leave scale-up/financing risk to public market investors.

Venture Capitalists believe the public markets are an appropriate vehicle for investors to bear the risk of scaling-up and financing the growth of technologies once they are proven.

4.   Crossover investing becoming increasingly popular.

“Crossover” funds, which allow a combination of public and private-market investments, become popular. There is an increasing number of investors using late-stage private rounds as a means to steep the learning curve on the industry, and enjoy the private vs. public earnings multiple arbitrage.

Wind turbine industry

During the trip, we have heard a lot of comments on current wind energy industry development. Key things to note as: 1) wind turbine producers are moving form onshore to offshore as turbines produced are getting bigger. While current standard is 3MW to 3.6MW (or blade of 140 meters in length), turbine producers are introducing even bigger turbines: Vestas to introduce 4MW, Siemens 5MW, and some Chinese players to introduce 8MW turbines. Officers in Danish Ministry of Energy predicts that wind blade will increase to 250 meters long in the next couple of years. 2) Coping with the variable production of wind energy is still a challenge. The officer demonstrated a chart of wind energy demand and production during January 2005 as an example. Sometimes when the wind blows too fast, turbines will automatically stop for safety reasons. Thus fire plants will be needed in order to supply electricity. However, it takes six hours for fire plants to operate to full capacity. As a result, a good demand forecast model is essential for utility industry. 3) Subsidy scheme is still important for companies to produce turbine and to compete with traditional fossils. 4) China is expanding aggressively on turbine capacity and will thus heavily influence turbine production industry in the future. Noticeable players include Sinovel and Goldwind.

 

Renewable energy IPOs was one of the key themes for HK capital market in 2010. Xinjiang Goldwind was among one of the renewable energy stocks that went listed in 2010. However, investors have growing concern on the sector due to rapid construction of wind power projects in recent years. Further, weaker economic conditions and lagging infrastructure development in some wind-abundant areas have resulted in situations where local installed wind power capacity is exceeding the transmission capacity of the local power grid.

 

---posted for Yunchen Tsai.

Bringing it back home to West Virginia - Appalachia is Rising

A few weeks have gone by sin ce we returned from our fantastic voyage to the magical land of "Everyone Loves Clean Energy" and I am still trying to figure out how to best apply what I have learned here in the US.  While we were on Samso Island, we learned that the folks who run the Energy Academy and coordinate the islands efforts to be fossil energy free are looking for sister cities/islands around the globe to join them.  I would love nothing more than to see a small town in the hills of West Virginia take up the challenge - and even have a few target communities in mind - but continue to struggle with how best to engage my home state in building a cleaner, safer, and healthier future.

Which brings me back to why this matters so much to me, and the ultimate rationale behind my commitment to a clean energy future.  In the southern part of the state is a battlefield where the bloodiest battle since the Civil War took place on the sides of Blair Mountain.  In 1921, 10,000 miners marched fifty miles to the site to help organize the miners into a union in an effort to break the strangling oligopoly power of the big coal companies.  Workers were forced ot live in Compnay owned towns, could only buy goods form company owned stores, and were even often paid not in US currency, but in Company "scrip" that could only be cashed in or traqded for goods at the Company Store.  They had no rights, if a miner was killed or wounded on the job, his family would be kicked out of the house with no recouse, and the conditions were atrocious. 

So when the struggle for workers rights streamed into Appalachia, there was a huige upwelling of support from the working class.  And yet the powers that be would go on to cruch the rebellion.  Starting with corporate thugs of the Baldwin-Felts Agency armed with machine guns, and ending with President McKinly calling in airstrikes from the National Guard to put the "insurrection" down.  Much blood was shed and hundreds lost their lives in this watershed movement in the labor movement. 

Today, Blair Mountain is in danger of being utterly destroyed and wiped from the memory of the state.  A coal company has purchsed rights to blast the mountain to get to the thin seams beneath.  The rocks, trees, streams, and everything that is not coal is merely "overburden."  Is out history just another piece of overburden that can be blasted away and buried forever?

Not if I can help it!  This summer I will be taking to the trail that those miners took 90 years ago, and along with what we hope to be countless others, will summit Blair Mountain and shout our barbaric YAWP over the rooftops of the world.  We will not let our history be buried like the thousands of miles of streams that are gone now forever.  We will not let the sacrifices of past generations be forsaken and destroyed like over 500 mountaintops throughout our Appalachian Mountains. 

Appalachia is Rising.  I have seen firsthand that a different way is possible -  that a rural community can embrace a clean and propserous way of life.  Samso showed me that.  And after we rise up and fight back against the cultural genocide being waged, I look forward to finding a city in my mountain home to join the brave and forward looking Danes of Samso.

Resolving the Spanish Tariff Deficit

The national government of Spain has created a regulated deficit in the electricity industry. The fees paid to electric utilities exceed the revenues collected by customers by approximately 5.5 billion Euros in 2010. The accumulated tariff deficit is authorized to reach 22 billion Euros. The government of Spain has enacted certain measures to resolve the yearly tariff deficit and retire the outstand debt. The bulk of these measures are reasonably, such as increasing the price of electricity, decreasing subsidies to renewable energy, and other cost saving measures. However, I disagree with the decision to adjust feed-in-tariffs for solar power retroactively. Furthermore, I recommend creating a mechanism to limit generation capacity additions to the officially promulgated targets.

I agree with the Ministry of Industry that the historic feed in tariff for solar photovoltaic was too generous. While the Ministry of Industry wanted just 400 MW of capacity additions, they achieved 4,000 MW, a tenfold surplus over the target. Solar photovoltaic power is too costly to be utilized at a meaningful scale in the absence of subsidizes, so the government clearly created an overly compelling subsidy, which needs to be adjusted downward. However, I disagree with the decision to change solar PV feed in tariffs retroactively. Such a change signals to investors that subsidies for renewable electricity generation cannot be relied upon. Bankability is essential for large energy development projects, and the decision to retroactively adjust FITs will destroy bankability, thereby increasing the cost of renewable electricity.

I also recommend a mechanism to limit the generation capacity additions that are beneficiaries of feed-in tariffs. Such a mechanism, had it been in effect in 2008 and 2009, would have prevented the ten-fold overshoot in solar photovoltaic construction. Such a mechanism could have several manifestations. For example, the feed in tariffs could be limited to just the targeted capacity. Alternatively, the Ministry of Industry could monitor generation capacity applications and adjust the level of the feed-in tariff more frequently so that the targets are met. This approach would be the economically efficient solution, if it were logistically feasible.

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Only In America: GHGs & Political Football

Last night, Federal legislatures came to an agreement to extend the deadline to advert the U.S. government from being shut down.  Depending on what news agency you follow there are several perspectives on winners and losers in this recent battle on the political gridiron.  One of the bargain points in the recent government shutdown was curtailing the EPA’s role to regulate green house gases (GHGs).  Huh? What do GHGs have to do with the price of tea in China?  I am sorry, how do GHGs equate to shutting down the government?

Let’s be clear, a partial government shutdown requires all non-essential government employees to be furloughed.  I tried to research exactly what this mean, but the information out there is pretty vague.  Here is what I found.  The post office will still deliver mail, but don’t expect to get a passport.  You still need to file your taxes with the IRS, but if you are expecting to get a refund you better file electronically or risk a delay.  Applying for a federally backed mortgage?  Sorry, no federally backed mortgage processing during a partial government shutdown.  Are you on active duty in the military?  You’ll be paid, but there are questions about whether there will be any delays.  Imagine that!  The government will still collect taxes, but just do not expect services during a shutdown.  It is more like taxation with lousy representation.

Now I know it seems as if I am digressing, but I am not.  I want to paint a picture of how despicable a government shutdown is.  Which brings me back to the EPA and GHGs.  I am not ranting.  I am frustrated.  Yes we have Federal clean energy programs.  Yes we have State-level programs and targets.  However, there is no coherent U.S. policy for clean energy.  It incenses me to know that China is now the number one country in terms of clean energy.  It stings even worse to know that they recently past the U.S. to become the number one country in terms of total installed renewable energy capacity.  What are we doing about it?  Playing political football with GHG regulations.  Even in the game of football you can be lucky and recover an onside kick.  However, that can only happen if you are in the game!  U.S. renewable energy policy is more like sitting on the sideline watching the clock wind down.

Wind Coops: Denmark vs US

There are three main factors that have made wind energy cooperatives successful in Denmark:

1. A predisposition to the cooperative business model.  Danish citizens have used cooperatives as a financing mechanism for centuries.  The earliest cases included dairy cooperatives and later examples can be seen in the way Denmark finances the healthcare, education, and public service systems.  Many large-scale investments are socialized and as a result, the cooperative business model is a natural answer to Denmark's renewable energy financing strategy.  
2. Strong market forces in favor of renewable energy.  Wholesale electricity prices in Denmark are 30% higher than the United States.  That means the payoff for producing wind power is 30% better before you even start talking about feed-in-tariffs and government incentives.  
3. Progressive government policies.  Danish subsidies for wind are approximately twice what they are in the United States.  This only adds to the appeal of investing in wind.

While the US wind power industry does not share these advantages, wind energy cooperatives have begun to sprout in New England and the Pacific Northwest.  This new movement has grown out of consumer demand for renewable energy, but even supporters of wind power experience a “Not in my back yard” sentiment about turbine installations.  American developers are finally taking a hint from their Danish counterparts and are experimenting with the cooperative business model as a way to ease the permitting process and gain community support for their projects.  Hopefully this new and growing trend will shift the conversation and economics of wind from “Not in my back yard” to “Only if I own it.”  In the meantime, we can only hope that rising fuel prices and progressive politics take hold and spur growth in the US renewable energy sector.  

Financing Renewable Energy

Several wind turbine manufacturers and operators informed the 2011 MIT Sloan Clean Tech Study Tour Group that a viable wind project should deliver a 15 to 20% IRR to its investors over a twenty year investment horizon. There are numerous wind farms under construction around the world right now as countries aim for ambitious renewable energy production targets. Can wind farms really deliver IRRs in that range?

 

A typical wind farm is financed using 20-30% equity and 70-80% debt. Ownership structures can vary from single owner and operator to separately owned and operated to community or cooperative-style ownership. Even if a wind farm is largely privately financed, its hard to explain a 15-20% IRR using a cost of capital comparable to market rates to discount the installation’s cash flows. I see even the most competitive developers garnering an IRR of about 12%.

 

I suspect that companies use discount rates that are lower than their true cost of capital to ensure that they their forecasts hit their IRR targets. That said, it’s also possible that clean tech developers have access to capital priced below-market or they are taxed below the 24% corporate tax level I estimated, or they have access to other sources of value.

 

The fact that European wind project developers can even hope to estimate their project IRRs with any degree of accuracy is testimony to the climate of certainty that renewable energy policies and clean tech innovation have created in Europe.  Feed-in-tariffs or market price premiums and guaranteed market access have enabled investors to make the business case for clean tech projects by promising stable cash flows. There are a number of field-tested and proven technologies on the market now, and “Tier 1” suppliers like Vestas, Gamesa, and Siemens whose technology entails low equipment malfunction risk. These factors contribute to increasing, or at least predictable, IRRs in clean energy projects.Well done, Europe.

 

Top Three Experiences in Denmark and Spain

            First on my list is our first day when we visited Vestas. We spent the morning getting an overview of the industry, company history and challenges that they currently face. We were then taken to a gutted nacelle in their office and given 3D glasses. The screen combined with the 3D glasses provided a real-life simulation of what it was like to be a technician working inside a nacelle. The 3D experience was very comprehensive and I was impressed by how many views and features the experience provided. After a delicious lunch of smoked salmon sandwiches (very typically Danish!), we were divided into groups of three to work on three strategic global challenges they faced.  We were given stacks of documents to review and told to come up with a recommendation. After our brainstorming session we presented our findings to our peers and the executives at Vestas and then participated in a lively question and answer session about our recommendations.

                Next on my list of trip highlights was our visit to Abengoa’s solar farm where we saw a whole mass of solar panels that reflected light onto three solar towers. We drove through a number of small villages on the way to the farm and then, it was like a scene right out of a science fiction movie – there was a huge clearing and three white towers with beams of like radiating from each tower. Lord of the Rings could have saved a lot of money in special effects if they had known about Abengoa’s solar farm. The rows and rows of solar panels reflect light to these three towers which turns the heat into steam and the steam into energy.

                And finally, our free day in Sevilla was a major highlight for me because it was such a beautiful day in a gorgeous city. A group of us visited the majestically extensive military compound, bumped into another group of Sloanies having drinks by the river (and joined them for late afternoon refreshments) and then proceeded to the bullring for a tour. Our fabulous day in the sun culminated in our visit to the Cathedral in the evening  (already closed, but as one of my friends pointed out, perfect for sitting still and soaking in all the awe-inducing detail) and wonderfully tasty and cheap tapas later that evening. Oh Sevilla… how I do adore thee…

And the learning continues...

Before taking this class I had practically no experience in the renewable energy sector. Prior to taking this trip, while I had gained a nuts and bolts understanding, I still knew little about the history of these industries in both Denmark and Spain. It was not until meeting with companies, and until researching for my paper that I began to understand the context within which these industries developed. So for my final blog, I thought I’d share some interesting facts and Denmark and the development of its renewable energy industry. Enjoy!

Renewable energy is not new to Denmark; farmers began developing turbines to power their farms as far back as the 1890s. But it was not until the late 20^th century that conditions were ripe for the birth of the renewable energy industry as we know it today. In 1973 oil provided 90% of Denmark’s energy. As such, the country was hit particularly hard by the 1973 oil crisis. The Danes coped with the heightened cost of energy by modifying their lifestyles, for example by not driving cars on Sundays and keeping store lights off outside of operating hours. Not long after the negative effects of the shock subsided, Denmark felt the pain of oil dependency again during the 1979 oil crisis. This time, the Danes mobilized around reducing their dependence on foreign oil. Not only did regular households reduce their energy consumption by, among other things, turning down their heat, but also companies began exploring energy efficiencies and savings, and energy policy made it to the forefront of political agendas.

Strong grassroots efforts were highly effective in Denmark, and in large part responsible for getting the wind industry off the ground. After the 1973 oil crisis, Denmark began investing in nuclear energy technology. But grassroots movements were strongly against these investments, and supported wind instead. These groups were eventually able to influence Parliament to cut nuclear plants from the country’s energy plan, despite the substantial investment that had already been made. Parliament’s move had another effect – it provided support for wind and other renewable energy sources. This was a turning point in Denmark’s history, and it led to the creation of a viable wind industry.

On the political front, Denmark’s first energy policy surfaced in 1976 – not long after the first oil crisis. This policy aimed at reducing both energy consumption and the country’s dependence on foreign oil. Denmark also created the Ministry of Energy, and by 1979, Parliament began passing energy related acts. By 1980 Denmark was significantly expanding its district heating system, which relied heavily on the co-production of electricity and heat. The Ministry has been gaining strength ever since its creation. The political power given to these agencies have proved critical in the country’s ability to enforce its policies and spread their mission across other sectors of the government. Other exogenous factors such as rising oil prices and growing awareness of the threats of climate change have pushed forward goals to reduce CO2 emissions across the country. Again, these aspirations are supported by both the Ministry and other governing bodies, and by Danish citizens.

The Heros of Tomorrow

We visited great companies, saw disruptive technologies, met talented executives and had a lot of fun on this study tour. However, my main high-level takeaway does not come from any of those. Instead, I found the key to the success of what we were seeing in Europe in the Energy Academy in Samso Island.

There, in addition to the roof PV solar plant, the ventilation and heating systems, the construction materials, and the human actioned light-fan-bike (that Juanito kindly made work), I found this picture hanging on the wall of one of the secondary rooms:

  
 
Source: Samso Island Energy Academy

I would go further than the artist, however. Academics and engineers don´t make changes happen alone. I’d add a third category to this list: entrepreneurs. Together, these groups are the driving force behind everything we have witnessed in Europe: passionate people who pursued crazy dreams and worked hard to make them real. And these people need to be recognized as heroes, because they work for a better world.

And we have the proof of this in our visits in Europe. Just look at the founder of Vestas, Peder Hansen, a visionary blacksmith, who with his creativity changed the understanding energy in Denmark.  Javier Benjumea or José María Entrecanales, founder of Abengoa and Acciona respectively, both engineers, started businesses that have been pushing Spanish society toward greater sustainability. And we have heroes who continue to strive today. Take someone from other of our visits, Shai Aghassi, the founder of Better Place, who was able to raise $350M from series B investors (including the conservative HSBC) to realize his dream of increasing access to electric vehicles worldwide.  

We have learned that most of the big changes in the energy space are driven by policymakers. It’s true. But they need people who think about these subjects and come with the ideas that change the world. And those are these academics, engineers and entrepreneurs.

In Europe, most of them don’t have the recognition that they deserve, but fortunately, the mentality is changing. Recognizing the merits of these people and encouraging their continued work, dedication, and creativity is the only way to make the world a better place for humankind.