Financing the Future of Energy
June / July 2004
Volume 2 Number 3
The author is co-founder and managing director of Nth Power LLC, a San Francisco-based venture capital firm specializing in energy technologies. This article was adapted, with permission, from the keynote address she delivered at the North American Energy Summit sponsored by the Western Governors' Association in April.
The North American Energy Summit communicates the important role that is increasingly played by new energy technologies. Solving energy problems faced by growing regions like ours is a great opportunity and pioneering entrepreneurs and investors like Nth Power are betting their time and capital on this new but important market.
Westerners are not alone in needing to find the best ways to ensure reliable, safe, renewable and economical energy sources.
Westerners are not alone in trying to protect themselves from the chronic problems of an ageing patchwork of practices, programs, technology and systems. They form the often-shaky infrastructure of so much of the foundation of our electric power resources and capabilities.
And Westerners are not alone in their concerns about the delicate, shifting balance that must be found between economic development and the environment.
Westerners are alone, however, in one respect. We lead the nation in the rate at which our population is expanding. At 20 percent growth per the last census, where every state grew, we were first among the nation's regions. This growth is unparalleled since the end of the baby boom years in the early 1960s.
The West grew more than 17 percent faster than the South, 150 percent faster than the Midwest and more than three times as fast as the Northeast.
And today, virtually every home, every office, every factory and every person shuts down when the power goes down, or acts up when the cost of electricity and other energy gets too high.
Coping with this growth and the demand it is creating require the kind of new thinking that is driving the restructuring of the energy industry, both here and around the world.
In light of the growth in the Western U.S. and in light of our 40-year recent history of going from energy crisis to energy crisis largely without addressing the underlying problems, it's time to break the pattern and find new solutions and a new architecture.
Nth Power is part of the revolution that the restructuring of the energy industry is continuing to foster (and please note that I said restructuring, not deregulation).
We invest in solutions to problems in:
—€ How we generate energy
—€ How we use energy
—€ How we track and manage it
In all, we have raised about $250 million in venture capital for startup companies addressing these opportunities. All told, our portfolio companies have attracted about $1 billion.
Looking at energy-tech venture investment, as recently as 10 years ago, there was virtually no capital raised for startups in energy technology. A study we have done for the past several years, which we released last month, showed energy technology venture funding at $428 million during 2003. That was about even with the $435 million raised during 2002. It represents 2.3 percent of the total of $18.2 billion in venture capital investments made in the U.S. last year. Two-point-three percent doesn't sound like a heck of a lot. But remember that there was virtually no energy technology venture capital investing prior to 1995.
By evolving from an agricultural society to an industrial society, leaders back then knew we'd need universal availability and reliability of electric power. The target was 99.9 percent availability, and that was fine for its time—€”even remarkable. Now, users want what we call "high nines" or they don't give any "high fives." Hi-tech businesses, hospital operating rooms, homeland security, to name just three environments, demand at least four or five "9s" and really want six or more.
These unforgiving needs were largely unknown during the first half of the 20th century. Then utilities were empowered through government-mandated monopolies to own a market. So they felt financially comfortable to build a mammoth plant that could deliver one-size-fits-all electric power everywhere in that market.
Today, the specific needs of users are driving entrepreneurs to pursue new energy-tech businesses.
It's absolutely vital because of the digital economy we have now. According to EPRI, one out of every eight watts generated in 2001 was delivered to digital devices. And that percentage has surely grown during the past three years, and will grow even more as the years go by.
Every year, power outages and poor power quality cost customers $120 billion —€“ and a lot of inconvenience —€“ in just the U.S. alone. In late March, there were power failures at Los Angeles airport and, separately, at the Las Vegas Belaggio hotel. Hundreds of cancelled flights, over 1,000 empty rooms and probably no working electronic slot machines to pass the time until the lights came back on.
Problems such as these are largely a reflection of the challenges we face —€“ and will continue to face —€“ from our ageing power transmission and distribution systems. And let's remember that customers are smarter these days about the costs of power outages and related problems, so tolerance levels are low.
The problems with how we track and manage power aren't likely to get any better any time soon.
And, of course, a complete replacement of the power grid is not the solution. While it's far from perfect, it does a pretty good job for what it was designed to do —€“ deliver large quantities of bulk, industrial grade power. So the grid isn't going away.
But to provide higher quality power to those who need it, we must look to deploying technologies that complement grid power and make it highly reliable to the end customer.
Now, let's look for a moment at the kind of information the power industry has about its customers and their requirements:
—€ How is power being used
—€ For what kinds of devices or equipment?
—€ At what time of day?
—€ In what quantities?
In 2004, answers to these questions are usually obtained via once-a-month meter readings. At a time when my teenage sons use instant messaging, the power industry continues to largely collect metering data the same way ice was once delivered to homes —€“ on foot or by truck. The equivalent data transfer rate is ten-to-the-minus-seventh baud. A modem that slow has never been built.
Information gathering is critical to managing power because power cannot be stored. Utilities, therefore, need to deploy a new generation of commercially available, advanced meters. That way, they can collect data in real time and support two-way communications between the utility and their customer.
And by understanding customer power needs, utilities can do a better job of creating economic incentives for customers to use power when it is the cheapest. However, today, most power companies are still just studying advanced metering. Most have yet to roll these programs out to their mass markets. Some of our portfolio companies, such as SmartSynch in Jackson, Mississippi, are out to change that.
Now let's look at the information the power industry has about its own operations. On critical assets, such as large power substations and power lines, the information feedback is scarce. Failure analysis is performed, at most, a couple times a year and in a way that transmits data manually. Let me repeat that: manually.
Here's one example. Transformers are monitored on average once or twice a year by taking manual samples of oil from the transformer and then shipping them to a lab for analysis. Results come back in a week. Let me repeat that, too. The results come back a week later. This is at a time when transformer failures caused the massive power outage in London last year, shut down the shopping district in San Francisco on the Saturday before last Christmas, and dumped thousands of gallons of oil into the Columbia River in Oregon earlier this year.
Transformer failures are not rare. They occur almost weekly.
One our portfolio companies, Serveron, is automating transformer failure analysis, providing grid operators with critical information—€”24/7, on-line and in real time. This enables the power companies and the grid operators to predict transformer failures and take steps to avoid any power outage. Put another way, San Francisco's retailers didn't have to go dark.
Good idea, right? Others think so, too. I'm happy to report that Serveron successfully completed a $9 million round of additional funding about three weeks ago, raising enough capital to take them to profitability.
What about how we generate power?
Computers moved from mainframes to laptops to your Palm Pilot or Blackberry. That same kind of distributed architecture is starting to be applied to the power industry. Where changing power demands and under-investment have placed stresses on the grid —€“ where the lack of real time information impedes our ability to identify and anticipate those stresses —€“ a solution is emerging in power generation to alleviate choke-points and bottlenecks. This should help make power more reliable and, ultimately, make the grid more stable.
At the heart of this change is distributed generation. Over a third of our investments at Nth Power have gone into distributed generation and storage. Why do we think this is so important? Consider that, for years, marginal demand for power was typically met by building additional large-scale power plants.
Over-sizing new power supply was the norm, and regulators approved new power plants. They did so knowing that demand would eventually grow into the mammoth amounts for new supply, eventually creating good economics for a new project.
But with the pervasiveness of NIMBY (Not In My Back Yard), we've reached the limits of the old approach of adding big chunks of centrally generated power to the system. But there's a problem: Distributed generation today is more expensive than grid power, except for wind power in certain wind regimes. But continued investment by groups of investors in next generation products for distributed power will bring down the cost curve well before this decade is over. Today's price differential between these power supplies is further evidence that grid power and distributed generation are not—€”and should not be—€”rivals.
And adding power to the system can just as effective and as compelling economically. An electric power visionary, Amory Lovins, calls it "negawatts." Harvesting negawatts can compete with producing more megawatts as a source of power. Utah Power is buying negawatts for Salt Lake City through one of our companies, Comverge, rather than from the local power generators. Far from a regulatory mandate, Utah Power is deriving a low-cost supply of power from consumers who volunteer for a managed, compensated program. That program lets them take power back that's not really needed and re-deliver it for more critical applications.
Solving the energy issues of the digital economy requires linking the vision of how the energy industry is changing with the technologies and entrepreneurs that will speed the transformation. And, of course, it requires the capital to make that change possible.
There are dozens of other companies behind these first waves of innovators. The smart incumbent energy players and the market leaders are realigning strategies around these new technologies. And they are doing it because it makes good business sense. Western states have the demand for power along with the ability to attract the high-tech people. These people are the ones who will apply the new solutions we have already found. They will also think of more of them as time goes by, creating new businesses to make things happen and—€”not coincidentally—€”more than a few new, well-paying jobs.
Put another way, we Westerners have the ability to build the new infrastructure we need, and build it right the first time. We can embrace new methods and new technologies that can take us beyond the near-term needs our region's growth is generating.
We can set the new standard for how to make energy supply reliable, environmentally sane, technically safe, renewable and economical. That's the new "quest for fire" —€“ the must-do priorities that form the foundation for all the desired growth and development Western governments are trying to foster with intelligence and with success.
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