Profits and Prophets in Clean Energy

February / March 2008 Volume 6 Number 1

Print this Article

E-mail this Article

Two scientists, an energy company CEO and two venture capitalists traded observations at the Forbes/Wolfe Nanotech Forum held in Albuquerque last December. All were bullish on the prospects of clean energy—€”but only if American innovation and technology were the driving forces.

The panelists:
—€ M. George Craford, chief technology officer, Philips Lumileds Lighting Co.
—€ Ira Ehrenpreis, general partner, Technology Partners
—€ Daniel G. Nocera, Henry Dreyfus professor of energy, Massachusetts Institute of Technology
—€ Victor Sprenger, chief executive officer, Accelergy Corp.
—€ Erik Straser, general partner, Mohr Davidow Ventures
—€ The Moderator: Bruce Upbin, assistant managing editor, Forbes Magazine

Here are excepts from the panel discussion.

1. First, the Bad News

BRUCE UPBIN: Tell us what you're thinking.

DAN NOCERA: In the next 45 years, the world's going to need 30 terrawatts. And 30 terrawatts is a large amount of energy—€”it's a trillion watts. We're using 12 or 13. So we're going to need around 17—€”for your kids and grandchildren—€”in the next 45 years. I'm going to tell you how to make up 17 terrawatts. And some of this is going to be surprising to you. I'm going to cover the entire planet where you can grow crops. And I'm not going to worry about cellulose and lignin. I'm going to burn it all to CO2 and water. You can't get any more energy out of a crop. And if I cover the entire planet with crops—€”five percent of the planet is land on which you can grow crops—€”you're going to get 7 terrawatts. I need 17.

The theoretical limit for photosynthesis is 10 percent. The switchgrass mycampus is one percent. All right? So it's not a very efficient thing to create energy from it and the reason is it's like you. You ate breakfast this morning, and you took energy but you didn't store it. You used it to live. That's what plants do. You can't get more than 10 percent out of a plant. I don't even want to talk about corn. It's ridiculous.

So I got 7 terrawatts out of biomass. I now need 8 terrawatts out of nuclear. And you guys should think about nuclear, because if you're worried about CO2 or energy efficiency, that's not a bad place to go. But you don't want to do it the way we do now, which is Gen 1 and Gen 2. It's Gen 3 and 4 where you won't be burying as much stuff, and you'll be using different types of fuels than plutonium. Actually, this is the heartland for that—€”Los Alamos, Sandia. Some of the best people in the world are working on what are called advanced fuel cycles. I want 8 terrawatts of nuclear. If you take 8 terrawatts—€”a nuclear power plant's 1 gigawatt—€”and divide by a gigawatt, you get 8,000 nuclear plants. Divide that by 45 years, and that by 365 days you will find that you need one new nuclear power plant every 1.8 days for the next 45 years to get eight terrawatts.

So fill in with two more terrawatts of wind. If I go 10 meters above the ground and extract all the energy out of wind, you get two terrawatts. So you probably want to go really high altitude.

If I dam every iver, I get .7 terrawatts.

So no more eating, nuclear power plants everywhere, dead birds galore, and I've dammed every river. And with that I just eked out 28 terrawatts for your kids and grandchildren in the future.

So that's where we are now. I should also tell you that's with unprecedented conservation. If you want to live like an American in 2050, which means GDP scales with energy use, you need 102 terrawatts. So you're going to have to live like a person in Guinea in energy use. That gives you a feeling of what we're up against in the here and now.

Who invited this guy? You're bumming me out.

Don't get bummed out, because there is science, technology, and innovation that can actually respond.

When Are We Going to Run Out?

FROM THE AUDIENCE: How much energy is still left in the remaining oil, coal and so forth?

NOCERA: I'm going to give you the optimistic number, and then if you're the world's worst pessimist, divide by two: 200 years oil, 100 years if you're a pessimist; 400 years methane, 200 if you're a pessimist. But here's the kicker: 1,900 years of coal, tar sand, you name it, and if you're a pessimist, 1,000 years. So everybody telling you we're going to run out, they don't know what they're talking about. We can do anything with coal. But you want to do it responsibly.

2. What's an Investor to Do?

UPBIN: Okay. So maybe that's a good segue into Erik's realm, because you're putting money to work getting us to the 30 terrawatts.

ERIK STRASER: I'm a general partner in Mohr Davidow Ventures. We're a 27-year-old venture firm investing out of our 9th fund. We manage probably about $2 billion, primarily for private foundations and private endowments in the United States. I lead our cleantech practice. We've been investing in cleantech for about six years now. We've made about 14 investments across solar, bio fuels, clean coal, energy storage, transportation. I think the key take-away from Dan's comment is that we have got to use innovation and technology to work our way out of these problems. There's no other path to do it. Conservation is not going to get us there. Hope is not going to get us there. We've got to turn to the intelligence and drive, not only of our own citizens but more broadly, the citizens of the countries that are going to be consuming most of this power.

What's different now versus past times is the demand surge here is unprecedented. The demand surge is basically twice as many people as the 20th century, which was basically the G6, let's call it—€”Western Europe, Japan, the United States. China and India represent twice that amount of people.

If you take the 20th century and strip out the world wars, you've had about 70 years to industrialize those countries. China and India are going to try to do it in about a third of that time. So if you just do the simple math—€”twice as many people times one third of the time—€”you've got six times the material intensity and energy intensity of any period we've had in human history.

And that puts a huge premium on supply. The average person in China consumes two barrels of oil a year. The average person in America consumes 25. That's a staggering number, given that most people in China don't have a car yet. So I think if you just look at the demand surges that have to happen in the first half of this 21st Century, you paint a very bright picture for technology substitution and technology innovation to fill in the gaps and to move us into market structures where we can deal with thedemand surges..
I think it's probably the most exciting time ever to be investing in the atoms of this world. We spent the last25 years in the Silicon Valley primarily in the bits—€”the electrons and photons that make our information economy work. But I think the bigger investment opportunity for the next 25 is around the atoms, the material science, the processing technologies. How do we actually rise up to meet the material challenge of the 21st Century?

IRA EHRENPREIS: I'm general partner at Technology Partners. Like Eric, we're a 24-year-old venture capital firm based in Silicon Valley. We're investing out of our 8th fund. I'm going to continue to echo this rise in optimism and hope —€”we've talked about the cynicism—€”and really talk about what's happened in the venture capital community. Energy historically was one of the stepchildren in venture asset class. It was about less than one percent of all venture dollars.
In the last three or four years, it's become the fastest growing segment of the venture asset class. It went from one percent of all venture dollars to double digits, somewhere between 10 and 12 percent now of all venture dollars, depending on the quarter, go into this area. Last year was the largest year in the venture asset class in terms of deploying capital, about $1.8 billion, to the solutions that Erik was alluding to.

The Q3 numbers are out. We're a little over $2.5 billion just in the first three quarters of —€˜07. What's happened? What's changed? The first big change is that we used to think of this as an area that was all about compromising returns for doing good for the environment. if we were going to invest in these energy solutions, we wouldn't generate the kind of commensurate returns that we were expecting out of IT and life science investments that have historically characterized the venture asset class.

It's only been in the last three or four years some of the largest IPOs in the have been in cleantech, led by the solar IPOs. The other major change is in the corporate community. We've gone from an era where in Silicon Valley we're used to the ecosystem of the large corporations driving much of the investment at a startup level. But what's happened in the last 12 or 18 months is that it's become the exception not to have a real initiative in this area. And that's really provided the foundation and backdrop for the startups that we're investing in to havethat analogous kind of partnership and ecosystem.

The final trend that's probably most impacting the venture asset class has to do with the most fundamental thing we invest in, which is not technology, it's management—€”or at least the pairing of the two. Historically the best and brightest minds have gone into the areas of the life sciences. We've begun to see that over the last several years cleantech has become a magnet for the best and brightest entrepreneurial executive teams and technologists.

UPBIN: I want to talk about startups and bubbles and big companies. It seems like—€”and especially if you look at the solar stocks—€”the valuations are so stretched, even though the opportunities are so large for the long term. Even if there is a reset for correction in the value of these stocks, such as that maybe an IPO pipeline shuts down, is there going to be a structural problem for meeting all these goals that we're trying to set for ourselves?

IRA EHRENPREIS: Everyone always refers to the solar bubble. So let's at least put the solar perspective in context. The largest category of investment has been solar, it is true. It is also true that today, solar represents about .068 percent of the entire U.S. electricity generation. If we had 30 years of growth at about a 30 percent growth rate, we're still at under three percent of all U.S. electricity generation. So I don't think any of us investing in solar somehow think we're in a bubble period, relative to the long-term opportunity of solar. I think instead we look at it like we look at any cycles in the venture asset class; there's going to be times when there are things that are over- and under-valued. But if you take a look at companies today we're thinking are over-valued, unlike other bubble periods in venture, these are companies that have multiple hundred million dollar revenue bases. They have incredible growth rates. And these are real companies. These are not companies that are going to go away. So I think we at least have to put that in context.

We actually look at solar and also bio fuels as one of the real opportunities of investing in this sector. When we think of the overall sector, we think of about 30 or 40 different areas of opportunity, and the fact that two have garnered the lion's share of attention in the venture community means that actually even though we think there's a huge opportunity in solar, it's these 38 other areas that we target and think are the next chapters in cleantech's life.
So we're investors, like Erik, in a whole range of diversified companies in this space. We have coal companies, we have transportation companies, we have battery companies—€”we think energy storage is a huge opportunity.

STRASER: I think one of the things that enables cleantech from the venture perspective is that there is a financing food chain. One of the things that's different today from three or four years ago, is that there's a large appetite primarily for private money, I think, to come into this area. Investors consider the assets they have accumulated across a diverse and widespread footprint and look at how they're going to repurpose them. So you've got some billion-dollar asset that's stranded somewhere in Texas or in the Midwest or perhaps along one of the major ports or river systems in America. There are a lot of private dollars that want to find multi-asset class options.

UPBIN: What is Accelergy, and what are you doing in China?

VICTOR SPRENGER: I think we may not want to listen to Dan, but Dan is more right than wrong. So I think that's where you have to start. There's a lot of activity going on in the balance of energy demand versus green demand. The perspective of Accelergy is one of a company that really is involved in providing alternative uses to create the energy market that's required.
Obviously, in my opinion, you must think in a global context. It's easy to put it in the perspective of a country or a continent, but this is a global problem that has to be resolved. That's number one.

Number two, there is no silver bullet. To resolve the problems that we face in terms of energy demand globally and the desire to have a green planet for our children's children's children, it takes an efficiency of all the technologies.
We're involved at Accelergy in the utilization of coal to liquids. Now, five or ten years ago, that was the most unattractive thing to say. Today there is a lot of activity, a lot of energy going on in looking at not only efficient ways to produce coal into liquids to products but also do it in a way where it's environmentally friendly.

Is it a perfect process? The answer is: of course not. One thing we can tell you is that the catalytic designs that create the efficiency of all of these processes are critical enablers in doing this: nano, fissure tropes, etc., So where we sit is right in the forefront of taking the oldest technology of the world, coal, tar sands and those kinds of things and converting them into clean, modern diesel fuels and gasolines, combined with lighting, combined with windmills, combined with nuclear. All of these things are the opportunity. All of these things are the challenge.

Technology is the only route forward. I'm encouraged by the naysayers that say that the world is coming to an end in 25 years. I'm encouraged by the naysayers that say that the greenhouse emissions is not a problem. You need those extremes. But the bulk of the activity, the bulk of the work is right in the middle.

UPBIN: I wanted to go back to you, Dan. I didn't want to position you as doom and gloom.

NOCERA: I'm not doom and gloom. That's reality.

So what would you do? What are you doing about it? I mean, what would you do about it if you were in a position to do something about it?

It is an exciting time. You're right. The private money is amazing. People really care.

The reel-to-reel manufacturing of photovoltaics, for example, is one of the game changers. Silicon panels are expensive to build and we do a panel at a time.
But reel-to-reel is no different than doing textiles or Polaroid or Eastman Kodak film. That's where you need to go to meet this energy demand.

There are some real science and technology challenges, and so that's why you're seeing the misinterpreted solar bubble. It's not a solar bubble. But what has happened is there's still this richness of discovery of new materials. That's the only thing that's going to make this reel-to-reel go because you need high efficiencies. You want it to look like silicon, but you just want to roll it out.

And biomass, even though I said it's limited, doesn't mean in the U.S. there's not a huge market. Converting the cellulose and lignin is new science that has to be discovered. We don't have the catalyst. You burn wood, for example, you don't think about breaking it down to sugars. Once we get to sugars, we know how to make fuels. So there are going to be new catalysts. They could be biologically based, they could be chemical engineering based, but there's a lot of new discovery that's going to have to be done in the next 10 years.

It makes it exciting for these guys, because they have to try to figure out what that's going to be, what technology looks promising to invest in. So that's where the solar market is now. There is, unfortunately, for me still a lot of science involved to really see solar really penetrate the market at four cents per kilowatt hour. That's what I do.

Batteries and super capacitors. are a huge investment opportunity, because you can take the electricity made during the day and then store it at night in the super capacitors. But there are some big science challenges. Electrons are of the same charge. They don't like each other. They don't want to be near each other in a battery. Because they're repulsive. They don't want to be smashed into a little space together. So again, it's the atoms part that Erik talked about. There are some real technology challenges to make a material accept electrons and get them close together so you can get a high energy density, and then get them out of the battery or super capacitor quickly. That's what you need to run an energy economy.

The last alternative is in chemical fuels, and that's photosynthesis. The one place electrons will get close together is in a bond. So Erik mentioned atoms. Atoms are held together by bonds. When you split water, it turns out, it makes photosynthesis and it makes hydrogen and makes oxygen.

Let me give you one message of hope. You know those leaves you see outside? How those things work—€”it's millions of years now, and only two years ago we finally got the picture of what is in the leaf that makes it split water to hydrogen and oxygen and makes the chemical fuel. In my lab, we've been able to split water to hydrogen and oxygen. There are terrible efficiencies. It's a creaky machine that needs a lot of oiling, but that's how fast science and technology can work. That's how America was built, with this sort of innovative spirit.
It's happening right now. You just don't realize it, and you shouldn't. It's too far off. But that's the undercurrent. You want PVs cheap. Then you want capture conversion: You take a solar photon, you capture it, you convert it to a wireless current—€”that's what PV does—€”then you've got to store it. You do that cheaply, which is inventing new materials, you'll take a big hunk out of the energy problem.

STRASER: Let me talk about what I think is a very large technology area that I think we just kind of glanced over. I know a lot of you are involved in direct public market investing, so I think this is something interesting to watch.
About two quarters ago, Jeff Immelt, CEO of General Electric, divested one of his business's units, the plastics business unit. And when you divest something worth $11 billion, whether you're a venture capitalist or a public market investor, you should probably try to understand why. At the core of it, what you realize is the fundamental basis for building most of the fittings that are in this room: This bottle, this piece of glass, that computer screen, that tablecloth, the paint on those chairs—€”the basic feedstock for all that is petroleum. We're moving into a world where, be it GE or any other industrial company, you can't rely on petroleum. So what do you have to do? You have to divest an enormous business unit in order to do that. Where does the business unit go? It goes to Saudi Arabia where—€”guess what?—€”the feedstock is really cheap.

The trend is that you're beginning to see a fundamental shift. We tend to think that chemicals were always made by petroleum. They weren't. Eighty years ago they were not made from a petroleum-based process. They were made from something that came out of the agricultural business. We are moving back to that as petroleum becomes a more difficult feedstock in the 21st century. So companies that are using biochemical or thermochemical processes, chemicals that are at least as good as petroleum-based equivalents, are going to be an enormous business in the 21st century. We have just begin to learn how to harness biology. And the way we do that is through a set of genetic tools and a set of processes that really didn't exit five years ago.

The best evidence is of this is to go to the major research universities of the United States, the lightning rods for innovation. If you rip off the lid of MIT, Cal, Stanford, Cal Tech, any of these places, you're going to find two things: first, a gigantic research program on molecular biology, turning biology into a physical science or an experiential science. The second one is in climate and energy change. So in your retail investing, or your public market investing, I would encourage you to try to find companies that are looking at how to shift from petroleum as a feedstock and onto technologies that are based on a biotech approach.

UPBIN: But how do you know if the management is any good? If all of this stuff is so new, there is no operating track record for a lot of these managers.

STRASER: Well, that's the curse and the opportunity. Because I think the thing you need to understand is how does the technology turn into a business model that causes differentiation? What is the background of the people in the company? I think one of the biggest challenges in putting together these cleantech companies is you've got to have domain expertise, but you've also got to have a set of people that know how to build a company. It's one thing to run a business unit at GE. It's another thing to operate a 10 person startup and try to turn it into 100 people in two years. So we have to marry up those two things: understanding management, understanding the disciplines that are needed in the company are brought together by the management team, and then honestly looking at the people behind it. Do the people have a track record of success? Do the investors have a track record of success?

* * *

SPRENGER: You know, you've got to ask yourself, where is the business of the business? It's great to talk about these novel technologies. It's great to talk about things from just a technology place—€”science for the sake of science. The real challenge in startup companies is to really focus on, where is the business of the business? Where is the value of the product? How does the money flow? How do you convert into a product, and then a useful product, that a customer is going to buy. That's the real challenge.

Essentially, I think what we tend to do is really try to understand the market dynamics. We really go back to the basics of business. The science follows the basics of business. But if you look at the activity in China, for one example, it's not about coal being used in China. That's not the issue. There's a lot of coal being used in China today. And the fact is the business of the business is very, very bad.

It really is about looking at the market. Where's the value proposition that a seller can bring to that marketplace? And how can our partners and our customers perceive this value to be created? We have spent the last year really honing our technology platforms, developing our partners. But even more important, we are really focusing on the market that we want to play in from the coal perspective, and spending a lot of time with that marketplace and with our company to make sure we align our capabilities with the value perceptions of the marketplace. It's not intuitively obvious that coal is good or bad. What is important for us is to present to our customers and to our partners why that is good. Where is the business proposition, and how does Accelergy exploit that?

So it's really a combination of all the marketing understanding, the business dynamics, and then really taking this team, the strongest challenge that any manager of a high-technology team company has, is to focus the scientists.
Because there's so many things they can do, and every day they want to do something that's different. So you really to have to pick the themes of technology, pick the enabling—€”where we can be different, perceive to be different, and really focus on that. The strength of a highly scientific company is really the focus of scientists.

EHRENPREIS: One thing about research I think is really important for the audience to understand: About 15 years ago we decided in this country that we were going to use research dollars to fight long-term disease. So we started pouring a ton of money into the National Institutes of Health. The health care system and our energy infrastructure—€”if you include transportation, chemicals, all the things we have been talking about—€”are about the same amount of GDP. We spend on the research side now $28.5 billion at the NIH. For the energy infrastructure? About $1.5 billion. That is the research gap. It's enormous. We are dilly-dallying. We don't have a plan to attack this. It's an enormous opportunity for investors to help fill that gap. But we have no chance of doing the amount that needs to be done, because the gap historically is now almost 20X wide. We have to tighten up this gap if we're going to be serious about these issues.

NOCERA: Erik reminds me of a joke. What's the difference between America and the rest of the world? Americans think dying is an option. And so that's why we've invested $28 billion.