Energy Tech Investor Conference

Yesterday and today I had the pleasure of attending Strategic Research Institutes Energy Tech Investor Conference here in San Francisco along with Expansion Capitals' summer intern Graham Evarts (who is co-contributor to this post). The conference was relatively well attended with around 100 participants yesterday and 75 or so today. The breakdown of investors vs. companies / industry groups / labs / others was pretty even, with investors being slightly better represented.

All in all it was a good conference, with very high quality speakers and presenters. The keynotes and panel topics continue to be timely, and below is a summary of key points.

Wednesday 6/29

Bryant Tong of Nth Power gave the introductory remarks to the conference.

- He has seen significant uptick of interest in Enertech since California Treasurer Phil Angelides announced the Green Wave Initiative in February 2004

- Some recent stats:

• $1.2B deployed in the sector in 2000 (high)
• $509M deployed in the sector in 2003
• $520M deployed in the sector in 2004, with average dealsize up 25% to $7.5M
• Now: $1.5-2B are being raised targeted at the sector
• He expects $3-5B to be deployed in the space over the next 2-3 years

- Key drivers (we include some from the panels as well):

• Low cost lasers
• Cheaper, more efficient communications devices
• Improvements in materials sciences
• Desire for energy independence
• An expected dramatic increase in international demand (Chinese GDP grew 9%+ last year)

The “State of the Industry: Challenges, Opportunities and Outlook” panel represented various company stages, including VC (Ira Ehrenpreis of Technology Partners and Tim Woodward of Nth Power), project finance (Ren Plastina of CIT Commercial Finance and Mark Huang of GE Commercial Finance – Technology Lending), equity research (Jarett J. Carson of RBC Capital Markets), and public support (Ken Locklin of Clean Energy Group).

The panelists largely agreed the drivers are in place for continued expansion in the sector. Points noted were a doubling in the price of coal over the last year as well as an upward trend in the cost of natural gas. Generally speaking, there seemed to be consensus among the crowd that the cost of energy and natural resources will continue to increase or flat line, at least for the next 5 years (I heard some participants say privately that they could see scenarios where oil drops down to $20-30 / barrel – what happens if India and/or China experiences a sudden recession for whatever reason?).

Tim noted that the utilities now invest large amounts of cash into their core business (power generation, transmission & distribution), which bodes well for technologies supporting this.

Project finance remains a key challenge. The lenders represented here typically look for $25M+ projects (size matters to lenders too, since underwriting a $500K transaction requires roughly the same amount of work as a $25M transaction), but GE is exploring a template which will allow it to underwrite smaller transactions more readily. Mark Huang also “joked” that GE looks for “no risk, high return” transactions. The takeaway here is the VC’s need to keep lenders in mind during the diligence process and the companies need to be very savvy in presenting their projects.

The panelists were also asked what their evolutionary predictions are for the next decade. Here’s what they said:

• PV at <$1 / Watt
• Large MW Fuel cell projects
• Energy externalities will be priced in

The next panel discussion session attempted to address the question, “Is CleanTech in danger of being overfunded?” While both sides of the coin were represented on this issue, the majority seemed to feel that there will always be promising technology companies that will go hungry for lack of capital. The other interesting point made was that the true constraints facing energy technology investing are a dearth of educated investors interested in CleanTech and a scarcity of qualified entrepreneurs and management teams to lead CleanTech firms. The end result is venture capital firms facing capacity constraints, meaning they don’t have sufficient time to find highly lucrative ground-level opportunities.

In the “Corporations & Cleantech: Pros & Cons” session, everyone agreed there is appetite for new technologies, but that there are still significant hurdles to overcome. According to Marc Aube (or Marubeni) “operational track record is king right now”, which means: don’t expect a shift in the sales cycle anytime soon, it is still a decade (as someone said in a different panel). So make sure to include this in your planning if you strategy is to sell to utilities.

During the panel discussion on “Energy Tech Convergence”, Martin Tobias (of Ignition Partners and Seattle Biodiesel) claimed that there was no software play in Energy Technology that will provide venture-grade returns, and no one challenged him on this. His point was that the degree of customization required for the utility customers prohibits the kind of mass replication needed for success in a software company. But it is not all bad from a VC perspective. Some quick points from the discussion:

• Grid is on average 40 years old, the people maintaining it probably 60
• Parts of the grid perform well, other don’t. The challenge is no one knows which is which until it’s too late – enter remote monitoring and control technologies
• There is a shift happening in the relationship between provider and end user – enter demand response technologies and services

Thursday 6/30

Today started with “Asset Allocation – Rethinking Energy Focused Funds: The Investors’ Perspectives”, and combined public sector (Winston Hickox representing CalPERS) with private sector (Nancy Pfund representing JP Morgan’s Bay Area Equity Fund). Winston was pretty clear that climate change is a significant driver for Cleantech, and in terms of asset allocation, few have made a clearer statement than CalPERS regarding intent to allocate assets to the sectors. While not news, the commitment is significant enough to note here:
$200M of the Private Equity portfolio invested in Cleantech (adding to this, CalSTRS have committed another $250M)
A 20% near term energy efficiency improvement in the buildings that comprise CalPERS’ $20B real estate portfolio
$500M of investments in global public Cleantech equities
Active use of investor governance tools to facilitate change with the portfolio companies

Next came the “Wind, Water & Solar” panel. One question posed was: is solar today where wind was a decade ago? While no one really said so, the answer appears to be yes. Solar is a large opportunity, and continues to grow at double digit rates. And water: with increased prosperity comes a demand for clean water. Population growth in the arid west continues, yet “strangely” the Colorado River has not added capacity to match. Clearly the need for clean water will offer some interesting investment opportunities. John Rockwell (DFJ Alta Terra) offered the following as interesting areas of opportunity: Wastewater treatment, water filtration, and water quality monitoring.

The discussion of “Micro and Portable Power” was fairly straightforward – battery and micro fuel cell technologies have potential, but turning technologies into cost-effective, customer-ready devices takes time. Tom Covington, CEO of Ardica Technologies, believes there will be low levels of consumer adoption of micro fuel cells by 2007-2008, but a major inflection point will not occur until 2010 or beyond. Michelle Rush, VP of Marketing at Medis Technologies, disagreed, saying consumer adoption will proceed more rapidly

“Hydrogen Economy” discussions are always interesting, and seem to fuel the most controversy. This time was no different, yet the topic has been so well covered by Rob in the past (here and here) that there is no need to regurgitate most of it. One interesting point though: when questioned, even those who believe in the future of hydrogen (and have invested to prove it) admitted that hydrogen production will continue to be a source of CO2 emissions (NG is currently the fuel of choice for production) for several decades, until renewable energy sources are efficient enough to fuel the production.

To end, the topic of Biodiesel came up several times, most notably from Martin Tobias (Seattle Biodiesel). Most if not all modern diesel cars can run on biodiesel with no modification. His point: if you can deliver biodiesel to the end user for less than you can deliver conventional diesel, the entire diesel market is open to you.