Generating Innovation

The energy sector is pretty well-known for being resistant to change, risk-averse, conservative.  One segment of the energy technology landscape that especially favors “tried-and-true” over “new-and-better” involves on-site generators, typically for standby or emergency purposes.

Scanning the most recent issue of Powerline — the periodical published by the on-site generator industry’s trade group, the Electrical Generating Systems Association — it looks pretty similar to the issues of the late 1990’s that I used to read regularly.  Indeed, I suspect that it looks like issues from when I was in school in the 1970’s, or even earlier. 

Dominated by industrial titans Caterpillar (NYSE:  CAT), Cummins (NYSE: CMI) and Kohler, the most important competitive factors in the generator marketplace are lowest first price, reliability, and service quality.  After all, the primary reason these products are bought is that they have to work on the rare occasions when they are called upon. 

Accordingly, the sector is biased towards incrementally improving upon the past, as opposed to seeking dramatic innovations.  As a result, most generators still employ diesel engines that, while substantially improved and evolved significantly, clearly show their lineage back to the mid-20th-Century.

Other considerations such as maintenance costs, fuel efficiency, emissions and noise can come into play, they are of secondary concern to most buyers of generators, who accept their limitations and disadvantages as long as they are cheap and dependable.

The other considerations listed above are stronger forces for change, and so it is not surprising that innovation in the generation sector is most often driven by those who pursue the niches that are too small for the big guys to care much about.

One such niche for has been the entertainment industry.  When shooting a movie in a remote location, electrical generating capacity often has to be brought along.  But, the on-site generators can’t be very noisy or smoky without compromising the filming (not to mention upsetting the sensibilities of the talent).

Founded in 1973 in the L.A. Basin, Multiquip has long sought to serve the generation needs of the entertainment industry.  This is not to say that the industrial titans of the Midwest (Caterpillar of Illinois, Cummins of Indiana, Kohler of Wisconsin) aren’t good companies or don’t make good products.  However, they probably didn’t fully appreciate the specific needs of customers in the entertainment business, or didn’t think the market was big enough to justify customized solutions.

Multiquip has long prided itself on extremely quiet on-site generator systems, and thus has spent a lot of time innovating on noise attenuation, insulation and exhaust technologies.  But, you can only put so much lipstick on a pig:  a diesel engine is still a pretty loud technology.

What’s much quieter?  Well, clearly solar is.  However, filming locations need megawatts of power, which would entail a massive array of solar panels.  Moreover, a lot of filming occurs at night, for which solar isn’t particularly well-suited.  (Duh.)  So, solar isn’t a great answer for the quiet on-site power generation needs of the entertainment business.

However, fuel cells might be:  Multiquip recently announced a prototype generator employing fuel cells.  This is an outgrowth of Multiquip’s efforts over the past few years to develop portable light towers operating off of fuel cells.

As those who’ve followed energy technologies for awhile know too well, fuel cells have long been seeking good entry points to penetrate the energy sector, in small bites.  Having an economic disadvantage (at least at present state of maturity), fuel cells need to seize upon the benefits that they can uniquely offer. 

One of the main advantages of fuel cells is their virtually silent operation, not to mention their low emissions profile.  As a result, after having established as solid role in the space market, fuel cell developers have been seeking to target their technologies for military applications. 

Now, it appears that fuel cells may be going Hollywood.

Eaton Gobbling Share In Smart Grid

Cleveland-based Eaton Corporation (NYSE: ETN) is rapidly becoming one of the major players in the smart-grid arena.

The big recent news, announced on May 21, was that Eaton is acquiring Cooper Industries (NYSE: CBE), one of the leading suppliers of electrical equipment.  While the largest acquisition, it’s only one of several in the last five years for Eaton to de-emphasize its historical focus on truck components.  And, the pace of Eaton’s acquisitions appears to be increasing.

Last week, Eaton announced the acquisition of Gycom‘s electrical business.  In December, Eaton acquired E.A. Pederson, a manufacturer of medium-voltage switchgear.  Last August, Eaton acquired IE Power, which makes inverters for large-scale solar and energy storage projects.

It seems that Eaton is aiming to develop a more comprehensive toolbox of equipment to sell to electric utilities.  According to this article by Greentech Media, Eaton is now “the sixth largest company in terms of smart grid related revenues, putting it alongside grid and power giants like Siemens (NYSE: SIE), Schneider (Euronext: SU), Alstom (Euronext: ALO) and ABB (NYSE: ABB).”  Not to mention, GE (NYSE: GE) and Johnson Controls (NYSE: JCI) and Honeywell (NYSE: HON).

The consensus sentiment is that the bidding for buying up pieces of the smart grid technology landscape is only heating up.  Given several deep-pocketed acquirers flush with cash, it would be a good time to be a seller.

CleanWeb: The Intersection of IT and CleanTech

For many observers, the bloom is off cleantech venture investing.  The challenges are numerous and increasingly well-known:  capital requirements are too large, the non-market (i.e., regulatory/political) forces are too influential, the incumbents are too strong, the sales cycles among risk-averse customers are too long, the technological issues are too profound. 

As reported in this posting, this negative view of cleantech venture capital is held especially strongly by Peter Thiel, one of the early principals of PayPal and a highly-influential voice within the capital markets and financial community — especially in Silicon Valley.

Oh, for the glory days of venture investing!  Where in cleantech is the next Google, Yahoo, Facebook, Microsoft, LinkedIn, Amazon?  Anyone, anyone?  Bueller?  Bueller?

A nascent movement is growing in response to this queasy inquiry.  At the center of this movement is “CleanWeb”, which focuses on the ability to harness the ever-expanding powers of intelligence for greater efficiency in physical resource management.  At the center of the CleanWeb phenomenon is Sunil Paul, the founder of Spring Ventures and a co-founder of the IT company Brightmail, which was eventually acquired by Symantec for the tidy sum of $370 million.

As Sunil and his Spring Ventures partner Nick Allen argue in this article from a recent issue of Technology Review, many of the enabling physical sciences discoveries to significantly change for the better our energy production and consumption have already been achieved.  “What hampers [them] now is poor sales channels, complex financing and incentives, and a failure to communicate with customers.  That makes them ripe for disruption by the application of IT, which will drive the next phase of cost reduction and implementation.”

More good news:  as Stanford Professor Jonathan Koomey argues in another article in the same issue of Technology Review, there’s a lot of remaining untapped upside potential in the CleanWeb.  Koomey writes that, according to some calculations by the crazy-genius physicist Richard Feynman, the energy efficiency of computing theoretically could improve by at least four more orders of magnitude from today’s levels, and it appears that the trajectory of improvement is a factor of 100 every decade.  So, we’ve got a long way to go. 

Or, put another way, as Koomey does:  today, the world’s most powerful computer (the 10.5 petaflop Fujitsu K) consumes a whopping 12.7 megawatts — an entire town’s worth of power — but a similarly capable machine two decades from now would consume as much electricity as a standard household toaster.  If you doubt that this degree of improvement can be achieved in 20 years, Koomey notes that today’s MacBook Air — if operated at the efficiency of 1991 computers — would fully discharge its battery in merely 2.5 seconds.

Sunil, Nick and their confederates have been organizing a series of regional CleanWeb Hackathons, bringing together information technology professionals to develop new code for “optimizing resource use and accelerating cleantech development.”  The first hackathon in (you guessed it) San Francisco last September was said in this article by GigaOM to have drawn 100 participants and resulted in 14 cleanweb applications.

The space of CleanWeb is pretty broad.  In our venture capital firm, Early Stage Partners, we’re seeing an increasing number of software-based business plans that – whether directly or tangentially – result in lower consumption of energy, and correspondingly lower emissions.  You could call any of these “CleanWeb”. 

One of ESP’s portfolio companies — Cleveland-based LineStream Technologies, spun-out from Cleveland State University by licensing the control systems innovations developed by Professor Zhiqiang Gao — clearly fits the CleanWeb category, as its proprietary algorithms enable much better management of both industrial and consumer applications.  This improved management usually results in lower energy consumption, and the reduction in energy consumption translates to lower costs, which is virtually always a good thing for prospective users.  The environmental benefits of lower energy consumption are nice, but incidental.

These CleanWeb business models often aren’t subject to the litany of challenges listed at the outset of this posting:  capital-intensity, regulatory impediments, incumbent opposition, long sales-cycles, or challenging physical innovations.  Accordingly, they may be relatively well-suited to venture capital investment approaches – more so than pushing for the next breakthrough in batteries, solar energy, fuel cells, wind, biofuels, nuclear or other cleantech sector involving a physical discipline.

A complaint leveled by some observers — such as in the closing paragraphs of this report by one of my favorite cleantech writers, Eric Wesoff of GreenTechMedia, on Thiel’s diatribe against cleantech venture capital — implies that CleanWeb investors are too wimpy.  The thinking seems to go that venture capital practices developed from investing in software start-ups just can’t handle the big/tough but necessary challenges of cleantech.  The CleanWeb innovations on which such investors are focusing, while nice, may be just “cherry-picking”, and not truly transformative.

Perhaps.  However, I would argue that the primary role of private capital is to make good returns, period.  Most investors don’t place their money in the hands of others (i.e., venture capital firms) to effectuate social change, no matter how desirable such change might be.  Venture capitalists can’t afford to break their picks fighting fights that they can’t win, or would have to spend inordinate amounts of capital in order to win.

Those battles need to be fought not by investors but rather by participants in the arenas of politics and laws.  Those battles set the rules of the game, within which investors and competitive market actors subsequently play.  

In my view, the rules of the game are in many ways stacked against those of us active in cleantech, and it is entirely appropriate to seek — in a fair and just manner — to change those rules.  But, it is unreasonable to expect professional investors to deploy capital imprudently, flying in the face of unfavorable rules. 

And, it is unreasonable to expect professional investors to be able to dedicate more than a modest portion of their time or effort in the public debates.  Their investments, and their investors, properly demand the majority of their attention.

In contrast to many investment opportunities in energy supply or storage technologies, CleanWeb faces minimal headwinds.  It may well be lamentable that renewable energy faces stiff headwinds, some of which may stem from outdated or inequitable rules, but that sentiment doesn’t change the harsh realities.

Virtuality does have its virtues.