Water: The Big Issue for Fracking

On February 13, the Cleveland office of the law firm McDonald Hopkins hosted a panel to discuss the pivotal water issues facing producers of oil/gas from shale via fracking.  In addition to three MH attorneys, the panel also included Jeff Dick (Director of the Natural Gas and Water Resource Institute at Youngstown State University), Samuel Johnson (Director of Water Asset Development for CONSOL Energy (NYSE: CNX)), John Lucey (EVP of Business Development and Engineering for Heckmann Corporation (NYSE: HEK)) and Sudarshan Sathe (President of Water and Wastewater Equipment Co.)

I took away three main observations from the panel discussion.

First, it’s important to keep in mind the distinction between produced water and flowback water.  Flowback water includes all of the fluids used in the fracking process to initially stimulate oil/gas production.  Produced water is defined as the flows associated with ongoing oil/gas production long after the fracking is complete,  as has long been the case with all conventional oil/gas wells that never required fracking, since all oil/gas production usually contains a sizable fraction of water.  The water treatment issues for flowback waters and produced waters are thus different.  In particular, flowback waters are contaminated by the proprietary ingredients that fracking operators want to protect for competitive advantage, whereas produced waters contain loadings of the minerals that leach out from the particular oil/gas bearing shale strata being tapped.

Second, as significant as the challenges are for treating the water resulting from fracking operations, sourcing the quantity of water from fracking operations may be even more challenging.  Simply, fracking operations require enormous quantities of water.  While the voluminous Great Lakes would seem a natural supply basin, the Great Lakes Basin Compact signed a few years ago by the jurisdictions within the Great Lakes Basin precludes transporting Great Lakes water outside the basin — and while the Marcellus and Utica shale plays are not far at all from Lake Erie as the crow flies, it nevertheless so happens that they generally lay outside that basin.  Thus, fracking operators in the Marcellus and the Utica have to get their water from somewhere else.

Lastly, for a company that is historically rooted in the coal industry, CONSOL comes across as highly progressive.  Among other eyebrow-arching comments, Mr. Johnson argued that environmental regulations associated with fracking operations needed to be tighter than they currently were simply to drive further technological advancement — existing practices just weren’t good enough.  I leaned over to a colleague and said that either (1) Mr. Johnson is out of step with his management, (2) CONSOL was outstanding at “greenwashing” with convincing public relations messaging, or (3) the company is genuinely trying to differentiate itself from many of its peers.

The panel was timely:  just a week prior, in an appallingly flagrant disregard of environmental law, a renegade operator in Youngstown called Hard Rock Excavating was caught by regulators dumping untold tens of thousands of gallons of untreated wastewater into the Mahoning River (which drains into the Ohio River).  The principal of the operation, a Mr. Ben Lupo, is subject to up to three years in prison and up to $250,000 in fines if convicted of violating the Clean Water Act.

(Oh, by the way, even though he was only just recently caught red-handed, this event doesn’t appear to have been the first for Mr. Lupo, who seems to have a long history of illegal water dumping, according to this article by the Vindicator.  Not to mention, Mr. Lupo also owns and operates another company, D&L Energy, which was responsible for the injection wells thought to have triggered the seismic activity in Youngstown in late 2011.  It’s almost as if Mr. Lupo is waging a one-man public relations demolition derby for the industry.)

My guess is that everyone on the panel, and presumably in the audience, would be in favor of strict punishment for Mr. Lupo, assuming that his guilt is confirmed.  Not only are the environmentalists up in arms, the panelists and others who seek to pursue fracking in the Marcellus and Utica shale know that they can’t afford many bad black-eyes like the one(s) wrought by Mr. Lupo’s apparent disregard for good practices.

Water’s just too important for the fracking business not to handle wisely.

The Powerful Capabilities of AEP’s Dolan Labs

Thanks to the efforts of Chris Mather, co-head of the Tech Belt Energy Innovation Center, I was able to gain a tour of the Dolan Laboratories, located just outside Columbus, owned and operated by American Electric Power (NYSE:  AEP).

This facility is now highly unusual for the electric utility industry.  Back in the day, a few other utilities had their own laboratories to test the basic equipment upon which the power grid is based.  Alas, most of those laboratories have since been shut down or spun-out to private operators.  Indeed, now even the Electric Power Research Institute – the industry’s collective non-profit R&D organization – sometimes uses Dolan for their work.

The labs at Dolan include chemical and water testing facilities and civil engineering (especially related to concrete) capabilities that are mostly relevant for powerplants.  However, our tour was mainly focused on the Dolan Technology Center:  the set of facilities and equipment employed for testing assets downstream of generation, particularly transmission and distribution.

Electric power transmission and distribution lines look pretty benign, given the lack of moving parts.  However, the forces in (and around, and caused by) these cables are, well, shocking.

At Dolan, AEP has the ability to discharge 1.2 megavolts, which creates something not far removed from a lightning bolt.  In addition to electrical energy, the labs have physical equipment inside containment rooms that can impart extreme mechanical forces to push supporting items like conductors and mounts to their breaking points.  The resulting explosions unleash shrapnel much like a hand grenade.

Trust me:  do not try this at home.  I won’t get into any specifics, but the stories associated with working on grid infrastructure – usually when something is not right, often in difficult environmental conditions (night, rain, snow, wind, cold, heat) – are sobering.

A key function of Dolan is to quality check the supplies that AEP receives from its vendors before deploying to its grid, where failures harm service reliability, pose safety risks and are expensive to repair.

To illustrate, our host Bob Burns (Manager of the Dolan Technology Center) showed us how Dolan has been working to improve underground distribution cables.  Twenty years ago, due to the novelty of the technology, AEP rejected upon receipt about 5% of its underground cable purchases owing to unknown defects.   Dolan was able to identify the root causes of cable failure and work with manufacturers to dramatically reduce those failures by changing designs and production processes – with economic, reliability and safety benefits that redound not only to AEP but to the power industry at large.

In addition to its grid focus, the Dolan Technology Center also includes a number of end-use application testing facilities.  For instance, the main facility includes a dummy household kitchen containing a number of appliances (stoves, refrigerators, dishwashers, water heaters) and control systems, a spectrum of electric vehicle recharging stations, and various installations of advanced lighting and metering technologies.

Although we spent most of the tour indoors, outside were some other uncommon capabilities.  Down the road a half-mile was a former site of a small peaker powerplant, at which Dolan staff experiments with novel technologies relevant for microgrids, including grid-scale energy storage and small-scale distributed generation.  It was here that Dolan has been helping Echogen with their innovative waste heat recovery technology, and it is here that the Dolan is testing community energy storage approaches for AEP’s GridSmartOhio pilot program to be rolled out in suburban Columbus.

It should be noted that AEP contracts out Dolan’s equipment and staff to perform services on behalf of third-parties, and that they have ample spare capacity.  Facilities like this are not found in very many places.  It’s an asset that the cleantech community should capitalize upon more fully.  If you need some specialized technical help related to the power industry – especially in on high-voltage issues – and you’re not able to find a place to get work done, I’m sure the good folks at AEP’s Dolan Laboratories would be happy to take your call to see if they can fit the bill.

Student Cleantech Entrepreneurship in the Buckeye State

On January 29, I spent a day inside a ballroom on The Ohio State University campus in Columbus serving as a judge for the Ohio Clean Energy Challenge, presented by the University Clean Energy Alliance of Ohio and NorTech.  This contest pitted student teams from universities and colleges across Ohio pitching their clean energy business plans, in the hopes of winning $10,000 and advancing to the next step in the National Clean Energy Business Plan Competition conducted by the DOE.

Twelve teams vied for the prize.  Perhaps not surprisingly, reflecting the strong agricultural heritage of the Buckeye state, several of the contestants had a strong biomass or agricultural bent to them.  Somewhat surprisingly, given the thin-film solar capabilities so strongly embedded in the Toledo area, no photovoltaics concepts were promoted.

The winner of the event was Amplified Wind Solutions (AWS), a start-up venture commercializing a technology born in the laboratories of Prof. Majid Rashidi at Cleveland State University (CSU).  As the name connotes, Prof. Rashidi’s technology is an innovative concept for wind energy generation:  using cylindrical towers as a means of channeling higher velocity and higher density wind flows to turbines mounted on the sides of the towers in the zones where the wind has been “amplified” by the tower.  The claim is that such amplification can yield 4-6 times as much energy capture from the wind as a comparable “unamplified” wind turbine.

A “Gen 1” version of Prof. Rashidi’s technology is visible on the CSU campus off of Chester Street, and a “Gen 2” version of the technology is even more visibly deployed atop the right field corner of the home park for the Cleveland Indians, Progressive Field.  AWS has a Gen 3 design up its sleeve that it aims to develop, offering greater simplicity and robustness at a lower manufactured cost.

A key reason underlying the victory of AWS was the strength of the presentation made by its CEO, Niki Zmij.  As is evidenced from this video, Ms. Zmij, an MBA student at CSU, was passionate, clear and confident in her pitch.  Certain other teams were touting very interesting technologies that could be winners in meaningful markets – although their chances for commercial success were far less well-articulated.

Those teams that didn’t win shouldn’t necessarily be discouraged.  It should be noted that AWS missed the cut in the prior year’s challenge, and has subsequently been polishing its story for a year.  With additional time and effort to refine their stories, success may come to the runners-up in future years.  Stay tuned.

Meanwhile, AWS goes to Chicago on April 4 to compete in the Midwest regional section, being convened by the Clean Energy Trust, aiming to win a $100,000 prize en route to the national finals in June 2013.

All told, I was extremely impressed and encouraged by the commitment to cleantech entrepreneurship being demonstrated by so many of today’s students and tomorrow’s future leaders in Ohio.  I sat humbled in the awareness that I, at a similar age 30 years ago, could not possibly have stood in front of a sizable audience baring my soul by promoting an uncertain business proposition – nor even to have such a risky aspiration as pursuing a professional path that didn’t involve someone paying me a safe salary.

It’s a far different world today, indeed.  And a good thing, too.

EPRI’s View on Emerging Technologies

Writing in the January issue of POWER magazine, Arshad Mansoor (Senior Vice President of Research and Development at the Electric Power Research Institute) authored an article entitled “Emerging Technologies Enable ‘No Regrets’ Energy Strategy” to provide a soup-to-nuts vision of the future technology landscape for the electric power industry.

I don’t know that it’s possible that any player in the challenging U.S. electricity sector can pursue a path that is truly “no-regrets”, and it’s not easy to cover the gamut of technology possibilities of such a complex industry in one relatively brief article.  However, Mansoor’s essay does at least provide some visibility on the broad technology trends of the future, and lays out a taxonomy to consider the panoply of technologies that electric utilities will be facing in the years to come.

Mansoor begins by singling out the three key drivers facing the industry that imply “unprecedented change in the industry over the next 10 to 20 years — more change than in the previous 100 years”:

  1. The availability of natural gas and its increasing role in power generation.
  2. The expanding role of renewable generation.
  3. Technology challenges to reducing carbon dioxide, mercury and other emissions.

As an implication of these three forces at work, Mansoor outlines three categories of technologies that collectively represent a “no-regrets” approach:

  1. Flexible resources and operations.  This spans a variety of technologies to enable both the power grid and power generating sources to better accommodate the inherent variability of demand and an increasingly variable supply base in an uncertain world.  The range of technologies include energy storage, demand response, advanced transmission (e.g., HVDC, FACTS), improved software (for planning, forecasting and operational management), and fossil/nuclear powerplant operational flexibility.
  2. Long-term operations.  This seems to be centered on a variety of robotic technologies to improve the ability for utilities to remotely and efficiently monitor asset conditions and anticipate failures before they happen.
  3. An interconnected and flexible delivery system.  This covers a swath of technologies for power distribution and utilization under the umbrellas of “smart energy”, “grid resilience”, and “consumer-focused technologies”.  Smart energy covers standardization of communications protocols among the various devices on the grid, while capitalizing on the trend towards “big data”.  Grid resilience acknowledges the increasing concerns about security from man-made and natural disasters, with technologies ranging from unmanned aerial vehicles for damage assessment to using plug-in electric vehicles as a power source in the event of emergencies.  Consumer technologies acknowledges the trend towards ubiquity of the always-connected customer (not to mention utility employee), envisioning apps on smartphones and tablets to modulate or activate just about anything on the grid — from specific equipment at a powerplant or a substation to a particular light fixture at a house.

Alas, I think there are some gaps in this overview.  As a primary example, after acknowledging the prospect of tightening environmental regulations, Mansoor barely mentions air or water pollution control technology opportunities that electric utilities may need to consider — and it’s not clear where in his three categories such technologies would even fit.

So, I view Mansoor’s article as a good first starting point in developing a holistic perspective on the future of the electricity sector and how new technologies will reshape it.

It will be interesting to see if the industry evolves as much and as quickly as Mansoor asserts.  As one electric utility executive said to me and some colleagues many years ago, “no major innovation has been widely adopted in this industry unless and until it was essentially required by regulators.”  His point was that utilities are mainly judged by reliability and cost — and new technologies usually (at first) represent risk and entail higher cost than the status quo.  So, why exactly would utilities adopt something new?

I would like to hear EPRI’s take on why it believes that the electricity industry will change more in the next few decades than over the past century, especially given the dire political and economic situation facing the U.S. and the associated regulatory stalemates that are likely.  Perhaps Mansoor or his colleagues can write a follow-up article to address this very important question.

Goldman, The Contrarian?

“I’m a contrarian, so when everyone else is capitulating, I think it’s time to invest.”

So says Stuart Bernstein, the partner in charge of cleantech at Goldman Sachs (NYSE:  GS), in this recent article about the ending slump of renewable energy financing.

“It feels like the worst is behind us…The market appears to have troughed in the fourth quarter of last year and several sectors have rallied meaningfully since then.”

At least Stuart himself and Goldman as a firm have reason to be bullish.  As the article reports, data from Bloomberg New Energy Finance has Goldman overtaking the top spot among investment banks in renewable energy stock offerings during 2012, with $405 million underwritten.

To be fair, it must be said that this represents resumption of leadership in a shrinking pie:  according to this companion article, global clean energy investment fell by 11% in 2012 relative to the prior year.

And, it must also be noted that Bernstein had more or less the same message almost a year ago, in his comments to the Cleantech Forum in San Francisco last March, when it was reported by Ucilia Wang of GigaOM that he said that cleantech “was certainly in the recovery period.”

In Bernstein’s favor, the long-term dynamics remain positive, whether or not we’ve hit bottom in the short-term.  “We have a growing global population coupled with an increasing per capita consumption of energy, while fossil resources are finite and shrinking.  How can one not consider clean energy and renewable alternatives?”

Let’s hope Bernstein is right.  I think he’s right.  But then again, I’m a contrarian too.

 

Batteries Are Hot! (Just Ask Boeing)

Boeing (NYSE: BA) may soon be on the verge of renaming its new 787 the Nightmareliner…

After a prolonged development program and costly production delays, Boeing started delivering its latest state-of-the-art airplane just 15 months ago, three years behind schedule.  Although the company has a lucrative backlog of nearly 800 787s on order, worth roughly $200 billion in revenues, production rates have been limited, as only 50 units have been delivered in a little over a year.

Alas, opening the production floodgates is not likely to happen just now.  In early limited service with a few airlines, the 787 is causing Boeing and its customers major headaches.  Thankfully, no-one has been injured, but a number of high-profile malfunctions have caused significant operational issues.

None has been worse than last week’s emergency landing in Japan, prompted by a burning smell in the cockpit.  This followed closely on the heels of an on-the-ground fire in Boston the previous week, upon which one aviation observer noted:  “Onboard fires on airplanes are as bad as it gets.”

These two incidents in close sequence produced a “That’s It!” moment, wherein all the aviation authorities worldwide put their collective feet down and issued orders to ground all 787s until the deficiencies have been identified and resolved.  There hasn’t been any similar draconian action in over 30 years, since the grounding of all DC-10s after the disastrous American Airlines 191 crash on takeoff at O’Hare in May 1979.

The most critical problems for the 787 all seem to relate to the batteries on board the plane.  The 787 design uses lithium-ion batteries made by GS Yuasa (6674) for many more functions than most airliners in order to maximize fuel efficiency.

Used in consumer electronics and electric vehicles, lithium-ion batteries are desirable because of their high energy/power density.  Simply put, they are very powerful for their size and weight — and in an airplane, size and weight matter a lot, especially when fuel efficiency is the goal.

Unfortunately, directly related to their high energy/power density, lithium-ion batteries are known to get hot.  Thermal management is critical, or else lithium-ion batteries start bulging and leaking electrolyte, which is highly corrosive.  Moreover, if the batteries don’t start bulging and leaking in response to increasing temperatures, a far worse fate could potentially arise:  explosions and/or fires.

This is not news.   A few years ago, Hewlett-Packard (NYSE: HPQ) settled a class action lawsuit involving burning laptops caused by lithium-ion battery fires.  Indeed, these experiences with lithium-ion batteries caused some to wonder if their use should be banned from airplanes for safety reasons.

Given this history of potential concern, you would think that Boeing would have moved heaven-and-earth to ensure that any lithium-ion battery on the 787 couldn’t experience a comparable problem.  Indeed, according to this article, Boeing engineers attest that the battery design now in use in the 787 was tested for a cumulative 1.3 million hours without failure.

It may not be easy to diagnose and solve a problem that hadn’t surfaced in 1.3 million previous hours.  Worryingly for all involved, GS Yuasa thinks it may take months to get to the bottom of the issues.

Two dissimilar reports over the weekend offer some hope for the principals that the solution will be sooner rather than later.  One story hinted that the battery problems may be confined to one batch of production.  Another story indicated that the two toasted batteries had been fed excessive voltage by their power supply system — a problem that perhaps could be resolved more easily.

Even if it’s a short hiccup, this is exceptionally costly to Boeing.  Not only is Boeing likely to have to cease new 787 production causing further delivery delays, face compensatory payments to airlines for their hardships, and incur increased costs in implementing whatever fixes are necessary on completed and already-in-the-queue units, but the potential credibility damage is enormous, even if unquantifiable.

For a company rooted in commercial aviation, nothing is more important than its safety reputation, which Boeing has built so superbly for nearly a century.   (“If it ain’t Boeing, I ain’t going.”)

At least three implications emerge from this escapade for the cleantech world:

  • Early adopters of new technologies in mission-critical application with large attached liabilities will be highly risk-averse.  The economic advantages afforded by improvement have to far outweigh the possible consequences of failure.
  • Lithium-ion batteries take another kick in the stomach.  As this posting by John Voelcker suggests, it will also hit the cause of electric vehicles, rightly or wrongly.
  • Battery technology still needs a lot of work — either to improve lithium-ion batteries or to develop commercially-viable substitutes with similar energy/power density.  Here is a recent posting by GigaOM blogger Katie Fehrenbacher entitled “13 Battery Startups to Watch in 2013.”

Why is it So Hard to Make Money in New Battery Technology?

Energy storage is still the rage in cleantech.  But after the collapse of A123 and Beacon, and the spectacular failure on the Fisker Karma in its Consumer Reports tests, fire  in Hawaii with Xtreme Power’s lead acid grid storage system and with NGK’s sodium sulphur system, and now battery problems grounding the Boeing Dreamliners, investors in batteries are again divided into the jaded camp, and the koolaid drinker camp.   Not a perjorative, just reality.  New batteries and energy storage is still one of the juiciest promised lands in energy.  And still undeniably hard.  Basically, investors are relearning lessons we learned a decade ago.

Batteries are just hard.  Investing in them is hard.  Commercialization of batteries is hard. So why is it so difficult to make money in new battery technology?

Above and beyond the numbers, there are a number of commonalities related to the commercialization and venture financing life cycle of battery technologies that seem to differ to some degree from other venture investments in IT or even other energy technologies.  Having looked at probably 100+ deals over the years, and on the back of an deep study we did a couple of years ago on benchmarking valuations in energy storage, here’s our take on the why.

Timing – Battery technology commercializations have historically tended to be one of the slower commercialization cycles from lab stage to market.  Startups and investors in batteries have a long history of underestimating both the development cycle, capital required, and the commercialization cycle, as well as underestimating the competitiveness of the market.

Special chemistry risk – There is significant risk in launching a technology in newer battery chemistry.  There have been only a limited number of new chemistries succeed, and when they do, as in the case of NiMH and Energy Conversion Devices, they are typically either co-opted by larger competitors obviating a first mover advantage (that advantage is typically much weaker in this field than others) or requiring expensive patent suits.  Also as in the case of NiMH, there is no guarantee the chemistry will have legs (just when it is hitting its stride, NiMH is already becoming eclipsed by Li-On.  This risk has proven to be especially high for new chemistries (like Zn type) that are not as widely researched, as the supply chain development does not keep pace.  In addition, the battery field is highly crowded, and research is old enough that and despite new chemistry in most cases truly defensible patent positions are extremely hard to come by, or provide only discrete advantages (ability to supply a range of quality product cheaply in high volumes (or with value add to the product) seems to be the primary competitive advantage).  Few battery technologies of any chemistry end up their commercialization cycle with anywhere near as sustained an advantage as their inventors expected.

High capital costs – In any case, almost all battery startups will require extremely large amounts of capital (on the order of US$50 to 100 mm+) to achieve commercialization (much higher for real manufacturing scale), and the end product margins tend not to be particularly high.  Even with stage gate, a very large portion of this investment (US$10-50 mm+), is generally required to be spent while the risk of technical and economic failure is still high.  In addition, during the manufacturing scale up phase post R&D, capital investment required per $1 of revenue growth tends to be linear, making these technologies capital intensive to grow.

Degradation of initial technical advantage – In many technology areas one can expect the performance of the final manufactured product to improve over the performance in initial lab results, In part because of the low cost target, high reliability, high volume requirements of this product type however, promising battery technologies, are often forced to make compromises in the scale up, manufacturing, and commercialization stages that mean the performance of actual product might be expected to fall from levels or rates seen in lab scale experiments (though cost may go the other way).    At the same time, battery performance of standard technologies, while mature, is a moving target, and during the time frame for commercialization, will often improve enough to obviate the need for the remaining technical advantages.

Size matters – Most battery products (whether batteries or components like anode or cathode materials or electrolyte), are sold to large customers with very large volume requirements, and highly competitive quality and performance requirements.  As a result, breaking into new markets generally is extremely hard to do in niche markets, and means a battery startup must prove itself and its technology farther and for a longer period of time than other technology areas (see capital costs, timing and down rounds).  Many battery components technology developers as a result will be relegated for early adopters to emerging customers with high risks in their own commercialization path.

Lack of superior economics from licensing – As a result of these size, capital cost, timing, and commercialization risk issues most battery technologies will command much lower and more short-lived economics than anticipated from licensing (or require expensive patent lawsuits to achieve), and will require almost as late a stage of development (ie manufacturing operating at scale with proof of volume customers) and commensurate capital requirements, as taking the product to market directly.

Propensity for down rounds – In addition, battery technology companies tend to have down rounds in much larger numbers in the post A rounds (Series B through D+) than other venture investment areas, as these challenges catch-up to investors and management teams who overestimated the scope of work, capital and timing required in the seed, A and B rounds.  In particular, battery investors have tended to invest in seed, A and B stage battery technologies (pre-scaled up manufacturing process or even lab and prototype scale) with expectations of typical venture style timing and economics.  Quite often instead, it is the B, C, or D investor group that post cram-down rounds achieve the Series A economics (even when the technology IS successful), and the seed, A and B investors suffer losses or subpar IRRs.

How To Fail In Cleantech

The transition to cleantech – some would call it a revolution – inevitably entails change, which implies risk.  In turn, this implies that some things will fail.

We’ve already seen more than a few failures, and we’ll no doubt see many more.

As long as the successes outweigh the failures, that’s all that ultimately matters.  Indeed, sometimes failure actually enables later successes.

As Thomas Edison has been quoted, “I have not failed.  I’ve just found 10,000 ways that won’t work.”  And, then finally — ta-da! — he discovered an approach that worked for the incandescent lightbulb, thereby changing the world forever.

But, sometimes failures can get in the way of success – particularly, if they’re the wrong kind of failures.

Edison failed quickly, cheaply and – perhaps most importantly – invisibly.  Some of cleantech’s most painful failures have been anything but.

Consider two prominent examples:  Solyndra and A123.  The technologies being developed by the two companies actually work well enough, but couldn’t compete effectively in the marketplace.

The management teams and the backers of these companies promised great things with premature hype in innumerable press releases.  The companies blew through lots of capital – including substantial government funding.

Then, they fly off the cliff and go bust, and the media and blogosphere — much of which is adverse to cleantech — report their demises with barely-hidden Schadenfreude.

OK, so it’s not like a mass shooting spree:  no-one got killed in these failures.  But equity holders lost every dollar, creditors took a deep haircut, taxpayer money was wasted, and pretty much everyone active in the cleantech sector gets tainted by extension.

As bad as economic failures, worse is when technologies fail because they simply don’t work.

The earliest windfarms of the mid-1980s in California became an eyesore of inoperative machinery, because the turbines were deployed in mass quantity before many engineering and manufacturing problems had been fully resolved.  In the wake of this debacle, the U.S. wind industry took more than a decade to recover.  By the time wind energy had regained credibility in America, European wind turbine manufacturers dominated the market.

These visions returned to me during a recent trip to Oahu, where my lodging provided me an ongoing view of the Kahuku windfarm standing idle in the face of a week of strong trade-winds.  My first thought was a serial failure of the turbines – a relatively new 2.5 megawatt design from Clipper, a manufacturer with known technical issues.

However, as this report indicates, the root cause of the shutdown was unrelated to the wind turbines, but rather some problem with a set of grid-scale batteries being developed by Xtreme Power, and being piloted at the site to test the ability of such batteries to buffer the variable output of a windfarm.  The pilot deployment had caused not one but three fires somehow involving the interconnection between the windfarm and the Hawaiian Electric grid, thus causing the windfarm to be idled while sorting out the battery issues.

Why weren’t these batteries tested in smaller scale and in a less obvious setting?  Not only is the image of Xtreme Power (and grid-scale energy storage) being adversely affected, the long shutdown of Kahuku is dampening enthusiasm for wind energy in Hawaii.

It is these kinds of visible economic or technical failures that give the cleantech sector a black eye.   The bad reputation diminishes civic goodwill, support for favorable public policies, and appetite for private capital to be allocated to the sector.

Unlike Edison’s failures, largely unnoticed by the rest of the world while he returned again and again to the drawing board, visible cleantech failures are distinctly unhelpful.

Such episodes are very painful for those of us on the sidelines working humbly to maintain forward progress in spite of the setbacks that inevitably occur in this long and challenging cleantech transition.

In the venture capital world, it is axiomatic to fail fast, so as to minimize capital at risk.  For cleantech, this adage should be modified:  fail fast, and stealthy.

The implication:  cleantech ventures — and their investors — are well-advised to maintain a low profile for a long time, until their success is reasonably assured.  It’s far better to underpromise and overdeliver than vice versa.  Humility is essential.  Premature bragging is very easy to eviscerate by the pundits hungry for a tussle when things later go bad.

The more that cleantech entrepreneurs can avoid shooting themselves in the foot when the spotlight is on them — first and foremost, by not encouraging the spotlight to be shined upon them — the better.

Is the Avis / ZipCar Acquisition Green?

I am selling my little Honda in California, since I moved to Texas two years ago, I left a car in San Francisco to drive when I’m here.

So I’d been looking into getting car share.  Absolutely loving the concept, been trying to figure out if it is a better deal for me than renting when I come out.

So when Avis dropped half a billion dollars on ZipCar, I was pretty intrigued.  Which raised the question, does this count as a cleantech or green exit?

I mean, I’ve rejected the “IT services instead of flying argument” making web conferencing services a product green, something I used to get emails on from marketers all the time.

Zipcar’s a little like that.  Are fewer miles actually driven?  Less gas used?

How about fewer cars bought?  Is Zipcar actually replacing cars?  Or adding cars and increasing miles driven by bringing new drivers into the fleet, or making some time drivers into more of the time drivers and reducing public transit use?  I’m not sure that car rentals like Avis don’t increase the number of vehicles and maybe even miles per person in the US.

When does efficiency and better shared services instead of capital expenditures become green, and not just a good deal?

Energy Cache: Avoiding Cleantech’s Catch-22

Recently, I came across this very interesting thought-piece, “Cleantech Marketing Isn’t IT Marketing”, written by Aaron Fike, the founder and CEO of Energy Cache.

Energy Cache has developed a rather unusual energy storage technology.  As described here, Energy Cache is offering a solution that is a hybrid of ski-lifts and mining technology, hauling gravel in buckets to the top of a hill.  An offshoot of pumped hydro, Energy Cache consumes electricity during off-peak hours (when electricity is cheap) to lift the gravel, and allows the gravel to fall in the buckets, exploiting gravity to power a generator during peak hours (when electricity is much more valuable).

As Fike notes in his recent commentary, Energy Cache has been the butt of jokes among certain of its peers for its less-than-high technology approach to solving one of the more important needs facing the energy sector:  an effective grid-scale storage approach that enables more power to be generated from intermittent wind and solar energy sources.

In contrast to Energy Cache, Fike worries that a number of other cleantech businesses “don’t follow the traditional ‘early adopters/early majority/late majority’ model made famous by Geoffrey Moore, and before that, by Everett Rogers.  Instead, with the siren song of the cleantech market being the sheer size of the potential market, most firms position themselves to enter the market by skipping the early-adopters phase, because there is no early-adopters phase.”

Fike continues:  “What happens instead is that a company will build a reasonably sized demonstration…and the next attempted step is a [twenty times bigger] plant, with no reasonable path in between.  The problem with that step function is that it is nearly impossible to deliver on [because it] requires hundreds of millions of dollars in debt and equity – financing that won’t come without a well-proven track record of performance…Customers and financiers all want to be first in line to back the third major installation…The vicious Catch-22 of ‘You can’t get funding until it is proven; you can’t prove it without funding’ is incredibly strong.  Nobody wants to be first.”

To avoid this conundrum, Fike says that Energy Cache consciously looked to develop a business that involved as little technology risk as possible.  “When I founded the company, I felt that the biggest problem facing clean technology companies was the marketing and financing problem discussed above, not the technology problem.  I set out to come up with a solution which used components from proven industries that we could point to, reducing uncertainty about lifetime, performance, and cost.”

At the conceptual level, without passing judgment on Energy Cache specifically, I think what Fike asserts so far is absolutely terrific, though I disagree with Fike when he later states that “the implicit demands of the investment community and the government finance community are for cool, breakthrough, technology-focused solutions.”

Well, I can’t speak for the “government finance” (i.e., hand-out) community, but as a card-carrying member of the investment community, I can unequivocally state that I (along with many others I know) really don’t care how wonderful a technology is if it can’t make any money.  I also really don’t care how mundane a technology is if it makes good money.  I am eager to find a boring unsexy investment opportunity that translates to profitable rapid growth with a high-value exit.

That being said, it is usually the case that a high-value exit is only achieved for companies that offer something proprietary — which in turn usually involves technology protected by both issued patents and trade-secret know-how — that prevents other companies from copying the formula for success.  This is more often applicable to advanced technologies, though it certainly can apply to low-tech as well.

Maybe Energy Cache has found a technology that offers the ideal combination of proven simplicity and defensible competitive advantage.  For many cleantech companies based on more ambitious technologies, Fike closes with a pithy forecast of the unpleasant fate ahead:

“Technology and IT market innovators and early adopters love new technology and are willing to take technology risk to adopt new products.  Regulated energy and utility markets do not like, and in some cases are forbidden from, taking technology risk.  To grow a cleantech company without recognizing these facts will result in a very painful impact with a very high brick wall.”

However sobering, this advice is a good reminder for all of us working in the cleantech realm to reflect upon periodically.

A Crystal Ball for 2013

Happy new year everyone.  As we reflect upon the year now past us, it’s also that time of year to look ahead.

For the cleantech sector, Dallas Kachan from Kachan & Co. recently put his neck on the line with his “Predictions for Cleantech in 2013”.  It’s a good read, well-reasoned.  The sound-bite version:

  • Cleantech venture capital may never again reach the heights (at least in terms of dollars invested) of 2011.  As Kachan notes, and I concur, that’s not necessarily a bad thing.  It just means that capital-inefficient deals that used to attract VC dollars won’t so much in the future.  And, it means that a lot of ineffective cleantech VCs will be washed out of the sector.  Moreover, other sources of private finance – especially corporates, but also family offices and sovereign wealth funds – will step in.
  • The solar and wind sectors face increasing challenges because grid-scale energy storage technologies aren’t coming to the fore as expected.  Dispatchable power sources with lower emissions will gain ground.  This is especially the case for natural gas, but Kachan controversially also sees a growing role for new nuclear technologies.
  • Clean-coal technologies become less oxymoronic.  Great quote here:  “No, clean coal doesn’t exist today.  But that doesn’t mean it shouldn’t.”  Kachan claims to have visibility on some promising new technologies in this realm.  Personally, I’m a little skeptical – I’ve heard such things many times before – but I’d be glad to be wrong.
  • Significant improvements are afoot for internal combustion engines, further stifling the advent of electric vehicles (EVs).  I agree with Kachan that a lot is being undertaken to improve the old piston engine.  Those innovations being pursued by tier one auto suppliers have a fair chance of quick adoption.  However, a lot of the potential breakthroughs I’ve heard about are being explored by venture-backed start-ups or garage-tinkerers, and I am less optimistic than Kachan appears to be that these companies can make large inroads into the incredibly demanding automotive supply chains within a year.
  • Mining and agriculture will become more important segments of the cleantech sector.  Especially with respect to agriculture, I agree with Kachan wholeheartedly, as increased corporate venture activity is beginning to burble in such stalwarts as Monsanto (NYSE: MON), Syngenta (NYSE: SYT), and Cargill.

Though I haven’t gone back to review his track record, Kachan claims a good history of prognostication from recent years.  I think many of his views for the near-future are justified and hence likely (if not for 2013 then more generally for the next couple of years), but he’s thrown in enough unconventional wisdom to make things interesting.

Let’s make 2013 a good one, shall we?

A Dose of Lithium

For those who want an overview of the current state of the lithium-ion (Li-ion) battery sector, the fall 2012 issue of Batteries International is just the thing.

It’s not a pretty picture that’s painted.  Beyond the well-publicized bankruptcies of A123 and Ener1, the general sentiment espoused is that players in the Li-ion sector face tough days ahead.  The technology is not improving rapidly enough, its costs are not coming down fast enough, and markets for its adoption are not growing as robustly as expected.  Meanwhile, too much capital has been invested in too much manufacturing capacity.  Inevitably, one must conclude that further shakeout is ahead.

The most data-laden article in the issue concerns the prospects for Li-ion batteries in electric vehicles (EVs).  In “The Battery Revolution That Stalled”, author Lynnda Greene summarizes four recent research reports – from McKinsey & Company, Pike Research, Lux Research, and Bloomberg New Energy Finance – that all provide projections for a long and slow (rather than short and steep) glide path of cost declines.  For EVs to make good economic sense, it is generally held that batteries need to be in the $150/kWh range.  It had been hoped that Li-ion would reach those levels by 2020, fed in part by the considerable funding frenzy the Li-ion sector received from private investors and government subsidies in recent years.  Alas, the shared perspective of the four research reports is that those cost levels won’t be achieved for well more than a decade, and perhaps two.

The near-term prospects for Li-ion in grid-scale power storage are not much more promising.  This is partly also because of costs, but also because of reliability – some of the Li-ion grid-scale test programs have resulted in fires, and risk-averse utilities are not keen on adopting a technology until it’s been thoroughly proven to work well under almost every conceivable set of conditions.

The challenges facing Li-ion cause some observers to wonder whether too much attention is being paid to Li-ion and not enough on other battery chemistries – including the old-fashioned lead-acid battery extensively used over the past century.  Some of the commentators that Battery International quoted are more subdued in their criticisms, offering modest glimmers of optimism here and there.  But, the inescapable sense from the issue in its totality is that li-ion won’t see happy days for quite awhile – if ever.

In a lengthy profile of his views, battery blogger John Petersen compares lithium-ion batteries to centerfold models:  “They’re glamorous, sleek, sexy and hot; the building blocks of pubescent dreams and mid-life crises.  But they’re expensive, temperamental, potentially dangerous and scarce.”  As several pages more of his analysis and quips indicate, Petersen is very pessimistic about li-ion – and about EVs in general, for that matter.  He thinks that the case for EVs based on li-ion technology has consistently been oversold, and never had the chance of achieving the naïve promises that were made.

MIT Professor Donald Sadoway may sum up the long-term fate of li-ion best:  ”It shocks me that 99% of the active battery community is working on lithium-ion improvements.  We’re not getting there though.  It’s like looking for your car keys underneath the street lamp because that where the light is shining.  But you didn’t drop your car keys there!  What’s next is beyond lithium; in fact, it’s a lithium-free chemistry, which has to date received almost no attention.”

It used to be that “lithium” was known primarily as a treatment for depression.  For those in the cleantech sector, lithium may be coming to be known better as a cause of depression.

Cap and Trade for Traffic

Great article today on a study suggesting that traffic congestion is created by the marginal driver, and more interesting, from the marginal driver from specific and predictable locations.  Maybe 1% of commuters leaving from specific neighborhoods have a big increase on traffic congestion and commute time for everyone. The link to the study is here.

We dealt with this in the demand response market for energy.  With regulators 10-15 years ago creating free markets enabling companies to sell a reduction of energy demand to the power companies instead of increase generation.

We dealt with this in the carbon, Renewable Energy Credit, and Acid rain sphere by creating cap and trade style mechanisms enabling the rest of the market to pay some marginal actors just enough for them to drop out first.

There are bars that change the price of beer based on demand.

The stock market handles real time demand pricing every day.

Why not for traffic?  Hammer congestion and air pollution.  Create localized markets where the transit or roads authority, like Caltrans, TexDOT, or the local air district, instead of spending my tax dollars only on new roads, infrastructure, or regulations, used cellphone apps to pay a few dollars to commuters who would drop out of the critical commute paths at the right times.  Perhaps credits on your toll road account?  The more who apply, the less each make? Compliance tracked against your cellphone GPS?  A thousand ways to address the myriad technical issues with payments, tracking, compliance, verification, and additionality.

Small investment, massive social, environmental and economic benefits.

Cleantech Venture Investing: On the Deathbed or Merely Resting?

Two weeks ago, I sat on a panel of eminent (that is, other than myself) cleantech venture capitalists at the New England Venture Summit to discuss our sector as we approach the end of 2012.

The basic theme being explored was whether we should be optimistic or pessimistic about the current state of affairs for cleantech investing.

As I noted in my opening quip:  “I have friends on both sides of this issue, and on this issue, I’m with my friends.”

Seriously, it’s easy to understand being pessimistic.  While the data on cleantech venture capital investing activity has been mixed and erratic over the past few years, the qualitative indicators have led to a plethora of articles during 2012 suggesting a cleantech “bust”.  True, the litany of woes is substantial.

  • Several high-profile venture capital firms have retreated from or at least strongly de-emphasized cleantech investing, and other cleantech venture firms are widely thought to be in challenging positions likely precluding a next fund for ongoing viability.
  • Valuations on cleantech investment rounds have experienced significant downward pressure.
  • While early-stage deals can get done, the trend is towards focusing on later-stage deals, and ventures with long histories but only limited customer traction and modest revenues (less than breakeven) will find it difficult to obtain the next round of capital at favorable terms.
  • The Solyndra debacle has been an excruciating black eye for venture-backed cleantech deals in general.
  • Very low natural gas prices from the shale bonanza make it difficult for many energy-related cleantech firms to compete economically with their products.
  • The Republican party has successfully made cleantech a political litmus test, which in turn means that roughly 50% of the U.S. population views the sector with a general sense of skepticism or disdain.

When you sum this up, it’s pretty tough to be a cleantech venture investor these days.   But, there’s also a strong case to be made for cautious optimism, too.

Taking the long view – which I can to a fair degree, since I’ve been playing in this sandbox in various capacities for nearly 15 years, far longer than most observers – the situation we face today is not as discouraging as it was in the late 1990s (when only ventures called ______.com could get funded) or in the 2002-2005 era (post-9/11, post dot-com meltdown, post-Enron, still-cheap oil).

A much-needed cleansing of the sector is going on, a case of Schumpeterian “creative destruction”.  I suspected then, and am pretty convinced now, that a significant cleantech venture investment bubble occurred in the 2006-2008 timeframe.  The confluence of rapidly rising oil and natural gas prices plus greater political consensus about climate change (recall that 2008 GOP Presidential candidate John McCain supported carbon-mitigation policies) drew in not only too-much capital, but also investment professionals that – in my opinion – weren’t applying a prudent set of commercial perspectives when making bets in the uniquely challenging cleantech space.

Simply put, venture capitalists drawn into cleantech from other sectors – either software or healthcare – because it was the “new new thing” employed many of the tricks they used (often successfully) in the past, but which don’t necessarily work so well in cleantech.  Combined with ever-increasing sizes of venture funds, which need bigger investments to “move the needle” (i.e., generate returns upon exit sizable enough to be noticeable), excessive quantities of capital were thrown at a number of cleantech ventures before they were ready to make productive use of such resources.

Using a pricelessly-wise idiom that I first heard from legendary venture capitalist David Morgenthaler:  “Getting nine women pregnant won’t get you a baby in one month.”

Not surprisingly, too many capital-intensive cleantech deals got funded, focused on a too-narrow set of investment theses, including thin-film solar, lithium-ion batteries, electric vehicles, and second generation biofuels.

Clearly, there will be a shakeout in cleantech investing.  More ventures will go bust.  More cleantech venture capitalists, and venture capital firms active in cleantech, will withdraw from the space.  Only the strongest will survive.

Yet, those that survive will almost certainly be better prepared to prosper in the next uptick in cleantech venture investing.  And, the deals will be more attractive:  valuations will be lower, business plans and models will be sounder, and leadership teams will be more seasoned.

Yes, there will be a rebound in cleantech.  I’m not going to predict exactly when it will become fully evident, but it must happen.  After all, the overall fundamentals in support of the cleantech thesis still remain:  growing populations and increasing standards of living worldwide who are demanding greater environmental protection while simultaneously competing for finite (in many cases, dwindling) essential resources such as energy, water and food.

The members of the panel on which I sat generally reiterated the same basic themes:  capital-efficiency of scale-up, clear technological differentiation and economic superiority, greater involvement of corporate venture capital as funders, working early with strategic partners (future acquirers) to accelerate market penetration, improved teams with relevant entrepreneurial experience from prior cleantech ventures.

Paraphrasing Mark Twain, the death of cleantech venture investing has been greatly exaggerated.  Although it may be “stunned”,  it’s not “just resting” or “pining for the fjords”, either.

The cleantech venture capitalists who will be successful in the future are today still working hard on their portfolio companies.  Most will not be noteworthy exits.  Some will need to be terminated, others “worked out” through turnarounds and restructurings, with a few winners coming out at the end of the process.  Not all the winners need to be “the next Google” or even “home runs”, but rather solid companies producing good (if not outrageous) rates of return to investors.

This restructuring of the cleantech venture sector will take time and be painful for pretty much everyone involved.  But it’s the price to be paid to stay in the game, and will surely separate those who are truly committed and capable from the “wanna-bes”.

I intend to remain engaged for the rest of my career, and will be working diligently to continue to earn the right to do so.

The Economics of Cleantech Investing

I drafted this memo in early 2003 for a venture capitalist friend of mine, well before the bubble in cleantech.  In light of the back and forth on the recent Solar City IPO, I thought it was worth revisiting.  Some of the points were pretty prescient, calling out many of the challenges cleantech investors and exits have faced,  nearly a decade before they faced them.

 

Risk Economics in Energy Technology Investing


We believe there is substantial economics to be made from venture capital investment in energy technology, especially focused on clean energy and high efficiency or environmentally friendly applications.

However, investors unfamiliar with the sector tend to under-price risk and overestimate stage in technology development and commercialization in energy technology.

Much of this miscalculation can be boiled down to the fact that adoption rates of new technology in the energy sector generally tend to be slower than more traditional venture capital industry sectors.  This tends to be true for a couple of reasons, and has a number of implications for venture capital investment in the sector.  We have tried to lay out a few thoughts for potential investors in the space, which though they by no means constitute an all-encompassing investment model, should be helpful in decision-making.

Integration / Customer Hurdle Issues – This is a sector that tends to be very risk averse in new product and technology acceptance, and does not tend to pay for technology before the product stage, with an attitude of “we as the customer are already taking a huge risk by simply changing our operating procedures or letting you have access to our mission critical, extremely expensive infrastructure, why would we pay you, too?”  This situation is often characterized by very entrenched channels and customers, with multiple levels capable of “saying no”, and a long process to “yes”.  As result the level of product testing is substantially longer than other sectors as well. One implication (also see “Cheap” Technology below) is that technology businesses that have access to customers or are in integration areas tend to be under-priced by investors relative to technology developers.  This under-pricing can be especially true if the business has a vision to acquire technology or IPRs from developers as a price of admission to a customer base.  This set of issues also raises a second set of implications in the engine industry, where the major engine manufacturers, while they are often under pressure for change, are not exactly adept at handling new technology adoption, in part since they sell almost entirely through low-tech dealer networks, and only partially touch the end customer themselves.  Another risk issue here is that investors in technology development have tended to underestimate the power of entrenchment in both customers and channels, and as discussed below, run a risk of being caught in a bind as a one-product wonder without the depth or breadth of solution to protect market share.

R&D vs. Product /Market Development Investments – Because of the slowness of adoption rates, the relative risk of R&D investment bets to product /market development investment bets tends to be substantially higher than in many other sectors.  The implication is that early stage investment (pre- purchase orders) should be done at lower valuations than the same stage in other sectors, while later stage (post purchase order) investment can potentially be done at higher valuations, while achieving the same risk adjusted IRR.  Another implication is that investors often should expect some level of public funding support for technology development as a prerequisite for investment, not as a driver of additional valuation.

“Eternal Pilots” – This industry tends to be under significant environmental and PR pressures and as a result companies in the space tend to make limited investment of resources and capital in numerous pilot programs and “evaluations” that do not have significant likelihood of moving forward in a major way, but may run for years.  This has been especially true of regulated utilities that could often in effect price through some of the cost, or were expecting to bear the cost anyway as part of a PR or ongoing market vision program, as well as major energy companies, who have huge margins, and tend to have massive and far-flung R&D programs.  This tends to obscure the vision of VC investors looking to bet on strategic relationship “traction” as a way to proxy potential product adoption.  In other words, one can easily overestimate “traction”, and investors often tend to overestimate the life cycle stage of a new technology.  The newer the technology, the higher the over-estimation risk would tend to be.

Political Process – This industry tends to be very politically sensitive.  And the entrenched leaders tend to be much better than the startups at managing this process.  One thing this means is that significant public/government backed or public/private capital is available to fund R&D in the area, and that government/military business can often be viewed as core customer base.  It also means that technology development requiring regulatory or legislative drivers can be much riskier than in other sectors.

“Cheap” Technology – Given the above, existing technology tends to be “cheap” on the venture capital scale, and contracted or visible business tends to be the driver of value. Part of this is because the technology is often developed with “cheap” public dollars. The other way to think about it is that if you have the market and access to customers, attractive, proven technology at the product development stage can often be acquired for essentially pure upside.  While this may not call into question a particular technology development investment program, it again does have implications for the value of that technology as opposed to the value of a going concern.

Make One Bet, Not Two – To follow on that point, one implication is that an effective investment strategy may be to accept either technology development risk, or market risk, but not both.  In that, an investment in technology development not be made unless there was a near certainty of obtaining public funding to offset substantial portions of the cost or customer purchase orders once product development is completed, or that investment in customer ramp or market development not be made unless the technology is proven and has extremely limited risk of failure.  Betting on early stage companies that neither have a “locked-in” customer or completed technology may tend to be an extremely risky bet, and should perhaps be done only at quite low valuations relative to other industries.

Gross Margin Ramp – Another area of typical miscalculation is in profitability of new technology.  The sector tends to be a bit more “custom” in its product demands than some industries, and one major bet that has caught investors is cost structure/timing of volume orders.  This is an area where it has proven extremely difficult for many companies to develop enough business to move gross margin positive, let alone operating profit.  A common mistake is to over build manufacturing capacity in an often desperate race to get a marginally cost effective technology to an acceptable cost point to achieve venture like growth projections, when a more effective strategy often might have been to build low volume, higher cost point premium solutions for a smaller market in order to maintain the business during the often long process of technology adoption.  Such a strategy, which tends to be ignored by venture backed startups until too late, can be a key element in reducing the timing risk in this sector.  Part of the issue also stems from technology companies misunderstanding the price point potential and impact on their net price to manufacturer from channel and integration costs, a particularly sore point now to many companies betting on distributed generation technology, as is the point below.

One Product Wonders – Unlike other sectors where large companies are quite adept at acquiring in new products and technology lines, this is a sector where major competitors tend to be more likely to make a build vs. buy decision.  This tends to be more true for high margin components of an overall solution, exactly where technology investors tend to play.  Often investors have found that their supposed channel is in fact their most successful competitor, even despite the fact that the channel may not very good at the solution.  The result is that investors often overestimate how far a single product company can go, and overestimate how badly a potential strategic partner or exit will view that they need a particular technology solution.

While none of these points are meant to invalidate particular investment strategies, they are meant to be points to consider when risk adjusting and developing pricing / valuation strategies for energy technology investments.  At the end of the day, we tend to feel that technology companies in this sector, when compared to many other venture capital investment sectors, should be priced much more closely on visible cashflows than value of technology or market potential, or by “stage”, where the risked economics may not be as easy for an investor to define.

Chicago: Battery Central

At the end of November, the U.S. Department of Energy announced that it had selected Argonne National Laboratory in suburban Chicago to host the Joint Center for Energy Storage Research (JCESR), and bestowed upon it a $120 million grant over 5 years, alongside a $35 million commitment for a new 45,000 square foot facility from the State of Illinois.

As noted in this article in the Chicago Tribune, the goal for the JCESR is to improve battery technologies by a factor of five — five times cheaper, with five times higher performance — within five years.

One of the nation’s Energy Innovation Hubs just being launched, the JCESR has an impressive list of collaborators.  In addition to Argonne, four other national laboratories – Lawrence Berkeley, Pacific Northwest, Sandia and SLAC National Accelerator – will also conduct research under the JCESR umbrella.  University research partners include Northwestern University, the University of Chicago, the University of Illinois at Chicago, the University of Illinois at Urbana-Champaign, and the University of Michigan.  A long list of the leading venture capital firms active in the cleantech arena – including ARCH Ventures, Khosla Ventures, Kleiner Perkins, Technology Partners and Venrock – will serve on an advisory panel to help focus the research on commercially-interesting opportunities.  Corporate titans Applied Materials (NASDAQ: AMAT), Dow Chemical (NYSE: DOW) and Johnson Controls (NYSE: JCI) have loaned their names to the effort.

Whether it was because the team didn’t want their influence or because they didn’t want to be involved, no corporate representatives from the automotive or electricity industries are part of the JCESR constellation.

Especially when paired with the Galvin Center for Electricity Innovation just 30 miles away at the Illinois Institute of Technology, where smart-grid research is a primary focus, the JCESR announcement arguably leapfrogs the Windy City into the top echelon of cleantech technology research clusters, particularly as it relates to electricity management.

Cleantech to “Backtrack” in 2013?

Our firm, Kachan & Co., has just published its latest annual set of predictions for the cleantech sector for the year ahead.

To our analysis, 2013 is shaping up to be something of a year of backtracking for the cleantech industry, a year that calls into question some of its traditional leading indicators of health, and one that surfaces long term risk to such cleantech stalwarts as solar, wind and electric vehicles.

Do we think cleantech is finished? Not at all. But much like young Skywalker learned in Episode V, cleantech is about to find out that the Empire sometimes gets its revenge.

In brief, (click here for long version) our predictions include:

Cleantech venture investment to decline –  Expect worldwide cleantech venture capital investment in 2013 to decline even further than it did in 2012, never to return to the previous highs it achieved before the financial crisis of 2007-2008, we believe. Among the factors: the departure of many venture investors from the sector because of disappointing returns, poor policy support worldwide and a lag time in the pullback of equity and debt investment.

But this doesn’t mean the sky is falling in cleantech. Family offices, sovereign wealth and corporate capital are now having more significant roles, filling gaps where traditional VC has played in recent years. It’s a sign the sector has matured, we believe. Fewer VC cooks in the kitchen may indeed impede innovation, but deep pocketed corporate capital should help clean technologies that are already de-risked reach more meaningful levels of scale.

Long term risk emerges for solar and wind – The solar and wind markets suffer today from margin erosion, allegations of corruption, international trade impropriety and other challenges. In 2013, we think poor progress in grid-scale power storage technology will also start to put downward pressure on solar and wind growth figures. Prices per kilowatt hour are falling, yes, but the cost of flow batteries, molten salt, compressed air, pumped hydro, moving mass or other storage technology needs to be factored in to make intermittent clean energies reliable and available 24/7. When also considering continued progress in cleaner baseload power from new, emerging nuclear technologies, natural gas and cleaner coal power, the growth rates for solar and wind appear increasingly at risk.

Clean coal technologies gain respect – We predict 2013 will be the year a new set of technologies will emerge aimed at capturing particulate and CO2 emissions from coal fired power plants and help clean coal technologies begin to overcome their negative positioning. The barrier to capturing coal emissions has been cost and power plant output penalties. Our research has identified encouraging new technologies without such drawbacks, and we think the world will begin to see them in 2013. China is expected to target domination of the clean coal equipment market, like it does already in many other cleantech equipment categories.

The internal combustion engine strikes back, putting EVs at risk – Important innovations quietly taking place in internal combustion engines (ICE) could further delay the timing of an all-electric vehicle future, we think. In 2013, unheard-of fuel economy innovations in ICEs will enter the market, including novel new natural gas conversion and heat exchange retrofits of existing engines aimed at dramatically lessening fuel needs. Some of these technologies, when combined, claim to be able to reduce fuel costs by 90%. That could push out the timing of EV adoption.

Cleantech adoption in mining – Notoriously conservative mining companies and their shareholders are starting to realize that the capital expenses of new clean technologies can be offset by reduced operating costs and the potential for new revenues. In 2013, we predict more adoption of cleantech innovation in mining, in areas such as tailings remediation, membrane-based water purification, sensors and telematics, route optimization software intended to lower fuel and equipment maintenance costs, and low water and power hydrometallurgical and other novel processes for mineral separation.

Big ag steps up and cleans up – We estimate that 2013 will be the year the world’s leading agricultural companies embrace new innovation in significant ways. Expect accelerated corporate investment, strategic partnership and agricultural M&A in 2013, as agricultural leaders race to meet consumer demand for cleaner, greener ways of producing food, having weathered intense consumer GMO-related and other backlash.

Want more rationale & data? Read our predictions for cleantech/greentech in 2013 in their entirety.

Agree? Disagree? Weigh in on our original article here.

Open Letter, Closed Minds

Last week, 129 signatories sent an open letter to the Secretary General of the United Nations, Ban Ki-Moon, that said in part:

“Current scientific knowledge does not substantiate your assertions” recently made that climate change is causing more extreme weather events (such as last month’s disastrous Hurricane Sandy), and that the cost of continued inaction on climate change will be very high.

The open letter continues:  “The hypothesis that our emissions of CO2 have caused, or will cause, dangerous warming is not supported by the evidence.  The incidence and severity of extreme weather has not increased. There is little evidence that dangerous weather-related events will occur more often in the future. ”

Moreover, “Policy actions by the U.N., or by the signatory nations to the UNFCCC (United Nationals Framework Convention on Climate Change), that aim to reduce CO2 emissions are unlikely to exercise any significant influence on future climate.”

I will leave it to others to opine whether or not the signatories to the open letter making these statements are credibly “qualified in climate-related matters”, as they claim for themselves.

For the record, a much larger body of people doubtlessly “qualified in climate-related matters” would surely strongly disagree with this letter.  Thousands of experts are quite confident that climate change is in fact a serious future threat to the planet (all species, not just humans), that its economic and social (and biological) costs will be high, and that effective actions can be taken to reduce the impacts.

Conclusions of this ilk come from the Intergovernmental Panel on Climate Change (IPCC), a massive peer-reviewed process of researchers around the world facilitated by the UN and the World Meteorological Organization (WMO) that — while imperfect — is nevertheless quite robust.

Here’s the rub:  it doesn’t matter that ten or twenty times as many experts of at least comparable quality can be amassed on the other side of the issue to outweigh the signatories of this open letter.

Notwithstanding the vast body of evidence concerning climate change, there are in fact certain elements of climate science that are admittedly unknown or not well understood.  Even the IPCC experts would agree.  And, because of that, it is in fact somewhat inappropriate to say cavalierly, as Ban Ki-Moon and others such as Al Gore have said, that “the science is settled.”

Even though assembling a vast quantity of data and analyses make for a damn persuasive case to most reasonable people, the science is not, fully, settled.  In fact, given the daunting complexity of the global climate system,  that will surely always be the case.

Those with closed minds — who for whatever reason choose to ignore the preponderance of evidence and focus instead on the exceptions — will not concede the likelihood of climate change.  To them, the outliers and unknowns mean that there could theoretically be a possibility that human-driven climate change isn’t really happening, ergo let’s not get worried about it until it can be proven (which, for them, will generally be never).

As a result, stalemate exists.  This is just fine for climate deniers and those who have a vested interest in maintaining the status quo — the former often being funded by the latter.

Extreme flip statements like “the science is settled” only harden the opposition.  It’s not the first time, and certainly won’t be the last, that too-strident environmentalists have harmed rather than helped the causes about which they care.

The open letter to Ban Ki-Moon does, however, have one notable redeeming feature.  It is found in the last sentence:  “Climate policies therefore need to focus on preparation for, and adaptation to, all dangerous climatic events however caused.”

This inarguable position in favor of improving our adaptation capabilities is an increasing focus of the climate debates.

The stalemate on climate change policy means that chances are growing that our time is shrinking to do anything meaningful to prevent significant future climate change.  Accordingly, the best we may be able to do is to agree to limit the impacts that more severe weather would create.

We can argue about whether weather severity is on the rise.  However, if we waste our time arguing about that (which we are), we will have less time to spend on actually preparing more prudently for the future — whether it’s as worrisome as many climate scientists think it will be, or it’s a “don’t worry, be happy” world just like today’s.

Cultivating Agricultural Cleantech

An expanding world population, coupled with increasing concerns about resource scarcity, land availability, biodiversity conservation and global warming is fostering interest in sustainable agriculture technologies.

Large companies and clean technology investors are focused on energy, and some are following water. Yet very few are tracking opportunities in breakthrough clean and green agricultural technology. And that suggests opportunity.

Certain innovations from a new crop of companies have the potential to expand yields, increase efficiencies, reduce waste and address concerns about toxicity, safety and the environment. There are innovative companies that are potentially poised for success across all categories of the taxonomy of agricultural cleantech—which Kachan & Co., having just published a major report on the subject, characterizes as follows:

Kachan agricultural cleantech taxonomy

Kachan & Co. agricultural cleantech taxonomy, a section of the larger Kachan cleantech taxonomy, which spans other sectors such as clean energy, transportation, water and others. Source: Kachan & Co. analysis.

In its new report on agricultural cleantech, Kachan uses the following criteria to differentiate cleantech developments from generic agricultural innovations:

  • improved efficiency of resource use
  • reduced ecological impact
  • smaller carbon footprint
  • sustained or enhanced profitability

Technologies which reduce the demand for water and chemical inputs are included as they reduce strain on the global water supply and reduce the impact on surrounding ecosystems via the introduction of foreign chemicals. Technologies which enhance the health and yield of crops and herds are included as these reduce waste from the industry and alleviate pressure to convert native land into agricultural fields. Innovations which reduce the carbon footprint of agriculture are included as they directly address the climate challenge we face today. Also included are land and resource management practices which decrease or eliminate nutrient drain and erosion of soils such that the land may sustain cultivable yields indefinitely. Focus in this definition is given to technologies which function at a commercial scale (as opposed to subsistence farming and hobby practices).

The following walks through the above taxonomy, offering definitions of each of the five main categories and profiles one leading company within each. The five companies profiled in this blog have either reached an exit (trade sale or IPO) or are simply compelling examples of the category in question. The full Kachan agricultural cleantech report goes through the taxonomy line by line and profiles a total of 57 companies.

Crop farming
Crop farming includes the cultivation of grains, fruits, vegetables, fiber crops, fuel crops and other plant varieties like mushrooms and fungi. This sector is of particular importance as cropland covers 12% of the earth’s ice-free land, and grain cultivation alone accounts for 50% of the world’s food supply (when supplies fed to livestock are considered).

Sustainability in crop farming focuses on increasing yields as well as improving resilience and persistence of crops. Greater yields are, and will continue to be, needed in order to feed the growing population with existing agricultural lands. Crop resilience describes the capacity of the plant to buffer shocks and stresses, which helps ensure food security in the face of climactic stresses. Persistence describes the ability of arable land to sustain a crop rotation indefinitely without diminishing yields.

Innovator Example: Plant Health Care
Plant Health Care (AIM:PHC) is best known for two natural crop amendments; Harpin and Myconate. Harpins are proteins produced by a variety of pathogens which cause plants to release cellular calcium and increase their metabolic rate. Photosynthesis and nutrient uptake rates rise, resulting in greater immunity and growth. Plant Health Care synthesizes Harpin proteins which have been shown to increase yield and shelf-life of certain crops. Harpin, discovered by Plant Health Care’s chief scientist, was a cover feature of Science Magazine. Myconate, a compound naturally secreted by drought resistant crops like red clover, promotes the colonization of plant roots with beneficial networks of fungi which work to increase the effective surface area of roots. Plant Health Care has developed a process to generate synthetic Myconate. Ultimately, the company claims, Myconate allows greater access to water and nutrient resources which has been shown to generate yield increases on the order of 9% for corn crops and 13% for soybeans.

Plant Health Care is headquartered in the USA with offices in the UK, Iberia, the Netherlands and Mexico. The management team has been involved in the agriculture industry for decades and retains the discoverer of Myconate as their chief scientist. The board of directors draws on similar experience in the agricultural and chemical industry with past endeavors at Arista and ICI. Long-term partnerships with Bayer CropScience, German Seed Technology, Syngenta and Monsanto, among others, have and continue to provide a secure revenue source alongside direct product sales. Plant Health Care continues to research new Harpin proteins which may have higher activity levels, applicability to different crops and elicit greater disease resistance.

Controlled environment agriculture
Just over half the world’s population currently resides in urban areas. This fraction is expected to rise over the coming decades, reaching 67% (~6 billion people) by the year 2050. Urbanization presents a myriad of challenges for the agricultural industry and introduces new environmental considerations associated with food production and distribution. One way of addressing these issues is by finding ways to cultivate food within city limits. Urban agriculture practices can take a variety of forms, from greenhouse farming to vertical farming in unused indoor spaces to rooftop gardens and so on. Urban agriculture can reduce risks associated with weather and spoilage. Indoor climates are predictable and controllable, thus droughts and cold snaps pose no threat. Shorter transport distances to markets reduce the fraction of food lost to spoilage and the carbon footprint of products. On top of the practical advantages of urban agriculture, society as a whole has a preference for local food. Research has indicated that citizens of developed countries are willing to pay a 15%-20% premium for local products.

Innovator Example: Urban Barns
Urban Barns (OTCQB: URBF.OB) claims its developments are best described as ‘cubic farming’. The company’s patent pending system is said to surpass the yield of top-of-the-line vertical farming developments several times over by making full use of the entire volume of an available space with no restrictions on floor plan or available height. The company asserts its system provides adequate growing conditions for leafy green vegetables in any building with standard climatic controls.

Urban Barns has been highlighted by experts on account of its impressive management team. The team has over 225 years of collective experience in the industry. Jack and Leo Benne (CEO and COO, respectively) have considerable experience in the area of controlled environment agriculture, Daniel Meikleham (Chairman and CFO) has had a forty year financial career with high profile multinational corporations, and Robyn Jackson (Vice president) has been a fresh food distribution entrepreneur for forty years. The technology has been implemented in North America and Puerto Rico with recent efforts to extend the business into the Middle-East.

Sustainable forestry
Forests provide a number of invaluable ecosystems services. They are hubs of biodiversity and play an integral role in global carbon and hydrological cycles. Timber is an inherently renewable resource, however proper management practices are paramount to sustaining the regenerative nature of forests. Sustainable forest management seeks to: maintain and enhance forest resources, promote the health and vitality of forest ecosystems, conserve biodiversity and ensure forest land retains its natural relation to soil and water systems. The ultimate goal is to retain the forest’s ability to support ecological, socio-economic and cultural functions beyond timber harvesting. Over the past three centuries, timber extraction has caused a net loss of 7 to 11 million km2¬¬ of forest land. An additional 2 million km2 have been converted to highly managed timber and oil palm plantations. The technologies outlined below represent new opportunities to reduce our impact on native forests and improve the sustainability of silviculture stands.

Innovator Example: Triton Logging
Triton Logging Inc. has developed a pair of devices which enable the collection of submerged forests from dam reservoirs. Harvesting these dead stands displaces live harvesting and impacts a previously disturbed ecosystem, resulting in a very low impact timber product. The SawFishTM is a remote controlled submarine equipped with a grapple and 55 inch chainsaw designed for deep reservoirs (>40m) where divers and surface mounted equipment cannot safely operate. Navigating via video, sonar and GPS, the SawFish can harvest a tree every three to five minutes (in good conditions), sending each one to the surface using reusable airbags. The SharcTM harvester is a barge mounted device with a telescopic boom and cutting head capable of harvesting timber up to 36.5m below the surface. The Sharc locates timber through sonar, remote cameras and GPS.

Triton is the only company to offer a mechanized means of collecting submerged timber at this scale and holds considerable competitive advantage. With 60,000 reservoirs globally, the company addresses a large market. Triton has operations in Canada, the USA, Ghana and a prospective project in Brazil. Triton’s Ghana project harvests odum, mahogany, ebony and a variety of other high demand tropical hardwoods from Volta Lake, the world’s largest man-made reservoir (350,000 hectares). The project is to be in full swing by 2013, harvesting 400,000m3 of wood each year. Licensing negotiations continue for developments in Brazil, where the company would profit from an estimated 300 million submerged trees. Revenue streams include eco-wood sales, inventory assessment, harvest concession development and logging services.

Animal Farming
Livestock operations present an increasingly important segment of the agricultural industry. Nations tend to increase their consumption of animal protein as they become more affluent. China, as an example, more than doubled its consumption of animal products during the 1990s. Over the next ten years, livestock is expected to provide 50% of agricultural output in value terms. Combining the land devoted to animal feed crops and pastureland, animal farming accounts for 75% of agricultural lands (3.73 billion hectares). Thirty-five percent of crop production globally is currently devoted to animal feed. Concentrated animal feeding operations (CAFOs) are becoming increasingly popular in the animal farming sector. CAFOs present unique challenges, most pressingly in the area of waste management.

Innovator Example: Livestock Water Recycling
Livestock Water Recycling (LWR) has developed a patented system that combines chemical and mechanical treatments to process manure and discharged water from CAFOs. The company claims that its technology will save operators 0.5 cents per gallon of manure produced, a substantial savings given that conventional handling costs currently sit at 1-1.5 cents per gallon. The system is also intended to address the pressing issue of manure storage. As illustrated in the following figure, the system converts animal wastes into a set of salable products, including concentrated liquid ammonium fertilizer, solid phosphorous fertilizer and potable water. The company claims that the system will save farmers nearly $10,000 for every million gallons of manure generated before profits from the sale or use of generated fertilizers. LWR estimates the market value of fertilizer product generated by each million gallons of manure at $12,500. The LWR system is said to be robust and fully automated, enabling indefinite operation with little more than routine maintenance. LWR expects a 20% annual return on investment from the system.

Livestock Water Recycling has a well-rounded team with experience in chemical engineering, waste water treatment, biological science, business development, industrial design and marketing. The company has had past success remediating contaminated aquifer sites throughout North America, working on projects related to pipeline spills and railway sites. LWR is fully integrated, addressing all matters from initial design to follow up and maintenance. In this way it plans to protect its proprietary process from copy-cat operations. The company is currently backed by AVAC investments and has earned an F.X. Aherne Prize for Innovative Pork Production, a Top-10 New Products award at the World Agricultural Expo and an Emerald Award for Environmental Excellence. The company has completed extensive testing of the system and says it is currently installing systems for customers at both dairy and hog operations in North America. LWR claims to have international inquiries and plans, in future, to extend its focus to areas including China, Korea, Europe, and Russia.

Aquaculture
Seafood currently provides 17% of the world’s protein and over 25% of protein in low-income countries. Roughly half the fish entering the market come from aquaculture and half from fisheries. The aquaculture industry is said be growing at 8-10% per year, making it the fastest growing sector of agriculture. Aquaculture is widely recognized as having a pivotal role in fighting world hunger and promoting the sustainable acquisition of dietary protein. The impacts of commercial scale aquaculture are, however, poorly understood. Primary concerns surround the acquisition of fishmeal and the impact on supporting ecosystems. Sustainable growth in the aquaculture industry will require innovations that minimize ecosystem impacts from open ocean aquaculture operations and methods of providing adequate nutrition to growing fish stocks in a manner that enables maintenance of feed fish populations. Recently a number of developments have occurred that support integrated multi-tropic aquaculture (IMTA), which describes nested aquaculture systems that raise fin-fish in conjunction with mollusks and other species, mimicking a natural ecosystem and lessening the load on the supporting environment. While such developments may play an important role in increasing aquaculture sustainability and a number of fish farms, like Cooke Aquaculture, have taken up the practice, the technology itself is not saleable per se and so has not been included herein.

Innovator Example: Marrone Bio Innovations
Marrone Bio Innovations (MBI) produces natural products for pest management. The company’s Zequanox product has demonstrated 90% mortality rates for zebra and quagga mussels, invasive pest species originating in the Caspian and Black seas which wreak havoc on aquatic ecosystems in North America. Zequanox consists of dead cells of a particular micro-organism which contain a compound naturally lethal to the target species. The company claims that at proper dosages Zequanox is safe for fish, insects, crustaceans, plants, algae and even native mollusks. In September of 2012, the company was chosen as a 2012 Top 50 Water Company by the Artemis Project on the success of its Zequanox product.

Zequanox finds a large market in North America as zebra and quagga mussels are a burden not only to aquaculture operations but also to industrial operations, power generation facilities, irrigation systems, public infrastructure and recreational facilities. The company has extensive experience in natural pesticides. Pamela Marrone, the company’s CEO, also founded AgraQuest in 1995.

As the world’s population grows and developing nations become more affluent, increased agricultural output and protein production will be necessary to meet demands. Issues of land and water scarcity alongside concerns about climate change and ecosystem degradation require increased emphasis on sustainability in agriculture.

Consensus on the ideal form of sustainable agriculture has not been reached. There are those who support a mix of high yield, heavily managed lands interspersed with sections of land reserved as natural sanctuaries, and there are those who support an agro-ecology approach where lands are farmed in a less productive manner while retaining ecosystem services.

A variety of agricultural cleantech innovations are emerging in the areas of crop farming, urban agriculture, sustainable forestry, animal farming and aquaculture. Venture capitalists have expressed only modest but growing interest in the area of agricultural cleantech, and increased investment is expected as our understanding of what truly constitutes sustainable agriculture evolves.

Latest Agricultural Technology Innovation, published November 2012 by Kachan & Co., details agricultural cleantech trends and drivers and profiles 57 important clean agricultural technology companies worldwide. This article was originally published here. Reposted by permission.

 

A former managing director of the Cleantech Group, Dallas Kachan is now managing partner of Kachan & Co., a cleantech research and advisory firm that does business worldwide from San Francisco, Toronto and Vancouver. Kachan & Co. staff have been covering, publishing about and helping propel clean technology since 2006. Kachan & Co. offers cleantech research reports, consulting and other services that help accelerate its clients’ success in clean technology. Details at www.kachan.com.

Electric Cars are a Niche? Or Able to Beat Conventionals?

Are electric cars a Niche?  Or just coming into their own?  I’ve been asked that question twice now in the last week in various forms, so thought I’d blog my answer.

Electric Drive Transportation Association has the total number of US sales at just under 400,000 this year, or 3.3% market share including hybrids.  Hybrids they have up 33% YTD compared to the whole of last year’s sales, and EVs/PHEVs up 375%.  But the EVs still make up only 10% of that total number.

In June The Street did a great article on EV sales forecasting line by line an estimate of 62,000 for the year, already at 18,000 at that point.

And while sales have been sluggish, they have been creeping up, with more and more and cheaper and better versions coming out in 2013 and 2014.

The price gap, somewhere between $8K and $25K, is closing.

Nissan just announced a cheaper and longer range Leaf version in Japan (yes it can be done, why didn’t you have the guts to do this last year Nissan?), Tesla’s 160-300 mi range Model S just started shipping and garnered the 2013 Motor Trend Car of the Year Award.

The Chevy Volt, for it’s struggles, as Forbes reported in September, is outselling the “Audi A6, BMW 7-Series, Porsche Cayenne and Mercedes-Benz S-Class, and it outsold most hybrids including the Toyota Prius plug-in, Honda Civic, Kia Optima, Toyota Highlander and Lexus RX 450h”.  Not yet high volume success, but then when you operate in small volumes and only send your dealers 1 or 2 at a time to start, it’s hard to blow sales numbers away.  Forbes comment was “If indeed the Volt is a “failure,” as some of its critics have contended, we’re sure there’s several auto executives out there that would like many of their slower-selling models to suffer the same fate.”

And how does this compare to the Prius?  The car that in many ways redefined the car industry and helped push Toyota to the top?  The first fours years of sales it struggled well south of 20,000 per year, the next 3 years globally shipping 30-40K/year, respectable, and strong, not earth shattering.   It took 6 years and price cuts and a second and 3rd generation to make it to the 100K/year mark.  Over 10 years to get a million sold.  Two years to get the second million sold.

But now every major car company and over half the top car models have a hybrid version now, barely 15 years (about two car design cycles) after initial launch.  Toyota shipped a million hybrids in ten months this year, 14% of sales for the world’s largest car company.  Honda reached the 1 mm number in hybrids shipped, Toyota is at 4 mm.  Does that sound niche to you?

Anyone really want to bet that in 6 years NO EV or PHEV has made it to the 100K level?

 

So why do we like EVs?

Among other things, 1) electrics cars run dead quiet, 2) electric cars have instant torque and terrific acceleration at low RPMs, performance which cannot be matched by gasoline engines, 3) electric cars have platform flexibility, turn radius/handling that can be amazing, since you can use distributed motors, all electric control etc, the same promise that fuel cell cars had, but couldn’t deliver, and 4) maintenance goes WAY down, virtually no fluids fewer moving parts.

Bottom line, once an EV or PHEV comes close on range and cost, it’s a better car than a gasoline car.

 

On the downside, cost is still cost, charging is still charging, range is still range.  But let’s look at those:

Best I can tell, we’re at an $8-$35K price difference to hybrids and conventionals, depending on the assumptions.  Since we’re still measuring at 10s of thousands of cars a year, I don’t think direct cost comparisons are yet fair.  Eventually one of these is going to take off in one market or another.  When it does, it’ll drive volume, and continue to collapse cost.  In addition the R&D work on EVs is paying off, manufacturers are finding ways to bring costs down in interim anyway.

I’ve had a couple of discussions about fast charging.  Charging is not a huge limitation, its a technology and cost choice.  Charge time is effectively a function of battery size, onboard charger size, and volts.  Let’s start out by saying we’re not going to be charging EVs at 110.  Too slow.  But charging at 220 is very doable.  220V home chargers today are in the 1-2K range. They will not stay that high for long.   Onboard charging The Leaf chose a 3.3Kw onboard charger.  Big mistake, done to skim $2K off the price of the car and keep it inline with the conventional Camry price point after tax credit.  They should have offered multiple options.  The Focus and Volt noticed this went with a 6.6 kw job,  the Tesla Model S comes with a 10 – 20 kw.  Faster charging is pretty much an ask and you shall receive issue.

Range.  Range matters.  Big time.  I contend the sub 100 mi car is idiocy and poor product management and fear of high costs.  Tesla, and the Volt and now Nissan is showing we can bring to market medium and long range EVs.  Betting against ranges getting longer is a bad bet.  I predict by 2015 the average EV/PHEV range will approach 200 mi, and range anxiety will be a thing of the past.

Scale.  Most of these are scale issues.  EVERY manufacturer of EVs started out viewing this as a few tens of thousands per year volume car platform.    In my first discussion on the Leaf with their Leaf product head, I kept asking whey they didn’t roll out faster charging options and longer battery range options for the consumer to start, and why spend all that marketing if only 10K were going to be available year one in the US.  The real answer, no guts no glory, they weren’t sure enough of success to roll this car out like they would have any other.  Even Tesla figured out the multi option idea!  In my first test drive of the Volt, the dealer admitted they had only 1 salesman trained to sell it.  And they could only get 1 car at a time in their allocation.  Not exactly setting their channel up for success.  Frankly guys, we’re not getting anywhere with that.  These are better cars, GO BIG OR GO HOME.

 

Niche? High cost? For today yes, but that’s how technology disruption happens.  Their parent cars broke through that ceiling, and they will too.  I think these cars are underperforming sales expectations that were all hype.  I think they are overperforming what we should have expected.  And I think we’ll look back on 2012 and 2013 as set up years.  It won’t be forever.  Electric is just a better platform once we get it right.