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Obama State of the Union: Clean Energy: 15; God: 2

Today, reading back through President Obama’s 2010 State of the Union address I went looking for his discussion of energy and cleantech. I counted Energy with 15 mentions, crushing Healthcare at 7, and losing out to Jobs at 26. Of course, God only got 2 mentions in the final line (1 more than George W. Bush’s last state of the union address).

So what exactly did he say?

“To build a future of energy security, we must trust in the creative genius of American researchers and entrepreneurs and empower them to pioneer a new generation of clean energy technology. Our security, our prosperity, and our environment all require reducing our dependence on oil.


Last year, I asked you to pass legislation to reduce oil consumption over the next decade, and you responded. Together we should take the next steps. Let us fund new technologies that can generate coal power while capturing carbon emissions. Let us increase the use of renewable power and emissions-free nuclear power. Let us continue investing in advanced battery technology and renewable fuels to power the cars and trucks of the future. Let us create a new international clean technology fund, which will help developing nations like India and China make a greater use of clean energy sources. And let us complete an international agreement that has the potential to slow, stop, and eventually reverse the growth of greenhouse gases.


This agreement will be effective only if it includes commitments by every major economy and gives none a free ride. The United States is committed to strengthening our energy security and confronting global climate change. And the best way to meet these goals is for America to continue leading the way toward the development of cleaner and more energy efficient technology.”

Oh, wait, that was from George W’s last state of the union address. Hmmmh. Here’s President Obama’s:

“Because of the steps we took, there are about two million Americans working right now who would otherwise be unemployed. (Applause.) Two hundred thousand work in construction and clean energy;
. . .

Next, we can put Americans to work today building the infrastructure of tomorrow. (Applause.) From the first railroads to the Interstate Highway System, our nation has always been built to compete. There’s no reason Europe or China should have the fastest trains, or the new factories that manufacture clean energy products.
. . .

We should put more Americans to work building clean energy facilities — (applause) — and give rebates to Americans who make their homes more energy-efficient, which supports clean energy jobs.
. . .

You see, Washington has been telling us to wait for decades, even as the problems have grown worse. Meanwhile, China is not waiting to revamp its economy. Germany is not waiting. India is not waiting. These nations — they’re not standing still. These nations aren’t playing for second place. They’re putting more emphasis on math and science. They’re rebuilding their infrastructure. They’re making serious investments in clean energy because they want those jobs. Well, I do not accept second place for the United States of America.
. . .

Next, we need to encourage American innovation. Last year, we made the largest investment in basic research funding in history -– (applause) — an investment that could lead to the world’s cheapest solar cells or treatment that kills cancer cells but leaves healthy ones untouched. And no area is more ripe for such innovation than energy. You can see the results of last year’s investments in clean energy -– in the North Carolina company that will create 1,200 jobs nationwide helping to make advanced batteries; or in the California business that will put a thousand people to work making solar panels.

But to create more of these clean energy jobs, we need more production, more efficiency, more incentives. And that means building a new generation of safe, clean nuclear power plants in this country. (Applause.) It means making tough decisions about opening new offshore areas for oil and gas development. (Applause.) It means continued investment in advanced biofuels and clean coal technologies. (Applause.) And, yes, it means passing a comprehensive energy and climate bill with incentives that will finally make clean energy the profitable kind of energy in America. (Applause.)

I am grateful to the House for passing such a bill last year. (Applause.) And this year I’m eager to help advance the bipartisan effort in the Senate. (Applause.)

I know there have been questions about whether we can afford such changes in a tough economy. I know that there are those who disagree with the overwhelming scientific evidence on climate change. But here’s the thing — even if you doubt the evidence, providing incentives for energy-efficiency and clean energy are the right thing to do for our future -– because the nation that leads the clean energy economy will be the nation that leads the global economy. And America must be that nation. (Applause.)”

Reducing dependence on foreign oil? New technologies? Renewables? Energy efficiency? Combating climate change? New nuclear? Offshore oil drilling?

I like it all. And it seems like I’ve heard this before. And unlike Obama President Bush even mentioned clean technology by name. Stop talking and deliver.

Neal Dikeman is a partner at cleantech merchant bank Jane Capital Partners LLC and the Chairman of Carbonflow and Cleantech.org.

The 21st Century will be the Cleantech Century

Dear Friends,

We know 2009 has been a rough year up and down, but we are proud to have had some great highlights to share. And as always, after 9 years in business as one of the leading merchant banks and advisors to the cleantech sector, Jane Capital is looking forward to our 10th Spring and the end of the first decade of the 21st Century (and another year of cleantech blogging!)

And yes, we do eat, sleep and breathe energy, and we do believe that the last century was the century of massive, cheap, available energy, and this one is shaping up to be all about cleantech: better, faster, cleaner energy. It will “take a village”, from natural gas, clean coal, nuclear, and better use of fossil fuels, to IT, carbon, wind, solar, superconductors et al driving us to a new and more efficient future.

A Few Highlights:

We capped off a multi-year engagement for New Zealand’s state owned all renewable power company Meridian Energy Ltd, successfully orchestrating the launch of Meridian Solar, http://www.meridiansolar.co.nz/, and arranging and executing the acquisition of California based solar IPP Cleantech America to anchor Meridian Solar’s business in the US. They are in the process of building the largest PV installation in California.

Our venture, Zenergy Power plc (AIM:ZEN), which we cofounded 5 years ago, successfully installed the first ever superconducting fault current limiter in the grid for Socal Edison, and secured FCL deals with AEP and Con Edison. FCLs instantly absorb spikes in power that are one of the major trigger of blackouts.

Our Carbonflow venture launched the first multi-party SaaS platform for the carbon verification market, and ended the year with pilots with 7 of the top 20 carbon market players. Neal spent much of the last year running Carbonflow helping it get off the ground, and we are very excited by the team we have recruited and the success they’ve had.

Despite a rough market, our industry leading handheld for restaurants company, TriniTEQ, continues to power along.

We spoke at over a dozen conferences this year, including the Wall Street Green Trading Summit, Cleantech Forum, and the Thin Film Solar Summit. Those of you who know us know we love speaking, and have a passion for this area.

And Giving Back:

This year Jane Lindner continued her work at California Pacific Medical Center’s non-profit Institute for Health & Healing, the largest integrative medical center in the nation, co-chairing their Community Advisory Council. IHH had another wonderfully successful Spring fundraiser in 2009, of which Jane Capital was a proud sponsor.

Our Cleantech.org venture, created by Jane Capital in 2007 to provide a center of gravity for cleantech, really hit its stride. It’s now one of the largest social media ventures in green, ran its first webinar, partnering with powerhouse carbon verifier Det Norske Veritas, and reached 40,000 in newsletter subscribers plus over 18,000 in social network members. Along with Cleantechblog.com, Cleantech.org gives us now 2 of the top 5 sites on google for the term “cleantech”. And thanks to a great cast of bloggers led by Richard Stuebi and John Addison (who are entering their 5th year as bloggers, Cleantech Blog continues to live up to its reputation as one of the 3 original blogs in cleantech. We also are particularly excited to have successfully taken over and rejuvenated the 2,000 member Cleantech.org group on Yahoo, giving us the largest cleantech dedicated social networking groups on both Linked In and Yahoo, as well as to have launched a new community on http://cleantech.socialgo.com/.

And in a new effort this year, along with DNV, Center for Resource Solutions, and Hedge Fund Services, Jane Capital partnered with the City of San Francisco to launch the SF Carbon Collaborative under the leadership of the City’s cleantech advocate, David Pascal. SFCC has just launched its website, check out http://www.carboncollaborative.org/. SFCC spun out the city’s cleantech initiative and this fall organized as a 501(c)(3). It’s first year successes included running over 50 stakeholder events to help coalesce the Bay Area carbon community, including a two week Copenhagen Café in San Francisco this month during COP-15, delivering from its policy committee multi-stakeholder comments to the CARB AB 32 rulemaking process, and helping to set up a Carbon Business Cluster at One Bush St in the heart of downtown San Francisco managed by Lee West of Hedge Fund Services.

We look forward to lots more in 2010. In particular, we are actively looking for acquisitions for both our account and select clients in solar, carbon, and the green web, and of course anyone looking for help launching a business in cleantech, give us a call.

Regards,

Jane Lindner, Neal Dikeman, and the Jane Capital team

Why Can’t Tom Friedman Find Cleantech?

Thomas Friedman, one of my favorite authors, had an editorial this week entitled, “America must lead in energy technology“. As with most of his recent writings and speeches, it’s targeted around the thesis of his Hot, Flat and Crowded book, which basically argues that a combination of climate change, globalization, and population growth are creating a crisis point in energy and resource use that must be dealt with by utilizing a shift of technologies to cleaner and more sustainable economic practices (some of us call that cleantech). Not a new idea, but as usual Tom Friedman articulates it well.

So for those of us who work in the trenches of cleantech, I found the language he used quite delightfully flighty.

Number one, when it comes to actually doing something about climate change, Friedman can’t seem to get beyond the idealists idea of a carbon tax.

In his article he mentions

cap-and-trade/carbon tax
tax on carbon
long term price on carbon

But not one mention of carbon trading or Kyoto, or CDM, ETS or any of the carbon trading work ($125 Billion in 2008) that makes up the vast majority of the current global response to climate change in process now.

The basic idea here is that the theoretically most efficient way to “put a price on carbon” is to tax carbon. Of course this ignores the reality on the ground that we are really, really bad at making efficient taxes, and the best real world that we absolutely have to have involved to succeed (read India and China) is even worse. So carbon tax basically means carbon trade war if you’re not careful. In the real world, a global response of cap and trade ends up being more efficient as it allows the melding of international trade schemes better, lets industry find the least cost path to comply, and also actually means compliance can be assured. And carbon tax ignores that fact that any economist worth their salt knows full well that a tax ensures some level of revenues to the taxing goverment, but does not necessarily mean you hit your abatement targets (some people just pay the tax). And didn’t we say it’s all about hitting the abatement targets? In the real world we’d actually like to do that with as LOW a carbon price as possible, as long as we hit the critical abatement levels. Unless you don’t like your current standard of living, in which case the fastest way to fight climate change is just take it out of GDP.

We as a globe entered into cap and trade and carbon trading as the best alternative that would 1) ensure we actually reduced GHG emissions enough (a tax doesn’t even pretend to do that) and 2) do it in the least cost path with the least economic collateral damage.

I heard him speak, so I’m pretty sure he knows how this works. But Friedman seems blissfully uninterested in diving down into the details on “how”, prefering to stay only in the “why” realm. Maybe because the how is actually hard. Unfortunately, when it comes to climate change action, the devil is ALL in the details of the how.

Number two, Friedman must really, really hate the term cleantech. He uses everything else he can think of.

clean power 2 mentions
clean-energy hawk 1 mention
green hawk 1 mention
E.T. 3 mentions
energy technology 3 mentions
green-tech 1 mention
clean energy 3 mention

but not a single mention of the word cleantech or clean tech. Now do a google search and see how those terms compare. It’s not like cleantech is one of the top segments of the venture capital world. And it’s not like cleantech investment isn’t anchoring billions upon billions of market and policy dollars. Oh wait, yes it is.

I guess my only request is this, Tom, please come back to the real world, and give the guys in the cleantech and carbon trading trenches their due. They’ve been working hard for years on the topics you are just now discovering. And yes, I have a vested interest. That’s because I’m actually working in the trenches.

Neal Dikeman is the founder of Cleantech Blog, and the Chairman of Cleantech.org, and Carbonflow, and a partner at Jane Capital Partners LLC.

A Quick Take on Joule Biotechnologies

by Gypsy Achong

Joule Biotechnologiesʼ recent press release has stimulated a bit of excitement and speculation on their technology, including by our own blogger Paul O’Callaghan.

A quick look at Joule Biotechnologiesʼ patent filing suggests that they are engineering a fast growing bacterium – Escherichia coli – capable of converting light and carbon dioxide into fuel. The advantages of using E. coli over algae are clear:

  • E. coli is significantly easier to genetically engineer than algae. Thus, Jouleʼs culture will allow greater flexibility in output of fuels / chemicals as policies and product prices change
  • E. coli grows ~10x faster than algae. As long as the metabolic load of photosynthesis does not slow down growth, Jouleʼs culture has potential to capture light at a greater rate than algae
  • Also, algae grow slower if light intensity gets too high. Jouleʼs plan to use a solar concentrator suggests that their engineered organism is less susceptible to light intensity.

In addition, use of a solar concentrator presents an opportunity for increasing light capture efficiency of a reactor. The benefits of Jouleʼs approach have potential to be game-changing, and they have assembled an A-team to deliver. Resumes of the inventors, Eric Devroe, Dan Robertson, Frank Skraly and Christian Ridley, include a whoʼs who of prestigious research labs and synthetic biology companies including Diversa (now Verenium), Metabolix and Codon Devices. George Church, a Harvard professor of genetics and serial entrepreneur, is an advisor (http://en.wikipedia.org/wiki/George_Church).

Still, development risks are high. Creating a photosynthetic organism from scratch is not facile – photosynthesis is one of the most complicated metabolic pathways that exist in nature, and includes membrane proteins – typically the hardest proteins to move between organisms. But perhaps Joule is a company to keep on the radar.

Gypsy Achong is a guest blogger on CleantechBlog.com. She was most recently a management consultant at the Boston Consulting Group, focusing on energy and biotechnology. She has a Ph.D. in environmental microbiology from Stanford University.

The Cleantech LP Conundrum

Cleantech limited partners have a big conundrum. It’s called unrealized gains.

After years of struggling, cleantech investors are now quietly but optimistically beginning to talk about impressive gains in their funds. Unfortunately, the elephant behind them that LPs are beginning to talk about is the prevalence of massive unrealized gains from the behemoth solar, biofuels and automotive startups in the portfolios.

The question is simple, and much debated. Are the unrealized gains real, or unreal?

The naysayer argument runs something like this:

  • Many of the companies are pre-revenue, certainly pre-profit, and tons of them are scary early stage when it comes to actually proving the technology OR the business at scale.
  • There’s still not much in the way of IPO market or M&A market backing up the levels of these valuations (one vicious example is the massive downround valuation smash A123 took in its last round, once you dig into the the prospectus).
  • The energy business doesn’t tend to pay huge tech multiples for exits, and even business successes may get crushed (think Aventine and Verasun at the end of the day).
  • The amount of capital many of the key companies in the portfolios will still need, and the limited GP funds raised in the last couple of quarters, may put a lot of downward pressure on price for the more capital intensive deals.
  • There is a sneaking suspicion among some LPs that if you looked at it from a concentration risk perspective, a quite small web of large deals has been bid up among venture capitalists, causing a bit of a valuation bubble in the portfolios.

The cleantech is finally coming into its own argument, runs like this:

  • The combo of policies around the world is now a heavyweight, from Stimulus to FIT to Climate Change to PTC et al, and those dollars are starting to tell.
  • The consumer and business shift to things green, and the rebounce in oil prices (though not gas or electricity) is underpinning the future growth to justify the valuations.
  • The valuations are based off of big successes like First Solar’s IPO, and are legitimately derived.
  • Some of the early big deals in key areas like thin film solar and automotive are finally beginning to deliver production, and will walk the walk, deserving the kinds of multiples that First Solar got, and underpinning valuations in an IPO market.
  • GPs are increasingly raising later stage funds, and that money has got to go somewhere.

Which argument you buy on the subject may frankly make or break you as an investor. If you believe the naysayers, and a couple of these deals realize out and make half a dozen or a dozen funds, you may be on the short end of the fundraising / returns bragging rights stick for years. If they don’t come through, anyone not in the “Big Bad Bets” (taking that “Bad” either as a pejorative or as BadA**, depending on your perspective), may look like a braniac. And regardless, if some of these big returns do realize, LPs will have plenty to debate about the “quality” of those earnings. Were they good, or just lucky? And how do you tell?

Neal Dikeman is a partner at Jane Capital Partners, and has cofounded, run, invested in, or served as a director of multiple startups in cleantech and technology, and has advised a number of large energy companies on venture investing. He is Chairman of Carbonflow and Cleantech.org, and a Texas Aggie.

Cap-and-Trade: How it works and why it’s the been the option of choice

In the run up to Copenhagen and the debate over Waxman-Markey, I think it’s worth laying out some of the key debating points on how cap and trade works and why it’s been our weapon of choice to date in the climate change fight.

I like to think of our carbon and energy problem as follows. We built the first industrial economies and long term economic growth model in all of human history in the last 200 years on a cheap, available energy base, in part by effectively running down our existing inventories of energy stocks from the least cost to the most expensive. We now need a lot more inventory each year (since we’ve been successful and are a lot bigger), and we’re into the expensive layer of our inventory, so it’s hitting our global cost of goods heavier than before. And we know we need to find more sources to replenish inventories, and we know that if we move immediately to higher cost sources we’ll pay the price in GDP.

We also know that producing and using those inventories had a non zero (and we argue about the level) cost to our environment that we have not measured well, but have been working on reducing for the last three decades. But we’ve now run into a new part of that cost with carbon or GHGs that’s very large, and is going to take a much larger and bigger hit to take care of, and depending on your view, has an aggressive time fuse on it. Essentially this means pricing carbon into our economy – which will basically add a whole new cost in all of our supply chains, a cost that varies from country to country and industry to industry, and will shake up comparative advantage in trade. And because it’s global, as far as the environment is concerned, for carbon, unlike most environmental pollutants, it doesn’t matter where in the world it’s emitted or reduced. So our problem is China’s problem is Europe’s problem is our problem.

So we start with a first climate change goal: to reduce the carbon emissions levels in the economy, by a level that we all debate by a point in time that we all debate. But we have to realize that while we do this, we do need to replace those energy supply inventories to both keep us where we are in GDP, and find new ones to sustain growth, or we’ll solve our GHG problem simply by being really poor. And we have to remember that adding costs has to be paid for, and it isn’t “business” that pays for it, it’s us, with business as our proxy.

So my corollary is the goal should be to squeeze carbon emissions out of the global economy in the fastest, least cost path, and as fairly as possible. Sorting out what that means and how to do so is the rub. But part of fair should mean a “do no harm” principal for the economy as well as the environment – meaning that when we start, as far as possible no country or group or industry or company within industries gets penalized out of the gate without either compensation or enough time to adjust. Think of it like eminent domain. If we give something up to the greater good, we deserve to get paid for it.

We have two main ways to go about it, place a tax or penalty on the emissions, or constrain the emissions factors (like power generation, driving, etc.) Cap and trade is essentially a hybrid of the two. The cost of such carbon reduction, because of the ubiquitous nature of carbon, and typically inelastic demand curves for most energy and carbon intensive products, is spread across all consumers in any scenario, but depending on system design can be borne disproportionately by some groups, industries or countries. Our special challenge is because of that global nature, we literally HAVE to have a solution that can engage and work in every country. Unlike cleaning up a local toxic spill, where we can fix ours without our trading partners, in carbon, if China fails, we fail. So if we try and succeed, and China does not try, the environment loses, and we lose worse.

Carbon Tax – Basically with carbon tax the government picks a series of carbon intensive industries or products, assigns a carbon value to them by one of a number of methods, and levies a tax on them. It’s often touted by economists as theoretically the cheapest method, and generally an industry favorite because they know how much they’ll have to pay and can plan.

But carbon taxes have big drawbacks. You can’t be sure you’ll actually get the level of reductions you want, because the tax fixes price, not volume. Worse, carbon is a global problem, and getting global tax codes to mesh together is virtually impossible (we can’t even do it inside the US), which means we may end up with everybody paying a different price of carbon and a complete mess. That certainly would throw the efficiency argument out the window. The next big disadvantage is that if you don’t get the tax level and structure exactly right, businesses and consumers get hurt in unpredictable ways, and have little room to adjust if we get it wrong. So while theoretically better, it’s not a very “fault tolerant” plan.

Main advantage is that you have a known cost to industry (which is why most industry prefers tax to trade or command and control). Next main advantage is that the the government gets lots and lots of revenue, which is why many politicians favor it.

The second option is classic environmental “command and control”, if you’ll excuse the perjorative sounding nature of that term. Esstentially the EPA or equivalent simply regulates every one who produces GHGs, and tells them how much they can produce through a permitting process.

The advantage is that you know exactly how much emissions reduction you are going to get. The disadvantage is that you may pay much more than you thought, and sink your economy, especially if your trading partners are more lax on either regulation or enforcement, and you let the EPA pick the winners and losers. The other disadvantage is that there is no upside. Under no circumstances will you ever get more reductions than you thought, unlike cap and trade, where done right, you may.

Cap and trade is the middle ground (which is why it keeps coming up). With cap and trade, the system operator (UN, EU, EPA, CARB etc) designates how many credits can enter the system, and prints, them like money. It then designates how many credits a company must turn in each year or period per unit of production (ie 0.5 tons/MWH of power produced), and penalizes or shuts down the company if they don’t turn in enough to meet their obligation. So no more emissions from a regulated sector will occur than credits (often called allowances) exist.

Then the regulator decides whether to sell the credits to the industry that needs them, or to simply allocate them (often based on some measure of current production). Both methods have pros and cons, and in practice have nothing to do with environmental protection or the price of carbon (the total level of credits and the relative level of credits to demand sets that) and more with subsidizing one industry vs another, or collecting revenue for the government.

Finally, the regulator can let offset credits be produced from the remaining unregulated sectors (or from inside a regulated or “capped” sector if appropriate adjustments are made), and sold to the emitters (it simply adjusts the cap so that the total level is where we want it to be). The advantage of this is that the regulations can be phased in easier, and we get a more equal price of carbon.

And what happens is that in unregulated sectors any time potential reductions exist (eg, a very inefficient emitter that could be shut down or run more efficiently), carbon developers pay up for the rights to the reduction, and that emitter finds it’s more profitable to do the right thing. The downside is that it looks like emitters are getting a profit off emissions. In reality, they are getting paid to reduce emissions for you and I, at just the right price.

Then emitters and financial parties buy and sell these credits from the government or each other or develop offset credits in a race to pay the least. And since the regulator starts reducing the number of credits it puts into the system, it’s kind of like musical chairs, the slowest, most carbon inefficient company gets left out and has to shut down, or shifts to a lower carbon production in order to stay in business.

The main advantages of cap and trade – 1) it assures us that we will meet our target goals like command and control 2) but it allows industry the flexibility to figure how to meet them cheapest (which is good for all of us), 3) it tells us what the real price (or cost) of carbon actually is, 4) and it’s better at equalizing the price of carbon so everyone pays the same across different industries and geographies, 5) in practice it costs less, and is easier to implement in a multicountry environment than command and control or tax.

Main disadvantages, it takes some time to get up and running, and makes it look like (not really true), that emitters are making money off it. Trust me, if they thought it was a profit center, they’d be all over it. The final disadvantage is it depends on the government operator to manage a market, something where we’ve had some good success (like NOX and SOX trading and up until recently the Fed), but can be susceptible to politics as usual.

In essence, you can think of cap and trade as a carbon tax with a tax rate that varies with the market (going up if industry is worse at producing carbon reductions than the government thought and down if they are better, and similiarly going down when the economy is bad and we can’t afford it and up when the economy is strong) and a tax base that is higher for emitters and emissions intensive industries than for those more efficient.

In any case, all three options need a lot of money spent on new technology and good measurement and verification. All three options will be expensive, and will be paid for by you and I at somepoint. And in practice, we are doing all three options to varying degrees right now.

Neal

The Past Few Hectic Weeks in Climate Change

The last few weeks have seen a number of big moves in climate policy.

US EPA Lets California Regulate GHG Emissions in Cars – On June 30, 2009, the US EPA backed off and let California Air Resources Board proceed with its longstanding plans to regulate greenhouse emissions from cars, after long resistance from the Bush Whitehouse.

Quick & Dirty Analysis – When it comes to the environment, where goes California, goes the US, eventually, and in climate policy where goes the US goes the world, probably. At the very least this plus a California low carbon fuel policy will make for interesting auto industry machinations at least.

Waxman-Markey Passess – This month, the US climate change bill Waxman Markey passed the House. On to the real battle, in the Senate.

Quick & Dirty Analysis – We’re out of the House, but the battle’s begun. Compromises are good, since it was never going to get through the Senate without them, especially since the US has a huge geographic divide over the economic impacts of cap and trade. The bill is a study in compromise, but this was a big, big test ahead of Copenhagen.

And the G8 starts thinking climate change.

Quick & Dirty Analysis – This is good. Climate change solutions are are heart a trade problem, not a local environmental protection problem like NOx, SOx, et al. The Bush policy, and the Clinton policy (both of them), and the McCain policy, and hopefully the Obama policy, was always to circle up the big emitters, including China, Russia, India, Brazil + the rest in the G8, and get on the same page. Until that happens. No nice for saving the world.

Neal Dikeman is a partner at Jane Capital Partners, and has cofounded, run, invested in, or served as a director of multiple startups in cleantech and technology. He is Chairman of Carbonflow and Cleantech.org, and Texas Aggie.

The Rules in Cleantech

I’ve now been asked enough times, that at the risk of destroying what little edge Jane Capital may have in cleantech, I finally got around to blogging our “Rules” in cleantech investing and business in general. Hopefully it will stimulate some good debate.

One of the things that makes cleantech different from other investing areas, is the best practice rules are the opposite of what the best investors have grown up with. Maybe that’s because cleantech IS energy and energy IS different.

Here is our version of the Rules:

  1. Energy is slow and big – Energy technology R&D and commercialization time frames are longer and costs higher
  2. Technology is “cheap”, the scale up is where all the risk is
  3. There is no disruptive technology in energy, only disruptive policies and resource shocks that make certain technologies look disruptive after the fact – aka, “it’s the policies (and subsidies), stupid”
  4. At scale, there is no capital efficient investing in energy
  5. Commodity prices and policy tend to be more important variables than technology and management
  6. Energy is at heart a resource play, the price you pay matters more than what you do with the resource

As a result we’ve worked out a strategic playbook:

  1. Look for mature technologies – if it’s not 10 year old technology, don’t touch it.
    Limit scale up risk and look for technology with few dependencies for scale
  2. Embrace policy – solid policy frameworks are much better bets than great technologies. In fact, most of the serious money in cleantech has been made by being in the right place when the policies or subsidies hit critical mass, not by developing technologies after the fact.
  3. Expect lower exit multiples, and target lower burn rates over a longer commercialization time as a result
  4. Discipline wins. Think Stage Gate and SPC instead of venture style “massively parallel” R&D commercialization strategies
  5. Don’t be afraid to play a diversified investment strategy
  6. Don’t ignore Acquisition & Development as a viable growth strategy
  7. Don’t be afraid of good low tech deals, that’s where many the cleantech hits have been (if we haven’t heard “that’s not a venture bet” 3 times, we tend to stay away.)
  8. “Powder dry approach” – deploy limited capital early on for larger stakes and focus on returning capital quickly, not rapidly deploying capital
  9. Secure vastly superior market intelligence before moving – stealth is pretty much a worthless strategy, you’re too likely to miss key things that way.

And I thought I’d share a few paraphrased quotes told to me over the years that have helped bring these thoughts home:

A former boss, now an executive at a major utility – “the only thing that matters to the bottom line of the company are the rate cases in front of us. Nothing else we can do with customers, finance, or technology will make a difference if those don’t go well.”

A former head of oil company venture fund on why it takes so long to get technology into the energy sector – “we figure we are taking enough risk just letting a vendor touch our $1 billion platform.”

My father in law, a long time refinery engineer and manager on what small scale means in energy – “let me take you on a refinery tour during a turnaround sometime and show you what half a billion looks like lying on the ground.” Corollary, “you can’t do anything serious at a refinery for less than $100 mm.”

Electrochemist and long time fuel cell researcher on the challenges of making a FC last – “if you could perfectly control humidity and temperature, a PEMFC will run forever.” He was pointing out that it’s much easier said than done.

Energy company technology head – “I don’t want to see the business plan, just show me the energy balance and the engineering behind it, and the data backing it up.”

I’d welcome other people’s thoughts on investing in cleantech and energy technology. So comment away.

Neal Dikeman is a partner at Jane Capital Partners, and has cofounded, run, invested in, or served as a director of multiple startups in cleantech and technology. He is Chairman of Carbonflow and Cleantech.org, and Texas Aggie.

Announcing Our Cleantech Blog Space Biodiesel Project

After the recent announcements about space solar projects, Cleantech Blog is announcing our Space Biodiesel project. “We are excited about space solar, it’s like a moon shot – huge and available. Suprisingly enough, the near earth orbit biodiesel development rights have not yet been locked up.” – SBP cofounder Alexandra Tesla, great granddaughter of the famed inventor of the same name.

So we are launching Space Biodiesel Project, Inc. The program will use solar thermal collectors in orbit and the massive heat sink of space to drive our heat engine providing electricity and processing biodiesel. “The heat differential is so great the cost difference will be game changing and allow us to produce electricity to supply wholesale to other space solar programs as a co-product of producing our all-renewable, carbon negative biodiesel products. To us, “spacepower” is just a matter of scaling up engineering and procuring equipment launch slots.” – SBP CEO, Jimmy Watt, great great great grandson of the coiner of the term “horsepower”.

The SBP is still evaluating feedstocks, and whether a closed loop anaerobic algal process scavenging CO2 from the upper atmosphere can be effective. We are also evaluating whether coproduction of H2 from the algal growth waste O2 through an electrolysis process can provide a space based fuel source to offset the costs of shipping.

Patents filings are in process. Tests to begin in our lab soon. Looking for CEO, engineers, investors, and technology and engineering partners. Pre-money valuation to be based on a DCF of our 1,150 MW PPA and 85,000 bopd fuel offtake agreement with Sealand, which we believe is the largest solar PPA and largest take or pay biodiesel offtake on record. This agreement is expected to make our Series A the largest Series A venture capital deal in the cleantech sector to date. We anticipate, based on the numbers, our Series A pre-money will surpass the Series C and D valuations of even the 3 biggest thin film solar investments of 2008 combined. “Sealand is fully on board, though they have committed they will only pay for MWH and gallons delivered, as they are constrained by a need to protect their ratepayers, that’s why we’re looking to the venture capital markets to finance the first project, now that the technology is proven.” – Alexandra Madoff, SBP VP of Finance, and long time money manager.

– The Management

Fusion, Lasers, and Cleantech Research on a Grand Scale

Thanks to a friend who is an engineer at Livermore, last weekend I had a chance to visit Livermore Labs and the National Ignition Facility when LLNL had a once in 7 years family and friends day. All in all and amazing experience.

The highlight of the show was a tour of NIF, “the world’s largest and highest energy laser“. As far as I can wrap my head around, it’s a massive building consisting of one single, tremendous piece of test equipment, hereby known as “that big fusion tester in Livermore”. Which of course has its own mascot, Niffy, a replica of the baby mammoth whose remains were unearthed during the construction.

Essentially the entirety of NIF exists to hold and direct 192 lasers that after being pumped to full power can be directed at a single millimeter sized target (holding deuterium and tritium) triggering a tiny fusion reaction inside a 30 foot chamber, consisting of the target and a set of extremely intense cameras.

The basic goals of the facility, which is many times larger than Livermore’s previous largest laser, are to enable testing and simulations for fusion bombs with out having to conduct underground tests, and provide a platform for basic research on inertial fusion energy for power, which they are set to begin experiments on in 2010. The construction on the facility is now complete, and they are taking it through full commissioning this year and next.

And speaking of swords to plowshares, who says basic research in the US is dead?

Neal Dikeman is a partner at merchant bank Jane Capital Partners LLC, and Chairman of Carbonflow and Cleantech.org, and a the founding blogger of Cleantech Blog.com. He previously cofounded superconductor firm Zenergy Power, and is a Texas Aggie.

The Efficacy of Biofuels from Algae on Cleantech.org

I usually don’t do this, but a couple of days ago we had a post on Cleantech.org’s Linked In group around algal processes, feedstocks, and the recent DOE solicitation, that engendered a lively discussion, in part taking off from the recent demise of Green Fuels.

While many of you know I am not personally a fan of algal fuels, I have posted it en masse, unedited, so enjoy, as the discussion ranges across a decent chunk of the issues facing algae processes and provides some food for thought.

Urgent – Algae Oil Production or Algae Methane Production Needed!
We are completing a DOE grant application design to meet our Notice of Intent by next Friday and need to find one or two companies with a process to make Algae Oil or Algae Methane, or either, for our process. Please email any information or contacts as our time line is running short for this grant. We believe we have lined up most all other pieces for this proposed biorefinery!

Posted 2 days ago Reply Privately Make featured Delete discussion

Walter Breidenstein
Professional Entrepreneur

See all Walter’s discussions »

Comments (24)
Poly Endrasik Jr.
Video/Web Conferencing & Teleworking Consultant
Hi Walter, Maybe you could pick up this technology for a song and take it somewhere:

http://www.greentechmedia.com/articles/read/greenfuel-technologies-closing-down-4670/

http://www.ecogeek.org/content/view/2747/70/ – both these are the same story!

Good Luck and God bless
Posted 2 days ago Reply Privately Delete comment
Walter Breidenstein
Professional Entrepreneur
Hi Poly,

That is why we turn down all VC investments into our company. They are best left to Universities and University students who manage a lot of deals that once one folds they can jump to the next one without a lot of pain. Where I come from we don’t throw other people’s money at deals…unless those investors who came in early can support those who come in later. Most VC deals are so ugly after the first and second round that who would ever want to support a technology with those types of “investors”. Not me!

Walt.
Posted 2 days ago Reply Privately Delete comment
Neil Farbstein
President of Vulvox Nanobiotechnology Corporation
Algae have several problems that make them untenable. Algal production systems use so much water that they will damage the environment,competing with city municipal reservoirs, agricultural water and they will drain rivers that support wildlife. CSP solar thermal uses a lot less water and some designs use no water to generate clean cheap electricity.
Posted 2 days ago Reply Privately Delete comment
Leif Johnston
Technology Consultant and Serial Entrepreneur
Neil – I would suggest that is myopic. There are many alternatives and many end products. Saying that electricity is the only solution is impractical since electricity does not give us any near term solutions for the vast network of spark and compression based ignition systems.

Walter asked for support on algae, stick to the topic. Walter, I dropped you a parrallel note… As one of the areas I am working on is a non-proprietary solution to put algae farming in the hands of who better? Farmers. My part in the process is the development of a low cost photo bioreactor and trying to engage the agricultual extension service in the mix. If that is a help to you or others, please connect.

There are still realistic challenges like best lipid extraction mechanism. Final protocols for maximizing lipid production are also in order. Some parrallel gadgets to be built include the PBR, a low cost easy operation lipid fraction meter, an oil/lipid extraction gizmo, etc.

The more we share the more likely we are to win/win…

Leif
Posted 2 days ago Reply Privately Delete comment
Walter Breidenstein
Professional Entrepreneur
Leif/Neil,

Our process produces water from the production of the methane. We could use that excess water for the algae systems if that would be helpful. We also produce near pure CO2 and we understand this could also be helpful. At this stage we just want methane sources without the algae oil if feasible. My background is oil & gas so I know methane, ethane and propane down the chain. I am not, nor my engineers, familiar with the bio/algae world as experts. We have lots of engineering firms contacting us to help us, but we really are just looking for designers who understand the algae space to complete this DOE grant. We have until next Friday for the Intent and our budget is around $25 million. We think we have a very strong chance to win this grant…but we need the CO2-algae-methane piece…or part of it to be proven. I know, contact Bill Gates and Sapphire Energy but it appears DOE grants are not going to impact their $100 million last funding round! 🙂

Walt.
Posted 2 days ago Reply Privately Delete comment
Leif Johnston
Technology Consultant and Serial Entrepreneur
Not sure I follow the direction of your need. I am not clear whether you are making methane, or consuming methane. I take it is making… I would assume you could decompose the algae to create a methane source, but like most methane sources, it wouldn’t be clear. Temp conversion/pyrolysis could be an option but certainly you know that.

Given that I am not tracking where you are heading, I am unlikely to be of help.

And I thought that while DOE expected to award some large, the easy high end was $5M and 24 months…

Leif
Posted 2 days ago Reply Privately Delete comment
Walter Breidenstein
Professional Entrepreneur
Lief,

Sorry I was not clear. We need methane for our process to make methanol.

Walt.
Posted 2 days ago Reply Privately Delete comment
Leif Johnston
Technology Consultant and Serial Entrepreneur
Yep I am of no help to you. I don’t have a good way for a clean source of methane. Lots out there, but not sure of metabolic pathway from the algae I work with.

Good luck.

Leif
Posted 2 days ago Reply Privately Delete comment
Leif Johnston
Technology Consultant and Serial Entrepreneur
I assume you are doing this against ARPA-E – did you catch the updated amendment on that?

Leif
Posted 1 day ago Reply Privately Delete comment
Lubo Morhac
Technology Management Consultant
Hi Walter,

I have several links for you to research relating to algae to fuel. I don’t think the following outfits have algae cultures that are capable of CH4 production, but fatty acids for sure:
This one is my favourite in terms of equipment:
http://www.algaelink.com/

also check these:
http://www.solixbiofuels.com/html/company.html
http://www.petroalgae.com/
http://www.greenfuelonline.com/
http://www.livefuels.com/

Landfill sites are an excellent source of CH4.
Some gasification systems may be of interest with Methanization back end.
but of course, best of luck with algae,

Lubo
Posted 1 day ago Reply Privately Delete comment
Lubo Morhac
Technology Management Consultant
Walter, I re-read the thread and I think this may be of interest as an alternative for turning CO2 into energy:
http://www.uafsunstar.com/20090317/sandia-technology-turns-sunshine-petrol
http://www.carbonsciences.com/

L.
Posted 1 day ago Reply Privately Delete comment
Walter Breidenstein
Professional Entrepreneur
Wow, thanks for the information guys. We need methane…that is what we need. We can work with Algae oil to make biodiesel since methanol is used in the biodiesel, but right now we want the most simple system. CO2-Algae-Methane-Methanol…we will recycle our water and CO2 nicely.

Poly, I spoke to my licensing friend at MIT and article you posted, “GreenFuel Technologies Closing Down” was just searched and there is no reference to that project at MIT. He called Harvard for me and they have no mention of it, but they have heard of it. They believe it was something a student started on the roof, and MIT says that any student who develops anything at their University is the owner of the IP. Thus, the article says it is an MIT-Harvard algae project that crashed, but my friend said there is no record of the project he could find, nor at Harvard…so maybe the author was mistaken…

Yes, finding Algae to Methane is not so easy!
Posted 1 day ago Reply Privately Delete comment
Leif Johnston
Technology Consultant and Serial Entrepreneur
The problem in part is that your target their is “swamp gas” from algae rather than the oil output. My challenge is that is a different species, in fact I have no clue what species that might be, vs the standard oil rich species e.g. chlorella …
Posted 1 day ago Reply Privately Delete comment
Walter Breidenstein
Professional Entrepreneur
Leif,

Here is the acceptable feedstocks from the grant…consider we need methane:

“Using the definitions of “renewable biomass” as stated in the Energy Policy Act of 2005 (EPAct 2005), the Energy Independence and Security Act of 2007 (EISA 2007), and the Food, Conservation, and Energy Act of 2008, Title IX, Sec. 9001, as guidance, for the purpose of this FOA, the acceptable feedstocks will be those listed below:
(A) materials, pre-commercial thinnings, or invasive species from National Forest System land and public lands (as defined in section 103 of the Federal Land Policy and Management Act of 1976 (43 U.S.C. 1702)) that –
(i) are byproducts of preventive treatments that are removed –
(I) to reduce hazardous fuels;
(II) to reduce or contain disease or insect infestation; or
(III) to restore ecosystem health;
(ii) would not otherwise be used for higher-value products; and
(iii) are harvested in accordance with –
(I) applicable law and land management plans; and
(II) the requirements for
i. old-growth maintenance, restoration, and management direction of paragraphs (2), (3), and (4) of subsection (e) of section 102 of the Healthy Forests Restoration Act of 2003 (16 U.S.C. 6512); and
ii. large-tree retention of subsection (f) of that section; or
(B) organic matter that is available on a renewable or recurring basis from non-Federal land or land belonging to an Indian or Indian tribe that is held in trust by the United States or subject to a restriction against alienation imposed by the United States, including –
(i) renewable plant material, including –
(I) organic material grown for the purposes of being converted to energy; and
(II) algae; and
(ii) waste material, including –
(I) crop residue (including cobs, stover, bagasse and other residues);
(II) other vegetative waste material (including wood waste and wood residues);
(III) food waste and yard waste.

No plant based material that is generally intended for use as food can be employed as a feedstock except as noted below under “Additional Feedstocks Acceptable For Topic Areas 5 and 6.” Hence, sugars derived from sugarcane or beets and oils derived from soy, canola, sunflower, peanut, etc. normally recovered using conventional food processing methods will be excluded from eligibility for this FOA. The determining factor will be the typical use of the material in commerce. Use of excess oil production of food-grade oil also does not constitute an acceptable feedstock. Distillers Dried Grains with Soluble (DDGS) is also excluded. Additional information regarding the use of algae as a feedstock is included in Appendix J.

Municipal Solid Waste (MSW) is not an acceptable feedstock. However, biomass as defined in EPAct 2005 (Public Law 109-58) Section 932(a)(1-2) that is segregated from the MSW as a separate stream, could be employed as a feedstock with appropriate considerations for the costs of such segregation, collection, processing, and transportation. Hence, post-sorted MSW, where all recyclables and non-biomass components have been removed, would qualify, but only the remaining dry material that meets the above requirements would qualify as a feedstock for purposes of this FOA. Allowable costs include processing (such as, chipping or grinding) the feedstock into a form that can be fed into the reactor. Processing costs for MSW are restricted to post-sorted materials.”

That is not an easy list to find methane…except here:

“A new method for converting algae into natural gas for use in pipelines and power generation has been transferred to the marketplace under a license between Genifuel Corp. and Battelle. Genefuel is based in Salt Lake City, and has an exclusive license for the technology.”

http://www.genifuel.com/ – maybe this is the only one?
Posted 1 day ago Reply Privately Delete comment
Karel Beelaerts van Blokland
Dutchmen Absolute Return F: 07-37% /08-100% /09- 5,4% – dutchmencapital.web-log.nl / kacobeelaerts@zonnet.nl
AlgaeLink N.V. is a Dutch Company that designs and manufactures algae growing equipment. Algaelink are building a world-wide supply chain and network that is sustainable and delivers value to our global customers . Our operations cover algae production, equipment, consultancy, installation support and training.

Fuel Green energy, biodiesel, bio-ethanol, bio-gas, bio-oil, and jet fuel (JV with AirFrance-KLM).
www.algaeLink.com
Posted 1 day ago Reply Privately Delete comment
Leif Johnston
Technology Consultant and Serial Entrepreneur
Walt – my point is in part to explain the tangential answers. Most of us (with all the negative broad brush implications that implies) are focused on the extraction of the large lipid fraction from algea and therefore area focused on microalgae – commonly Chlorella, and other variants of the small motile buggers since lipid fractions can reach 50% in some claims. That oil then become the feedstock for a biodiesel process.

The algae you are after are just different. You are looking for a swamp/march algae (or pnd scum), likely long strain clumpy stuff most people try to kill. A source would be https://ccmp.bigelow.org/ which is a national repository for many such things.

My issue is I just haven’t focused on it. You might be able to find help and support in the reverse from your local agricultural extension agent.

I think I had misread the feedstocks grant to assume it precluded algae – not 100% which one you are pursuing.

Given the time and the inclination, you or I could come up with the right kind of algae and the people involved. You are looking for the swamp biology professor – not anyone talking about algae for biofuels. Not a bad thing, just a different thing.

You are welcome to call me if it would help – 540 847 5343.

Leif
Posted 1 day ago Reply Privately Delete comment
Walter Breidenstein
Professional Entrepreneur
Leif,
I will see if I can get my engineer to call you as he is just now getting started on all these calculations. We know how much methane we need to produce methanol. We know how much methanol is needed to produce biodiesel. We know how much oil is needed to produce biodiesel. We will likely need 5-10 times more oil-algae than methane-algae to have a tight, packaged CO2-to-biodiesel system. We wonder if that amount exists already in stable systems (i.e. before they go in and kill off the “bad” algae)? Interesting dilemma…I’m sure the answer is out there at some of these Universities and DOE labs who get all the “fun money” to do the R&D.
Walt.
Posted 1 day ago Reply Privately Delete comment
Leif Johnston
Technology Consultant and Serial Entrepreneur
That is part of the dilemma – there is much talk and speculation, but other than a haxane oil extraction standard, the only thing that is talked about is pyrolysis to derive a clean oil residue and that is a piss awful waste of energy. Ultimately that is why I think that is why some folks are tanking, because without extraction mechanisms, algae is a tough nut.

The one I am holding out for is algae ‘milking” to extract the oil while the algae is still alive. But I fear that may turn our processes from open to proprietary.

To be fair from your earlier post, you can decompose algae, food, and other wastes that aren’t muni solid – so you should be able to leverage sewage or other feedstocks. I think those folks are really your targets and the organisms in the Archaea group are the metanogens you seek…

Leif
Posted 1 day ago Reply Privately Delete comment
Matt Sloustcher
Account Executive at Peppercom Strategic Communications
Walter,

Nobody has mentioned the heterotrophic “in the dark” method of algae oil production Solazyme employs. I suggest you review the following blog post, and check out Greentech Media’s analysis of the industry.

http://www.oilgae.com/blog/2009/02/advantages-of-heterotropic-algae-for.html
Posted 1 day ago Reply Privately Delete comment
Christine Harmel
PR
I would suggest OriginOil http://www.originoil.com/
Posted 22 hours ago Reply Privately Delete comment

Comments (24)
Walter Breidenstein
Professional Entrepreneur
Has anyone studied the cost accuracy associated with this Algae-methane process? Everything boils down to CAPEX and OPEX in these models, and this looks interesting.

http://www.unh.edu/p2/biodiesel/pdf/algae_salton_sea.pdf
Posted 20 hours ago Reply Privately Delete comment
Leif Johnston
Technology Consultant and Serial Entrepreneur
Big picture you are still decomposing the algal as the methane creation process with techniques not 100% clear to me and combine with complicating compounds in the decomposition gases, sulpher containing mercaptans etc. Which still leaves you with the need for a decomposition specialist…
Posted 17 hours ago Reply Privately Delete comment
Frédéric Vogel
Research group leader at Paul Scherrer Institut
Dear Walter,

I know that I’m too late for your grant application. Nevertheless, you might be interested to know that we are developing a process similar to the one Genifuel has licensed from PNNL. The strong feature of our process is the recovery of all nutrients in a concentrated brine, besides the efficient production of methane. We have recently published a paper accessible to anyone:

http://www.rsc.org/Publishing/Journals/EE/article.asp?doi=b819874h

Feel free to connect if you think some further discussion might be of interest.

Frédéric
Posted 1 hour ago Reply Privately Delete comment
Walter Breidenstein
Professional Entrepreneur
Frederic,
Thank you for the very interesting information. We have not reached any agreement with Genifuel yet, but I have had one brief discussion and a couple email exchanges. I get the feeling they are at the top of their game and have their own uses for methane from their website. I’m not convinced as I know the methane markets extremely well and not a day passes that I don’t hear of another methane technology that will be “easily converted to liquids”. I’ve traveled the world on researching and studying methane conversion, and it just is not as easy as some would have you believe. Therefore, I would be most interested in your technology. We remain open and ready to do business with anyone that can integrate their value chain into ours. Further, the grant is not due until June 30 (so you are not too late) while the Notice of Intent is due by next Friday. We remain committed to find some help in Algae to Methane technologies. We think we can add value to whatever is the methane source.
Walt.
Posted 42 minutes ago Reply Privately Delete comment

Neal Dikeman is a partner at cleantech merchant bank Jane Capital Partners and Chairman of Carbonflow, Inc. and Cleantech.org.

In the Beginning … All Costs Were External

By Ed Beardsworth

Are we in just another cycle, where we charge ahead with renewables and care for the environment, but then forget all about it when oil prices drop? The saga is all too familiar, and cynics can’t be blamed for seeing deja-vu all over again.

This time, however, it feels different. Reality seems to have penetrated so many layers and segments of society, government and business. What’s more, there is a very long standing historical trend that lends hope to the notion that we’re really doing it this time – the process of internalizing externalities.

Garret Hardin, famous for creating the concept of “tragedy of the commons”, published a (now out-of-print) book “Exploring New Ethics for Survival–The Voyage of the Spaceship Beagle” (1972). Reaching far into prehistory, he outlines the evolution of the process of “the internalization of so-called external costs” from early pre-history, the time of the cave-man.

The first “cost” to be “internalized” was probably the fruit on a tree. Someone said “mine”. Then, the red dirt you need to make iron. And on from there.

Cost of -When Internalized (approx)

Raw materials B.C.
Labor a.d. 1000-1862 (ending slavery)
Raising & Educating labor 1800-1900
Industrial Accidents 1875-1925
Industrial Diseases 1900 onward
Pollution cleanup yet to be internalized
Pollution prevention yet to be internalized

Each episode required a fundamental cultural “value shift”, as the established order fought the change bitterly, claiming bankruptcy and ruination would ensue. Each time, the fight was long, often lasting until the old order simply died out or was forced aside, unable to see the light or admit the errors of their ways.

Hardin’s development of these ideas is worth reading. Drastically summarizing, he argues that “right to throw way” into the air, water or onto the land, is perhaps the last major externality yet to be fully internalized, noting that on the “spaceship earth”, there is no place that is truly “away”. The struggle parallels exactly the process of change that took place in every previous episode of internalization.

Perhaps he would be somewhat optimistic now, all these years later farther along in the struggle, that progress is being made.

I wrote these words in 1996. OK, probably a bit overly optimistic then, but an understatement if anything of what we’re seeing today:

Perspectives on Externalities

There is a world wide movement underway to begin thinking about externalities in new and many would say more enlightened ways, as an aspect of industrial, business and social activity that is no longer just the province of environmental idealists and idealogues. Major corporations are starting to realize profound economic implications (e.g. higher profits!) of taking a more comprehensive (holistic) view of production systems, and are adopting strategies that take into account, for example, the “cradle to grave” aspects of their products, from what resources are used to make them, to how they are used, to their ultimate disposal.

Ed Beardsworth is a long time fixture in the cleantech sector, is the Research Director of Cleantech.org and the Director of the Hub Lab. He was formerly with EPRI and Brookhaven, and has a PhD in Physics from Rutgers.

The REAL Story on Moore’s Law for Solar

All new industries seem to think they deserve a Moore’s Law. The photovoltaic solar really, really thinks it deserves one, since it kind of sort of looks like a semiconductor business: Photovoltaic Moore’s Law Will Make Solar Competitive by 2015, IEEE.org, Understanding Moore’s Law, DistributedEnergy.com, and Silicon Valley Starts to Turn Its Face to the Sun, NY Times.

However the nuances are mischevious. The cost implications of Moore’s Law at heart are built around a constant rate of technology performance improvement (2x transistors every 2 years), implying certain cost improvements. PV’s falling costs curves have had more variables at play. In fact, the real equivalent to Moore’s Law in solar would be to say that cell efficiency or a similiar measure doubles every x years. Most people have tried to apply a Moore’s Law like concept in solar directly to the cost curve, not the technology improvement curve. In fact, the solar costs “Moore’s Law” that seemed the simplest was the idea that every doubling of industry size equaled 10% in cost reductions. But that is not a Moore’s Law, that’s mainly just a description of the supply curve shape and shift, it’s a totally different animal.

I’ve been researching this topic for some time, trying to develop a simple conceptual model to understand falling solar cost curves and their impacts, and I update my cost analysis spreadsheets based on numerous inputs from energy companies, solar developers, solar integrators, as well as module manufacturers. I think I now have a simple, economically sound model with good explanatory power, that allows us to shed some light on why and how the cost curves fall.

We’ll call it the Dikeman Solar Cost Model – DiSoCo Model, and it’s somewhat simple and axiomatic: the value on the supply side = the value on the demand side, broken down into fixed, sticky, and variable components, by market segment.

Over the last couple of years, I’d argue that roughly half of the cost reduction in solar have come from massive increases in larger installations (primarily spreading NRE and installation cost across a larger projects at the installations, as well as dealing improved economics of scale in manufacturing), not really from solar costs themselves. And roughly the other half from actual technology cost reductions.

This is an important distinction as it means that arguably with say 2003 solar technology, if the subsidies and demand had been there to build a whole bunch of 10 MW PV farms, a similiar cost could have been achieved to today’s costs, at least within striking distance (as opposed to a Moore’s law industry where the fundamental technology performance curves would have been 8x better, with drastic cost improvements resulting). Technology costs haven’t necessarily fallen as much as we think, so much as the scale has changed, making costs look like they’ve fallen a significant amount.

And we have to be careful about making generalizations of the technology cost reductions, too. A large chunk of the technology cost reductions at scale (perhaps 50%?) have come from one company, First Solar, out of the hundreds that manufacture PV products. If you take them out of the equation, the falling technology cost curves don’t look so great.

But I’ll posit a cost reduction law for solar that may hold. Roughly speaking, the per unit solar industry costs at a system level fall every year in line with the reduction in per unit subsidies for the key solar subsidy programs in that year, adjusted for interest rates and margin changes. Because if they don’t, they don’t sell product.

Why? We argue that the market is basically willing to pay a set rate per kwh for solar that is reasonably constant over time. The underlying conceptual DiSoCo Model is this: the market’s set rate for solar + the cost of capital + the per unit subsidy = solar system cost + solar system embedded margin. My primary use of the model has been to break out each component, market by market, segment by segment, and analyze how fixed, variable, or sticky they are, to better understand their interactions as conditions change. If this is true, then for a given set rate, same interest rates as last year, then changes in the subsidy either come out of cost or margin. If margin were mature and fixed, then cost changes would equal subsidy changes.

We could extend the model by suggesting that changes in the market set rate is a function of retail and wholesale energy prices, and non direct subsidy programs like a RPSs and RECs, and non market based buyers willing to accept low equity ROEs. We could further extend it by suggesting that some subsidies, like the ITC, may manifest in the cost of capital, not the per unit of subsidy.

In a real life example, when the subsidy programs have built in per unit reductions in them over time or volume (like the Japanese industry maker did, and California does, and many of the FITs do), then the industry has to find a way to take enough costs out to match the reduction, otherwise the margin gets hammered. This suggests that market won’t actually see the cost reductions until the subsidy ends, except where the industry cost reductions exceed the subsidy reductions in a given period (in fact, this was true, and available manufacturing capacity seems to have a big impact on this component also, as for several years, the manufacturer’s didn’t pass on ANY technology costs reductions, but fattened margins and prices instead).

And extending on that, we realize that the swing variable has been manufacturer’s margin at the ingot/wafer, cell, and module levels, not cost, which has tended to be more fixed or sticky than we thought. And in a period of tight supply, as we had in the silicon refining shortage, margin goes up, all else equal, and in period of oversupply, where we are moving too, margin goes down, since the other major components (including, unlike the corollary to Moore’s Law, technology cost) are relatively fixed or sticky over short time frames. The market still only pays what it will pay per kwh, and the subsidies and interest rates are what they are, and so known coming reductions /volumes in per unit subsidies force the industry to find a way to take it out of costs, see margin suffer, or find new markets with new subsidies. Hence, the model allows us to posit the law that the real long term linkage is subsidy reductions to cost reductions, adjusted for swings in margins.

This would help explain the rise of the grid linked industrial market in California and Germany, effectively as a partnership between public policy, manufacturers with limited near term technology cost reduction potential needing economies of scale, and the rise of the PPA/developer model as the facilitator between the two, and explain the continual skinny economics for end users/PPA owners, despite falling costs.

We could further extend that last point by suggesting it can be applied niche by niche, country by country. And better understand the market by realizing that manufacturers, starting with the Japanese firms 5 years ago when the Japen rebates rolled off, and extending currently to First Solar’s and Suntech’s et al moves into power plant development, effectively applied this model on a country by country, niche by niche approach seeking new markets as the subsidies fall and move, in a bid to maintain margins while cost curves were steady.

So the DiSoCo Model is simple enough, it states that the value on the supply side = the value on the demand side, and when breaking the components out and evaluating market by market which are fixed in the short term and which are variable, it has seemed to us to shed some light on why the solar markets have moved the way they’ve moved. And it posits that a market set price exists segment by segment, and therefore that if margins are normal in that segment, reductions in the per unit subsidy levels roughly equal reductions in cost, and only when reductions in cost drastically exceed those of subsidy levels, can price be effected.

And it gives us a very different picture of falling cost curves and price implications than pretending Moore’s Law works for solar.

Neal Dikeman is CEO fo Carbonflow, Inc., a Partner at Jane Capital Partners LLC, the Chairman of Cleantech.org, and the founding contributor to CleantechBlog.com.

Cleantech Blog Power 5 – Top Investors in Cleantech

I’ve been warning about a massive mispricing of risk in cleantech investing for years.

Cleantech Venture Capitalists Beware – What You Don’t Know About Energy Can Kill You

Beware the Allure of Ethanol Investing

Is there a cleantech bubble? Experts don’t think so

That certainly doesn’t mean that cleantech investing is bad. On the contrary, I’m very very bullish on cleantech. The question is which cleantech investors are following my rules on what’s good about investing in cleantech, and which ones are just following the old style IT rules of venture capital and taking that mispriced risk for their LPs.

In the cattle business, a bad rancher judges the cow by the quality of cow, a good rancher judges the cow by the quality of the calf. That’s how this Power 5 Ranking and Big 5 Question Mark Ranking of cleantech investors was constructed. Quality of the calf.

The Cleantech Blog Power 5

  1. GFI Energy – The top private equity shop in cleantech in my opinion. Caminus, Noreseco, Xantrex, et al. Been doing it quietly for over a decade creating great companies. A shop that doesn’t miss often, and doesn’t bother to show up at the cleantech conference circuit. Maybe they don’t need to.
  2. MissionPoint Capital Management – SunEdison, Ecosecurities, APX et al. Great discipline, great picks. They actually seem to know something about the areas they invest in.
  3. Clean Pacific Ventures – Early stage, see things others are going to see about 4 months before they do. Backed one of my companies. Show the love.
  4. Acorn Energy – The place where Comverge was borne. Publicly traded, now investing in cleantech. I love this portfolio. John Moore has a nose for deals. His card says “CEO and Evangelist”. Most people will ignore him because he’s publicly traded. But if it works, so what?
  5. Goldman Sachs – Their name is on or in half of the marquee deals in the sector from First Solar to SunEdison, Horizon Wind, Suntech. Hard to leave them out.

Honorable mention goes to the AIM market. The whole market. It’s better for founders, better for investors, took HUGE market share from the venture capital community in cleantech. All around eating VC lunch for breakfast. And yes, there is liquidity. Stop saying there’s not in the same breath you ask me to sell you preferred stock with cosale rights. It’s obnoxious.

And the Big 5 Question Marks

  1. KPCB – Bloom Energy? EEStor? 5 different stealth thin film plays? Et al. How many stealth science projects in cleantech can dance on the head of a pin? Let’s work on a very mixed metaphor/cliché of sorts – you shall not crucify this crown of venture upon a cross of cleantech. Too many of the technologies in Kleiner deals are only sexy because Kleiner’s name is attached. Come on guys, you’re better than this.
  2. Google.org – The world is rooting for you to succeed. And Silicon Valley needs a poster child for cleantech. How about articulating a strategy that the market understands? Maybe “sustainably energizing the web” or some such? When people ask me what does Google.org invest in and why, there should be a clear answer.
  3. Khosla Ventures – How many odd ways are there to invest in ethanol? Do we really think being in refining is a good business? And no, it’s not cheaper than gasoline. Can we lobby our way out of it? There are some gems in here, but the weighting may catch him. Kudos though for doing it with large chunks his own money instead of my grandmother’s pension fund’s money.
  4. VantagePoint Venture Partners – The anti Kleiner? Lots of strategics involved, and taking very, very large, very, very risky bets. Perhaps they better hope Vinod’s lobbying comes through. But it only takes one, right? If they can find the discipline of the Power 5, this could be good.
  5. Nth Power – Where’d you go? You were the acknowledged market leader when cleantech started in the first part of this decade. At one time virtually every strategic that mattered was an LP. The cleantech market needs you to be bigger than you are today.

So yes, invest in cleantech. But pay attention to the risk not just the management fees when it’s OPM.

Neal Dikeman is a partner at Jane Capital Partners LLC, and Chairman of Carbonflow and Cleantech.org. And he has the utmost respect for the guys behind these firms, regardless of whether or not he thinks their investment strategies are pricing risk well.

Cleantech Blog "Power 10" Ranking Vol II 2009

Last year I did my first “Power 10” ranking for 2008 of cleantech companies, and the response was so good we’re doing it again.

I spend most of my day meeting and talking to companies in the cleantech sector. And those of you who know me know I have opinions on who is doing it right, and who is doing it wrong.

As before this is the Cleantech Blog Power 10 Ranking of cleantech companies doing it right.

Eligibility for inclusion in the ranking requires meeting a 6 point test. Suggestions for inclusions in future volumes are welcome. The 6 point test:
1. The company is energy or environmental technology related
2. I like their products
3. The market needs them
4. The company is smart about building their business
5. I’d like to own the company if I could (for the right price, of course!)
6. It is not already one of mine (my apologies to my friends Zenergy Power)

I have included cleantech companies big and small.

  1. Sharp – Makes the list again as top dog battling to hold its crown in solar PV. Keep on trucking.
  2. GE – Their M&A strategy delivered venture like returns, and they still hold power positions in wind, T&D, clean gensets, and water capital equipment. Hard to dethrone.
  3. Iberdrola – Barely didn’t make the cut last year. Largest wind operator in the world now. Deserves it.
  4. First Solar (NASDAQ:FSLR) – Still the low cost producer in PV and growing. Smart move swapping expensive stock for the Optisolar project pipeline. Keep those factories full!
  5. Goldman Sachs (NYSE:GS) -The only investor to merit consideration, but area a part of too many power plays in cleantech to leave off this time.
  6. DNV – Their auditors underpin roughly half of the carbon markets. In carbon, audit and verification is everything. Their market share slipped some, but they hold their crown as the only one of the big carbon auditors yet aggressively investing in the US.
  7. Applied Materials – The future of thin film if they can deliver on their strategic moves. But I need to see some of your customer’s production taking serious market share, or making next year’s list could be tough.
  8. Cleantech Group – The business is now definitely more than just a conference operator. Despite massive competition in conferences (long a cash cow for them), the Cleantech Group hasn’t lost its footing as the preeminent brand. And now seems to be learning how to play well with others. Great job guys on both creating an asset class AND building a cool company.
  9. Bayard Group/Landis Gyr – Smart grid is the big cleantech play along with carbon and solar. Bayard, now branded around Landis Gyr, is a global Metering/Smart Grid roll up powerhouse. Bought Cellnet, Hunt, Enermet, and Landis Gyr et al.
  10. Valero – Texas refiner’s acquisition of VeraSun and move into renewable fuels gets it the nod. Now where to from here?

Honorable mention to Zenergy Power plc (AIM: ZEN.L), one I helped cofound. I couldn’t resist this year since the team is making hay off of fault current limiter technology we bet on in 2004, and deserves the nod. Also to Smart Fuel Cell (XETRA:F3C.DE) – Still the most mature fuel cell company in the world by a mile. But revenues flattened in 2008 and it made no moves allowing it to stave off the newcomers to Power 10. 2009 is the make or break year. And finally to Sindicatum – Mover of the year in carbon in 2008. Raised a warchest into the teeth of a tough carbon market. Now we’ll see what they can do with it.

Also on our watchlist for next year: Abengoa, Acciona, SGS, Duke Energy, SoCal Edison, Origin Energy, Ecosecurities, Q-Cells, SunPower, Oerlikon, ConocoPhillips, BP, Shell.

Of note, no CIGS or solar thermal this year. The list is indicative of a shift towards carbon and projects. Still no cellulosic, and I can’t bring myself to add EVs to the Power 10 until somebody shows something real. Perhaps the 2013 list?

Neal Dikeman is a founding partner at Jane Capital Partners LLC, a boutique merchant bank advising strategic investors and startups in cleantech. He is founding contributor of Cleantech Blog, Chairman of Cleantech.org, and the Chairman of Carbonflow, Inc..

Cleantech Crunched

The cleantech crunch is on. And a few juicy tidbits are coming to light.

Optisolar – Crunched. Several 9 figures into it, what do we find? The only thing of real value are the development deals in a post subsidy boom year. Is it a “financial market” issue? Only if manufacturing and technology development are “financial market issues”. Several of my long time clients have deep pockets actively looking to finance “financial market issues” for renewable power plants – assuming the numbers actually stack up on the project, that is. Actual returns have proven to be quite skinny in many cases. Buyers from the energy sector looking under the hood can be such a downer.

Tesla – for all intents and purposes looking for a bailout. But at least they’re shipping now, sort of. 100 cars I think? Good money, if the margin is positive. Keep this up and they should be at several percent of tiny little Jaguar’s US sales volumes with a year or two. Why do sane people want to be in the automotive business again? Oh – that’s right, because it’s not really the automotive business – it’s the ELECTRIC automotive business, and we can really outcompete those dinosaur automotive companies in EVs. And I’m sure the new batteries will just solve everything. I wonder who will sell us the materials for those new batteries, maybe the oil companies, here, and here whom we are going to replace and our automotive competitors? Wow. That’s a business plan that gets me really, really excited. Not.

Solyndra – the bailout came through. Yippee! Will it be enough? I’m sure coating CIGS on 1,000s of cylinders is a brilliant way to be cheaper than CdTe and A-Si on large scale glass. The sounds like a great way to make replicable, scalable 30 year devices.

VeraSun – the deal that helped build the investor craze for ethanol – finally sold off in pieces in bankruptcy. To whom? A Texas refiner known for picking up refining assets on the cheap. Note to Vinod, yes, ethanol is much, much more expensive than gasoline, any way you cut it. And no, refining feedstocks into fuel is not a wonderful new business that should trade at tech multiples. Way to go Valero (VLO)! But don’t worry, all the “good” deals are doing cellulosic ethanol – you know the btu poor, hard to transport, pain in the rear to refine feedstock which we don’t own using technology currently at 0.25% of the scale of the average oil refinery. That’s where we’ll make our “smart” money.

MMA – Along with SunEdison one of two companies to create the solar PPA model. Sold off.

What are we learning? Energy – and yes, I’ll say it again, cleantech is energy – is all about owning the resource. Not the technology. In energy technology follows resources, not the other way around.

And lots of deals and money are there to be had, maybe just not for the cleantech venture capitalists who insist it’s all about the technology and the startup, not the resource. I guess it is if you like to gamble.

Learn people, learn. Or you could just follow Kleiner into their next Energy Bloom.

Neal Dikeman is a Partner at Jane Capital Partners LLC.

Reality Check on Earth2Tech’s Top 10 Cleantech Predictions for 2009

Katie Fehrenbacher, writing on Earth2Tech, is one of the most prolific of the cleantech journalists. She compiled this week their 2009 top 10 cleantech predictions. Here’s my take, worth the electronic paper it’s printed on, of what she got right, wrong, “duh, of course”, and most understated. Just for fun, of course, Katie’s one of my most favorite bloggers.

1) U.S. Federal Policy On Climate Change Will Move Slowly:

Probably. But the end of 2009 in Copenhagen is still a pivotal point for the global climate change framework, so we have to get our act together to play ball.

2) Oil Prices Will Stay Low For Much of the Year, Potentially Climbing in Q4 of 2009:

True only if you believe that oil prices in the $30s are low. I happen not to. $15 is low. $40 is high. $140 is ridiculously high. Oil has been essentially deflationary for 30+ years, with just a blip looking flat in real terms the last couple. And the big variable is GDP growth. No economic recovery, no oil price stablization, let alone rise. I don’t buy that OPEC will stop the slide over the next couple of quarters either. And I don’t buy a Q4 climb.

3) Next Generation of Biofuels on the Backburner:

Only if you believe they were ever on the front burner. I’ve been blogging this siren’s song for years.

4) Green Buildings are Bright Spot:

Probably a good call. It is growing, but is it large enough to be a bright spot?

5) Utilities Turn to Energy Efficiency Programs:

Utilities ALWAYS turn to energy efficiency programs, they just never seem to achieve scale. But we can hope. My hope is demand side energy efficienciy gets included in our cap and trade scheme.

6) Gloomy Skies for Traditional Solar PV:

I disagree. In a year when companies are reporting falling sales, solar will still be a way outperfomer. But we should see margins compressed as the industry learns that it (gasp!) really is a heavily subsidized very cyclical business when supply growth meets subsidy weakness and economic turmoil.

7) Infotech Turns to Energy Efficiency to Save Cash:

Hmmmmh. With energy prices cratering? I could imagine some wind coming out of these sails (or sales). But I’m not an expert on this one.

8) More Green Buildings? Yes. Emergence of the Smart Home? No.:

Smart home is another of those siren’s songs. Smart metering, however, is a goldmine, and just now coming into it’s own. We’ll see how it weathers the financial crisis.

9) Public Perceptions of Green to Become More Savvy:

How about, the public just ceases to care? We’ll find out just how much of a luxury item “green” really is. My personal benchmark here is random chats with Erik Blachford, CEO of Terrapass, the leading retailer of carbon credits. His last prognosis – green may be a bit more of a luxury item than previously expected. But we can hope. And I’ll keep asking Erik.

10) Green Investors Go Conservative Or Double Down:

Come on people, energy is STILL the biggest industry out there. When energy prices are cratering it’s time to buy. Just stop buying into the highest cost producer (like next gen biofuels :)) of the most “out there” technology at venture prices. But try telling that to Sandhill Road.

Neal Dikeman is a partner at Jane Capital Partners LLC, the Chairman and Founding CEO of Carbonflow, Inc., edits the Cleantech Blog and Chairs Cleantech.org.

Best of Blogroll: Kanellos on the Most Paranoid Cleantech Companies

Best of our Blogroll:

I could not resist for a Friday afternoon offering up Michael Kanellos’ pithy (and dead-on) chronicling of the most paranoid startups in the cleantech world. Utterly hilarious. First Solar, Bloom Energy, EEStor and Solyndra of course make the list.

And the Cleantech Avenger last week had some quite entertaining speculation about Nancy Floyd, one of my favorite venture capitalists, and politics.

And finally rounding out with an entertaining read from Robert Rapier on falling oil prices.

Drive as green as the inside of a kiwi

by Cristina Foung

My favorite green product of the week: the PLX Kiwi Fuel Saving Device

What is it?
The PLX Kiwi is basically a fuel efficiency monitor for any car. It’s an on-board display that shows you quite a bit of information, including your miles per gallon and how much you spent (or saved) on fuel in a given trip.

Why is it better?
Before the Kiwi, you might have been guessing at your car’s fuel efficiency. But now, you can see your MPG at the exact moment you’re driving. It gives you real time feedback which helps you adjust your driving style to maximize your fuel efficiency and minimize your carbon footprint (and save money). Just don’t keep your eyes on the Kiwi and forget about the road.

The Kiwi also comes with another nifty feature. It’s called the “Drive Green” mode. This setting lets you run through different driving lessons. The lessons teach you strategies to maximize smoothness, acceleration, and deceleration (among other things).

By making drivers more aware of their habits, their fuel economy, and their potential gas savings, the Kiwi helps cut gasoline consumption and therefore emissions. Now mileage monitors are no longer just for Prius drivers.

Where can you find it?
You can get the Kiwi for $299 directly from PLX Devices.

Besides her green products column on Cleantech Blog, Cristina is a passionate advocate for green living at the Green Home Huddle at Huddler.com, which focuses on electric cars, organic personal care, and other green products.

A Swash(buckling) Bidet Seat

by Cristina Foung

My favorite green product of the week: the Brondell Swash Ecoseat Bidet Seat

What is it?
The Swash Ecoseat is a bidet seat. It gets installed in place of your traditional toilet seat and has a control panel to help you select the water direction and flow. The Swash Ecoseat has two retractable “cleansing wands” which are self-cleaning. The seat also has a body sensor, so it can tell when you’re not seated and will automatically shut off the flow of water. The seat operates with only 4 AA batteries.

Why is it better?
By nature, a bidet seat does use more water per use than a standard toilet. However, a standard toilet without a Swash Ecoseat also requires toilet paper. The Swash Ecoseat was designed to reduce toilet paper use by 75%.

According to Brondell, in one day, Americans use 34 million rolls of toilet paper. But in order to make all that toilet paper, there are a lot of resources required (221 thousand trees, 255 million gallons of water, 161 million kWh of electricity). Just imagine offsetting 75% of that toilet paper use – it would reduce greenhouse gas emissions by 33 thousand tons.

Besides some serious resource conservation, the Swash Ecoseat is simply more hygienic. The only thing you have to touch with your hands is the control panel.

I can tell you from personal experience, the seat is really comfortable and the water pressure is quite strong. At the Huddler office, we experimented getting around the body sensor to see what was really going on. There’s even a Swash Ecoseat video to prove it.

Where can you find it?
You can buy the Swash Ecoseat (and a variety of other bidet seats) directly from Brondell for $360.

Besides her green products column on Cleantech Blog, Cristina is a passionate advocate for green living at the Green Home Huddle at Huddler.com, which focuses on electric cars, organic personal care, and other green products.