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.

The Advent of SPS Policy?

In the cleantech sector, pretty much everyone knows the acronym RPS, for Renewable Portfolio Standards.  Since the first RPS policy in the U.S., implemented in Iowa in the late 1990s, 30 states have passed similar policies to promote the installation of renewable energy projects and expedite penetration (overcoming the ambivalence or outright opposition of utilities) of renewable energy in electric power supply.

Now, as reported in this article, California is considering the adoption of what looks to be the first Storage Portfolio Standard:  requirements for utilities to install grid-scale energy storage.  Specifically, in early August, the California Public Utilities Commission (CPUC) voted unanimously to adopt a framework for analyzing the energy storage needs of each utility.  This builds upon a previous bill, AB 2514, which included a mandate for the CPUC to “determine appropriate targets, if any, for each load-serving entity to procure viable and cost-effective energy storage systems to be achieved by” the end of 2015 and 2020.

Not surprisingly, the three major electric “load-serving entities” (i.e., electric utilities) in California — PG&E, SCE and SDG&E — all opposed this movement.  As did the Division of Ratepayer Advocates (DRA), the consumer watchdog organization, which argued that “picking arbitrary procurement levels…would most likely result in sub-optimal market solutions and increase costs to ratepayers without yielding commensurate benefits”.

As one of my former McKinsey colleagues noted on a number of occasions, quoting an executive who worked his entire career at a large electric utility, “No technology has ever been widely adopted by the electric utility industry without having it mandated by the regulators.”

The storage analogue of RPS policy — let’s call it SPS — faces some hurdles, no doubt.  But so did RPS policies.

Given that GE (NYSE: GE) is now working on a grid-scale battery technology, given how much GE’s wind business has benefited from the expansion of RPS policies over the last decade, and given how active GE tends to be in energy policy circles, it’s not a stretch to think that there will be a push for SPS-like policies across the U.S.

It will take time to fully implement, but perhaps grid-scale energy storage will soon be following the path blazed by renewables over the past 15 years, with a domino-effect of SPS requirements spreading across the country.