In Northern California, A New Revolution Sprouts
Finanz und Wirtschaft (Finance and Business)
April 2, 2008
International News – Nr. 26, Page 45
In Northern California, A New Revolution Sprouts
By Mark Dittli, San Francisco and Sacramento
The Silicon Valley region is an ideal hotbed for energy entrepreneurs striving to capitalize on the “Mother of all Markets”.
Twenty miles south of Las Vegas, in the wilderness of Nevada, a new light beams across the United States. Like soldiers standing at attention, 182,000 mirrors belonging to Nevada Solar One capture solar energy and transform it into an electrical current that supplies Sin City’s sea of lights. An equally imposing sight can be seen from the sky over Northwest Texas or Kansas: hundreds of white windmills, each as tall as the tallest house in Switzerland, dance as if part of a finely choreographed rhythmic ballet in the open prairie.
What the Kyoto Protocol – which the Bush administration torpedoed – could not achieve, a combination of a free market, $100 oil barrels, and growing concern over the dangers of climate change has: America has turned green. By all accounts, this trend will only gain momentum as of January 2009 because all three presidential candidates have spoken out in favor of continued support for alternative energy research.
The focal point of the development of this industry is – once again – the region between San Francisco, San Jose and Sacramento. The Silicon Valley region, which with the founding of Intel and Google led the IT and Internet revolution, offers an ideal hotbed for entrepreneurs, risk-taking venture capitalists, first-class university research centers, as well as a forward-thinking state administration. Hundreds of budding enterprises work meticulously on energy efficient solar panels, better wind turbines, and on bacteria that can convert forest waste into vehicle fuel. What they are working on is nothing short of the solution to the 21st century’s energy problem. And they want a piece of what venture capital guru John Doerr calls the “Mother of all Markets”.
Big Plans
One such new venture is Bloo Solar. In a nondescript industrial building on the outskirts of Sacramento, the 12 employees of this UC-Davis campus spin-off develop innovative thin-film for solar technology. The idea: Bloo Solar attaches billions of nano-structured wands onto a support substrate. Tiny hairs protrude from each wand. This bristled landscape is then coated with a protective cadmium telluride and plastic film. “Our photovoltaic cells cover 700 times more surface area than conventional thin-film panels,” says founder Mark Breunig. That means that Bloo’s panels can take advantage of a wider spectrum of light – earlier in the morning and later at night – to convert solar energy into electricity. “Our cells absorb approximately 16% of the sun’s energy, which is clearly more efficient than other thin-film cells,” explains Breunig. “We believe we have a better technology to offer than First Solar.”
These are not humble words. First Solar, a pioneer in thin-film solar technology, earned $504 million in sales, and a profit of $119 million last year (see box). In contrast, Breunig is planning a manufacturing facility for Bloo in the coming months and hopes to sell its first solar panels in 2009. “Our production is already a write-off for the next three years. We are working with Flextronics and Applied Materials to find ways to quickly scale up our production capacity,” he says. While the company waits to become profitable, Bloo Solar continues to accept VC funding. And afterwards? “If all goes according to plan, we will have our IPO in either 2011 or 2012,” says Breunig.
Arnold Offers Support
The availability of venture capital is what makes Silicon Valley unique. Without VC funding, neither Intel nor Genentech nor Google would be what they are today. According to PricewaterhouseCoopers (PwC), despite the credit crisis in the second half of the year, VCs provided hundreds of new companies in the US with $30 billion in funding. That translates to the best year since 2001 (see graphic). Estimates vary as to how much of that funding has been allocated towards renewable energy: PwC says $2.2 billion, research company Cleantech speaks of $4 billion. Both anticipate industry growth of 46% compared to last year.
Various well-known venture capitalists are playing the game: Under John Doerr’s leadership, Kleiner Perkins Caufield & Byers, the “midwife” of Amazon, Genentech and Google, has invested $250 million in green technology companies. Sun Microsystems founder Vinod Khosla has invested approximately $300 million with Khosla Ventures. The VCs enjoy state government support in Sacramento. The public pension funds Calpers and CalSTRS, two of the world’s largest institutional investors, have, as per Governor Arnold Schwarzenegger’s request, invested some $500 million in various green start-ups.
Green Need Not Be Sexy
One of the recipients of Calper’s millions is Harry Laswell, whose VC fund American River Ventures manages $100 million which he plans to grow to $200 million. Laswell fits the typical picture of a California venture capitalist: khaki pants, sailor shoes, light-blue button-down shirt. He spent 21 years at Intel and founded his own firm seven years ago, shortly after the tech bubble burst. Laswell has found his niche: he invests above all in companies whose business objective is to increase efficiency in the world’s culture of consumption. “Most people see the solution to the energy problem as an opportunity,” he says, “but so many solar and wind enterprises we’re building won’t be able to keep up with demand. New technologies that decrease the demand for energy don’t seem as sexy but are of far greater economic value in a shorter amount of time.”
One of the companies in Laswell’s portfolio is Synapsense. The young company has developed sensors and software that can help optimize energy demand for data centers. A lucrative market: according to a 2005 study by chip manufacturer Advanced Micro Devices, global data centers – including the enormous server farms of Google and Yahoo – consume approximately 14,000 megawatts (MW) of energy, or the output of 14 large coal-fired power plants at a cost of around $7.2 billion. “Half of that is necessary for the cooling of the server alone”, explains Laswell. “With Synapsense’s systems, the cooling needs can be cut by up to half, cutting overall data center energy needs by about 25%.”
Waiting for Washington
One of the financial challenges is the enormous need that energy start-ups have for capital. In the software start-up milieu, VCs grew accustomed to $5-10 million rounds of financing, before larger VC funds would emerge to ultimately take them public. “To bring to market an innovative solar panel technology, you need a quick $400 million,” says Laswell. To minimize capital risk, the industry relies on state protection. California, the eighth largest economy in the world, offers a degree of certainty. Public utility companies like Pacific Gas & Electric (PG&E) are legally required to produce at least one-fifth of all electricity through renewable sources by 2010. Hydroelectricity and nuclear power do not qualify. Schwarzenegger has set a goal to raise that figure to 33% by 2020. With this ambitious goal, California can now match every European nation.
To date, the government in Washington has granted tax credits for the construction of new wind and solar facilities. But this particular law expires at the end of 2008 and neither Congress nor the administration can initiate a renewal. Despite that, in Silicon Valley, confidence in the future prevails. The democratic presidential candidates Hillary Clinton and Barack Obama both support a plan to require utilities to produce a quarter of their electricity from renewable resources by 2025. Republican candidate John McCain is also an enthusiastic supporter of green technologies to fight global warming. “Our market is going to explode in 2009, regardless of who is sitting in the White House,” Faried Muscati, US head of Dutch energy consultancy Ecostream, is convinced.
Until Washington gets its act together, states like California, New Mexico and Texas are moving forward. The projects speak for themselves: according to Ernst & Young, in 2007, wind power stations generating a total of 5255 MW were installed in the US. That’s enough to power 1.4 million homes. Across California, Nevada and Arizona, 12 thermo-solar power plants similar to Nevada Solar One’s are being built. They use mirrors, and transform the sun’s energy into steam to power the turbines. The largest among them, designed by Spanish company Abengoa in Phoenix, should provide about 280 MW of energy by 2011. At the end of March, Governor Schwarzenegger announced the construction of solar panels covering two square miles of rooftops across Southern California Edison’s area of coverage. Beginning in 2013, it should achieve 250 MW. At present, the largest photovoltaic power plant in operation is in Spain. Its performance: 23 MW. Such large-scale projects are scaleable, reduce production costs and offers hundreds of budding companies the promise of a new market.
Creative Destruction
Every mega-market, from the US train industry in the 19th century to the commercialization of the Internet less than ten years ago, begins with an entrepreneurial spirit, an openness to risktaking and big plans. This time it’s entrepreneurs like the founders of Bloo Solar. Or Paul Misso, whose company, Marquiss Wind Power, developed a high-efficiency wind turbine that can be installed on the rooftops of industrial buildings. Misso rhapsodizes that by 2011 he will have sold more than 3,000 of his turbines. It is the researchers at Amyris Biotech and Mascoma, who are developing microbes that break down plant matter and convert the sugars into ethanol for energy. And it’s visionaries like Vinod Khosla who place their trust in start-ups instead of spending their retirement on the golf course. Khosla rarely grants interviews but his enthusiasm is clear in a strategy paper available on his website. In ten years, he wants to see ethanol sourced from plant by-products at a price of $1 a gallon. That way, the fuel can compete with conventional gasoline at a price of $45 a barrel.
John Doerr of Kleiner Perkins said in a Fortune interview at the end of 2007 that he is counting on a “Netscape event” whereby the stock market would unlock access to more capital for energy companies with the simultaneous push of continued research and development into new technologies. The IPO of browser host Netscape launched the “New Economy Boom” in August 2005. Just as it was then, the evolution of the “green tech” wave will surely be replete with overstatements, entrepreneurial errors, the misallocation of resources and, occasionally, depression. But in the end, something big is brewing. And with all its foresight, Silicon Valley will ensure its success as the incubator.
Box: A Narrow Field for Investors
From the point of view of investors, the US “green” market is still in its infancy. The wind turbine market is dominated by Danish firm Vestas, Spanish firm Gamesa and by General Electric. The boom in alternative fuel ethanol over the past two years has caused fireworks for US-based Pacific Ethanol (Nasdaq PEIX). On Wall Street, the realization has set in that the conversion of corn for the production of ethanol is only minimally lucrative and ‘green’ at present. The result: Pacific Ethanol shares are trading at a 90% lower price than their highest point two years ago. Ethanol will become a lucrative opportunity once again when companies like Amyris, Mascoma and Range Fuels fully develop processes to convert plant by-products into ethanol. But these projects are still not within the reach of investors: they remain in the portfolios of venture capitalists. The best bet for individual investors is solar energy. The “best in show” of the industry is First Solar (Nasdaq FSLR), a pioneer in the development of thin-film solar cells (see Finanz und Wirtschaft issue #13, February 16). In 2007, First Solar announced sales of $500 million and $119 in profits. Analysts are confident that the company will reach $1.8 billion in sales and $400 million in profits by 2009. This is no secret tip: First Solar’s share price has increased tenfold since the end of 2006, its market cap amounts to $18.2 billion. On the basis of its estimated 2009 earnings, the titles are being valued at a price-earnings ratio of 50. 5N Plus (Toronto VNP, p-e ratio 2009: 36), one of First Solar’s biggest suppliers, has also profited from the boom. Other names on the US solar landscape are Chinese companies Suntech Power (STP, p-e ratio 2009:13), Evergreen Solar (Nasdaq ESLR, p-e ratio 2009: 11) as well as the majority stakeholder of Cypress Semiconductor, Sunpower (Nasdaq SPWR, p-e ratio 2009:18).