Navigant Research Blog

What Cleantech Bust?

— February 17, 2012

This month’s issue of Wired magazine includes a long feature, written by Washington Post national environmental reporter Juliet Eilperin, headlined “Why the Clean Tech Boom Went Bust.” (Disclosure: I’m also a contributor to Wired, and Eilperin is an acquaintance.) The story, which joins a lengthening list of obits for the cleantech industries, has a certain usual-suspects quality to it: John Doerr, Elon Musk, Solyndra, blah blah blah. Beyond that, like most such eulogies, it misses the forest for the trees.

Suffice it to say up front that Pike Research does not see a bust taking down the cleantech industries. Our January 10 webinar, “The Year Ahead in Cleantech,” included a forecast for combined revenue across the industries and technologies covered in our smart energy practice – biopower, energy storage services, distributed solar, wind energy, geothermal, etc. – at nearly $300 billion. By way of comparison, the global automotive industry, which has been in business for about 120 years, generated $1.7 trillion in revenue in 2010 – less than six times the smart energy industries, which are less than 40 years old. Growth rates in 2012 will range from 6.3% for biopower to 116% for stationary fuel cells to 766% for energy storage on the grid. That does not sound like an industry in crisis.

Based in San Francisco, Wired, of course, is the quintessential pinup magazine for Silicon Valley, and Eilperin at first glance confuses a bunch of disappointed venture capitalists for a wider industry downturn. VC funding for cleantech startups, she notes, totaled $4.1 billion in 2008, before the global financial crash. Much of that went down a rat hole. VC firms are temperamentally and structurally unsuited for investment in clean energy technologies: “Venture capitalists tend to work on three- to five-year horizons,” Eilperin acknowledges. “As they were quickly finding out, energy companies don’t operate on those timelines.” VC funding for “the green Google” has almost dried up; that doesn’t mean that large vendors and new startups and angel investors aren’t investing in, and making profits off, nuts-and-bolts clean-energy products like fuel cells, geothermal pumps, smart meters, and so on. Such niche products don’t make headlines like a novel solar panel technology, of the sort developed by Solyndra, does; but they form the core of the real cleantech revolution.

To her credit, Eilperin sheds the narrow, Silicon Valley-centric view late in her article. “And yet, clean tech is far from dead,” she writes, contradicting the headline and premise of her story. “Certain companies and technologies will emerge from the ruins not only to survive but to thrive, just like they did after the bursting of the Internet bubble.” (Among feature writers this is known as the “‘To be sure,…’ paragraph.”)

Among the winners, she predicts, will be electric vehicles – a somewhat surprising conclusion since disappointing EV sales have been in the headlines for weeks – and providers of distributed generation systems. The problem with a story like this one is not that it gets the facts wrong; it’s the six-blind-men-and-an-elephant problem. There is plenty of evidence available that the cleantech revolution is happening at a slower pace than its marketers originally hoped, and in many of the sectors that Pike Research covers, consolidation (including spectacular flameouts like Solyndra) is an inevitable, and healthy, part of the maturation process.

As it happens, the Wired story came out almost simultaneously with former vice president Al Gore’s latest broadside, entitled “A Manifesto for Sustainable Capitalism.” In it, Gore and his partner David Blood (“Blood & Gore” – sounds like a law firm in a Dickens novel) address the very dysfunction that has plagued the cleantech industries. In particular, Gore calls for extending the investor timelines that rule Western capitalism today – abolishing quarterly earnings guidance, for instance, and eliminating short-term performance rewards for investment managers whose liabilities are measured in decades. What we need now, declares Gore, is “a more responsible form of capitalism, what we call sustainable capitalism: a framework that seeks to maximize longterm economic value by reforming markets to address real needs while integrating environmental, social and governance (ESG) metrics throughout the decision-making process.”

This is not warm and fuzzy enviro-correctness; it’s a belated recognition that long-term performance (of corporations, of investment funds, of managers) is inextricably bound up with the notions of sustainability and social costs. That’s exactly the equation that the short-term, IPO-driven models of Silicon Valley VC firms are incapable of solving. To see what’s really happening in cleantech we need to step back, take off the blinders, and see the elephant in full. Unfortunately, gloom and doom stories like the Wired feature don’t help with that.


Itron’s SmartSynch Acquisition Bolsters Cellular Tech for Smart Grid Communications

— February 16, 2012

Itron’s deal to acquire cellular-networking company SmartSynch is a smart move by the big meter maker, helping bring an increasingly important communication technology in-house.  Besides helping to validate cellular as a supplement to various RF mesh technologies, it also reflects market reality.  Cellular technology is now an efficient and cost-effective alternative to RF mesh in some cases, and utility operators now recognize this.

Moreover, Itron is not alone in seeing the value and future of cellular solutions.  Recently, Silver Spring Networks launched its latest version of smart grid network technology, Gen4, which allows a utility to mix in cellular if it wants.  And Cisco recently unveiled its latest network architecture that encompasses cellular, RF mesh and WiMAX.

The major communication suppliers in this space – including Itron with its OpenWay RF mesh technology – naturally want to promote their own RF solutions.  But cellular got a big lift last year when Consumers Energy (an electricity and natural gas provider in Michigan) chose SmartSynch’s cellular-based AMI system for 1.8 million electric customers.  That got people’s attention.

Now with SmartSynch under its wing, Itron can tell its utility customers, “We’ve got you covered.  If you need to build a private RF network, fine, we’ve got that.  But if you also need a cellular solution, we’ve got that, too.”

The purchase doesn’t come as a big surprise.  The two have been partners for more than a decade, and have contemplated a tie-up in the past, but could never agree on terms.  This deal, valued at $100 million, finally worked for both sides.  Over the years, privately held and venture-backed SmartSynch had raised an estimated $91 million.  But its prospects for an IPO were dim, and barring an acquisition, it was likely faced with having to go back to VCs for more funding.  The choice was fairly clear: take the Itron deal and play with the big boys, or shuffle along.

The deal also highlights the following:

  • The growing importance of cellular for AMI, supplementing its traditional strength in commercial and industrial market and “hard to reach” meters
  • Industry consolidation in the face of a shrinking North American AMI market
  • The potential to leverage SmartSynch’s technology outside the U.S. with Itron’s global reach
  • An interesting overlap between SmartSynch GridRouter and the Cisco router developed in partnership with Itron (and used at BC Hydro)

Itron CEO LeRoy Nosbaum, who came out of retirement last September to get Itron’s house in order, has put another arrow in his quiver as he moves the company forward.  And, quite clearly, this deal moves cellular up the food chain.


The Interminable Wait for New Grid Security Standards

— February 16, 2012

There’s been a lot of discussion since the NERC CIP V5 standards were voted down last month.  Fortunately, most of that talk has been optimistic.  No one is giving up, and that’s good.  But the pace of success is still slow, considering the current vulnerability to cyber attack of most power grids worldwide.

For a quick background, NERC CIP (North American Electric Reliability Corporation, Critical Infrastructure Protection) standards are designed to protect critical cyber assets (CCAs) of the North American Bulk Electric System (BES) from attack.  That sentence indicates the scope:  NERC CIP is only applicable in the U.S. and Canada, and the Bulk Electric System is defined as grids operating above 100 kV and control systems managing more than 1500 MW of generation.  The CIP standards are designed to ensure a minimum level of protection for the CCAs but should not be considered equal to full cyber security, which is unique for every business entity.  What exactly is or is not a CCA has been a topic of prolonged discussion throughout CIP’s lifetime.  This continues with v5.

The question now is what this might mean in terms of a) the likelihood that v5 will ever be adopted and b) if so, when.  My own view of this topic is stuck somewhere between pessimism and ambivalence.

One of the direr comments on a LinkedIn thread was:  “In the cyber world where bugs, Trojans, and malware proliferate overnight, and in the real world where Iran seems to be itching to get even with someone, ANYONE, for Stuxnet, NERC’s effective date of ‘two years from now’ for the security of our national grid can be seen as more than appalling.”

Seven Year Itch

I fear that this comment may be right, if a bit optimistic.  I have blogged, and continue to believe, that Stuxnet may have been developed in late 2007, and certainly no later than the middle of 2008.  Picture yourself as the Stuxnet project manager and lay out all the tasks that had to be accomplished so that Stuxnet could have done its job sometime in mid-2009, as later observed by international inspectors.  If you work backward from a mid-2009 payload, early 2008 is the absolute latest you could have begun.

If that’s correct, then Stuxnet is now three-and-a-half years old.  It would take heroic assumptions to believe that nothing worse has been developed during the intervening 42 months.  If nothing else, lots of potential attackers have had the Stuxnet source code for over a year.  Now we must wait at least another 24 months for CIP v4 to take effect – 66 months after Stuxnet was completed.  And NERC CIP v4 is what? – inclusive language to identify more critical cyber assets.

The best-case scenario (to which some commentators assign a low probability) is that version 5 will be approved at the next vote.  If that happens, there would be a short delay until the NERC Board approves v5, then it goes to FERC (Federal Energy Regulatory Commission) for implementation.  Let’s remember that we are closing in on 13 months since the NERC Board approved v4, and it’s still not FERC approved.  So there’s another year.  Yes, there are extenuating circumstances around v4, but it was somewhat truncated so that it could be enacted quickly and that hasn’t happened.  Then we’ll wait another two years after that for v5 compliance to be required.  In round numbers that looks like like another 40 months from now as the earliest date for v5 compliance.  So, nearly seven years after Stuxnet was created, NERC CIP v5 compliance may be in force.  Does that qualify as “relevant”?  Ferrari purchasers finance their 599s over a shorter term.  Okay, most of them pay cash, but you know what I mean.

Attackers of enterprise systems thought they had it made when, in the mid-1990s, we started requiring all software changes to go through CMM (Capability Maturity Model) and ISO9001 processes before they could be deployed.  They’ve got it even better on the control side.  Forget real-time software patches – when are we going to have meaningful standards in the same decade when they’re needed?


DOE Budget a Bonanza for Battery Builders

— February 15, 2012

Announced on February 14, the Obama administration’s Department of Energy (DOE) budget recommendation is a big valentine to those working on developing batteries for electric vehicles. 

As we said last year, the current administration has focused the majority of its vehicle technologies research and development dollars on EVs.  This is a significant reversal from the attention given to fuel cell vehicles and biofuels such as ethanol during the second Bush administration.  As with last year, the request completely omits funding development for these two technologies, which is a significant blow to the companies developing those alternatives.

For fiscal year 2013, the DOE is requesting a total allocation for the Vehicle Technologies program of $420 million, down from the $588 million requested last year, but still a 27-percent jump over the $329 million that Congress actually approved last year. 

The new budget calls for an increase of 73 percent in funding dedicated to “Batteries and Electric Drive Technologies.”  This $203 million would represent 48 percent of the total vehicle technologies budget, up from the 35 percent included in last year’s budget.  As you can see in the accompanying chart, three research areas would receive less investment in 2013 while no other area would receive an increase of more than 20 percent, a further indication that battery R&D is where the federal money is. 

These numbers show a consistent viewpoint between the DOE and the automotive industry: For plug-in electric vehicles (PEVs) to succeed, major improvements are needed across the board for EV batteries.  The technology currently being used in today’s plug-in vehicles is not sufficient to sell millions of these vehicles annually.  Improvements are sorely needed in making the batteries last longer, cost less, store more energy, and produce more power for the majority of consumers to consider buying a PEV. 

Let’s not forget that there continues to be tangible progress in battery development.  Lithium ion batteries are seeing improvements in all of these areas annually, as the estimated installed cost per kWh for an entire battery system fell from nearly $900 in 2010 to below $800 in 2011.

Thanks to the billions of dollars of private capital, and in part the $2 billion in grants from the 2009 American Recovery and Reinvestment Act for battery technology, R&D on battery technology development is accelerating.  However, the fruits of this investment won’t be fully realized for a few years to come due to the deliberate process of commercialization within the automotive industry.  In some cases (such as the award to EnerDel), no benefits are likely to be seen from the government funding, but every program has its winners and losers.  The additional research battery being undertaken this year is unlikely to provide any benefit until the latter part of the decade, which requires patience that many investors lack. 


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