In the 2005-2006 timeframe, direct methanol fuel cells (DMFCs) were the next big thing.  Not just for the military, for portable power, recharging power, and even on-board plug-in systems in armored vehicles, but also very much for consumer electronics.  At the time, many in the industry expected to see an integrated fuel cell in every laptop and mobile phone just around the corner.  On the weight of expectation and some interesting lab results, a number of companies had stellar, at least by the fuel cell industry standard, VC investments and initial public offerings.

That was 2005 / 2006.  Now, 6 years later, the industry is down to two companies with commercial product and only five others currently anywhere near market with a product.  The DMFC sector has always been buoyed up by SFC Energy, a poster child not just for DMFCs but for the entire fuel cell industry.  But beyond this innovative company, there is very little now left.

Taking a quick run though the remaining seven companies developing DMFC products:

• Fujikura (Japan): Was aiming at a 2012 commercial rollout.  Nothing so far.
• IRD: Working across a number of electrolytes but has two DMFC products which are in theory commercial.
• Neah Power: In its 2012 annual report, Neah stated “Investment funds received have not been sufficient to continue to support certain operating activities, which led to postponement in the deployment of our business strategy and the scaling back of research and development activities. … Without additional funding, our cash is estimated to support our operations into March 2012.”  Of course, if Neah Power comes forward with a large order, the funding situation could change quickly.
• Oorja Protonics: Provides shipping systems to the industrial vehicle sector, primarily forklifts.
• Panasonic – was aiming to field test its DMFC system in 2012.  With the re-unveiling of the unit in June this could happen on time.
• SFC Energy:   Shifting to higher margin markets alongside it foundation markets in the leisure sector.
• Toyobo: In R&D mode, developing systems for portable power generation.

Other companies have been mothballed, their products have sent back to the lab, or they are currently sidelined.

So why is SFC Energy so successful while others have taken such a beating?  If you ever get a chance to hear SFC Energy’s charismatic CEO, Dr. Peter Podesser, speak, take it.  He will tell you that company does not sell fuel cells, it sells solutions.

So could DMFCs make a comeback?  Yes.  There is nothing fundamentally wrong with DMFC technology and there’s a lot right with it.  But the assumptions underpinning the expectations of 6 years ago were wrong.  The military will not shift its technology readiness levels to match what a technology can do.  Personal electronics power demand is moving faster than increases in power densities in DMFCs, and the stack architecture of the DMFC is still fiendishly complicated to integrate.  The difference now, though, is that they are being targeted at markets where there’s a need for the characteristics that they have, rather than the ones the developers would like them to have.   The remote power market is burgeoning, with remote telemetry a hot market, posting double digit growth rates in terms of DMFC fuel cell deployment.  The leisure sector is bouncing back, and the military and first responders are cautiously dipping their toes in small batch deployments of proven systems.

And then there’s the Apple factor – the patents that Apple filed for integrated fuel cells in December look suspiciously like a DMFC system.

What a week!

At the start of the year we forecast that one of the big trends in 2012 would be the return of the private equity markets to the fuel cell and hydrogen industry.  In fact, this trend has been far larger and is now having an impact on the entire cleantech sector.

The last week has seen an announcement from Goldman Sachs that it plans to invest a $40 billion fund in clean energy and Pangaea Ventures Ltd. achieving a first close of Pangaea Ventures Fund III, LP, having attracted the initial $50 million into the target $100 million fund.  The Pangaea Ventures Fund will also be targeted at energy storage, energy efficiency technology, and energy generation.  In Europe, the United Kingdom’s $5 billion bet, the Green Investment Bank, became a commercial reality.  (It was also the week though when T. Boone Pickens, the U.S. industrialist and of late clean energy supporter, pulled his backing of wind power development in the U.S. citing low natural gas prices that have reduced his profit margins in wind.)

Does this mean we are in for a new hype cycle with government R&D being replaced by easier to acquire private equity? And if so, is this a bad thing? Although it’s unlikely that we will see a return to the days when investors lily-padded across the supposed Next Big Thing en masse, we should see the average deal increase in dollar amount as well as the number of deals increase.

Series A funding is likely to remain the largest hurdle for cleantech companies, with more and more emphasis being placed on commercial viability of the product, rather than on a concept.  But once through that gate, the pool of available investment is growing and the number of companies investing larger.  Investors are still looking for the same things as in any other sector, including a good management team.  If the startup is small and stacked with R&D types, but with strong intellectual property, we are more likely looking at acquisition by a large corporations rather than investment by the private equity sector.  For companies that are clearly on the commercial track, with a viable and well developed business plan, getting the next level of funding should be easier.

So what has changed to bring investors back into the sector?  The clear major shift in the last twelve months has been the exit from the market in many countries of government based intervention.  The second factor is the increased number of technologies that now fit into a standard private equity model of a five-year exit strategy.  Fuel cells, wind, and biopower, as well as a range of energy efficiency technologies, now all are strong enough markets to sustain the traditional investment and exit model.

Finally, if we do have another hype cycle, will it be as counterproductive as the last?  Unequivocally yes.  The cleantech market cannot sustain another boom and bust.  To be a sustainable, growing part of the global energy market, cleantech cannot afford another gold rush.

The first Pike Research Smart Energy Annual Report is due out soon (Q2 of 2012), and in it Pike Research calculates the size and value of the global smart energy market in 2011.  We define smart energy as “the range of efficient technological options available to providing electricity in a distributed fashion, either for local use or for grid support,” covering renewable energy, biopower, energy storage and advanced conversion technologies such as fuel cells and CHP technology.  But we don’t cover developments in the natural gas market.  Why? Because it remains unclear whether the developing natural gas market in the US will harm or help the smart energy market.

Daniel Yergin in his article for CNN is cautiously optimistic that in the US natural gas will not crowd out the developing renewable energy market, but will more likely replace and then displace coal and nuclear for power production.  In Europe I believe that governments are starting to move away from the dash-to-gas due to the increased geopolitical tensions caused by the location of most of natural gas reserves.  In Austria, for example, the region of Güssing has a policy of 100% renewable, locally produced, power.  As I covered in the past in an article for Fierce Energy, this includes 50 MWs of distributed fuel cell power using locally produced biogas.  The United Kingdom has taken a slightly different approach, and has to date limited the use of hydraulic fracturing, or “fracking,” due to the increased incidences of minor earthquakes in the vicinity of a nuclear waste storage facility.

But how will the surge in natural gas supplies affect the overall smart energy paradigm – the production, storage and use of efficient, distributed power?  From my own personal perspective it’s likely to be a good thing.  Over three quarters of all fuel cell systems deployed today use either natural gas or a form of fuel in which natural gas is the main component.  The addition of natural gas-powered fuel cells will in some cases help a renewable installation in the same grid system win contracts, as it can guarantee steady, predictable baseload power.  A win-win surely and a prefect example of the systems based approach that we see rapidly developing in the smart energy market.

One scenario we could see developing is utilities providing smart energy systems, rather than electrons and heat, where a package that combines a natural gas-fuelled fuel cell, solar and wind capacity, and an advanced battery for hydrogen-based storage are deployed together in a turn-key system.  This could be everything from 1-5-kilowatt (kW) systems for homes right up to 50-100 megawatts for communities or towns.  Joining the dots in this way will increase the overall efficiency of the power and heat production network, and emissions will decrease.  So, note to self: Next year in the 2013 Smart Energy Annual Report – include natural gas.

We all know that Silicon Valley is the beating heart of the tech industry, with large corporations, tiny start-ups, entrepreneurs and the finance community all living, working and drinking coffee together.   (This last bit isn’t a throw away reference to our increasing addiction to the black magic bean, but to an article I read in Harvard Business Review in 2010 which said that you are as likely to start up a conversation with a potential investor or tech start-up CEO in the local coffee shop as over a formal meeting in an office.)  This melting pot of groups and interest is the key to the success of the Valley.  The key players are all there breathing in the same idea.

Do we need a Silicon Valley of Smart Energy?  And if so, will we see one emerge?  I believe that yes, we do need one.  By bringing all the actors together in an environment conducive to change, change happens.  Smart Energy is stronger than the sum of its parts, but right now its parts are like hissing cats in a sack, as quick to fight each other as to work together to foster innovation.  Just throwing them together won’t enable this change, but it should help them to understand the value of united action.  Secondly, investors are still quick to run to the more traditional markets of the old energy paradigm and high tech.  Investment in cleantech is still patchy and piecemeal with little evidence of a long term sustainable shift in focus to the Smart Energy sector.  A focused geographical region that comprises all the elements of a thriving tech sector would help draw in investors and generate investment.

If the Smart Energy Valley appeared, where would it be? As a European it pains me to write this, but it’s unlikely to be Europe.  Even though the European countries compose one of the biggest, if not the biggest, market for Smart Energy in the short to medium term, we are simply too institutionally risk-adverse to celebrate the successes, but critically also the failures, that a thriving Smart Energy Valley would need.  Micro valleys (let’s call them “Corries,” from the old Scots word for a round hollow) are springing up all over Europe.  These Silicon Corries though tend to promote a regional activity rather than a market.  So even though they can be very successful in promoting growth in their regions, their impact on the overall market is limited.

Asia Pacific? More likely than Europe, but still an outlier.  In energy at least the focus is still on regional growth and with the markets in Indonesia and China exploding this global focus is still, possibly, on the back burner.  Here I could be wrong.  If the Smart Energy Valley does appear in Asia Pacific it could well be in one of the younger countries – specifically Australia.

Africa or Latin America?  Even with the massive surge in liberalisation of energy investment in Africa and the huge strides that Latin America is making to develop deploy Smart Energy technology, there is simply too much going against them for either to be a realistic candidate.

We are left with India, the Middle East, and North America.  These are my front runners.  I believe a Smart Energy Valley will emerge.  Where will it be? In India, the Middle East or North America.