Navigant Research Blog

As Governments Exit, Private Investors Return to Cleantech

— May 24, 2012

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.


Facing Stormy Seas, Exelon Seeks a New Course

— May 9, 2012

Fresh off its $7.9 billion acquisition of Constellation Energy, Exelon Corp. – now the nation’s largest competitive power producer, with total generation capacity of 34 gigawatts – reported weak quarterly earnings this week due to a historically mild winter, the plunging price of natural gas, and costs associated with the merger with Constellation.  Also the largest U.S. nuclear power company, Exelon faces rough sailing ahead under new CEO Christopher Crane.  Confronted with a natural gas glut with no end in sight, plateauing demand for electricity, and forthcoming stringent regulations on greenhouse gas (GHG) emissions, particularly from aging coal plants, U.S. utilities are going through a wave of consolidation and cost cutting as they attempt to weather the stormy transition to more sustainable forms of power generation.  The Exelon-Constellation announcement was followed by Duke Energy’s purchase of Progress Energy for $13.7 billion in stock, in January.

Chicago-based Exelon is in a particularly interesting, not to say dicey, position because of the big bets that Crane’s predecessor, John Rowe, placed on nuclear power.  A blunt-spoken “lawyer and amateur historian with a fascination for antiquities and a love of the podium,” as Crain’s Chicago Business described him, Rowe had become a familiar figure in Washington, D.C.’s corridors of power and a leading advocate for the heralded “nuclear renaissance.” He believed that the shift away from coal and other carbon-emitting forms of power would favor nuclear power, which supplies 20% of America’s electricity and remains cheap compared to other forms of clean energy, including renewables.

“The single most disruptive technology in my 28 years as a CEO was shale-gas fracking,” Mr. Rowe told an energy conference in March. The natural gas boom represents “a huge challenge for my successors at Exelon.”

That’s not exactly a rousing vote of confidence for Crane, who never finished college and who started out as an electrician at nuclear plants in the 1970s.  Exelon’s share price has lost 18% of its value since its peak in November 2011, before the full extent of the domestic natural gas supply became evident.  That now seems like another era.  Few people foresaw the gas glut that’s now proving to be an economic boost for the United States and a huge challenge for big producers of power from coal (like American Electric Power) and nuclear, like Exelon.

Exelon is also locked in a political battle over a new 650-megawatt plant planned by Omaha-based operator Tenaska, Inc. on Exelon’s home turf of Illinois.  Tenaska had originally planned a $3 billion next-generation “clean coal” plant for its Taylorville, Ill. site.  Faced with strong opposition from state politicians and influential business figures including John Rowe, Tenaska this week said it would shift gears and build a natural gas plant instead, at a third of the cost.  How Exelon will respond remains to be seen.

The waves rippling across the energy industry represent the biggest change in the utility business since deregulation, in the 1990s.  How these new power behemoths navigate the tossing energy seas will play a major role in determining the structure of the U.S. energy industry for a generation.


The Solazyme Effect and Algae’s Second Wave

— April 27, 2012

When it comes to navigating the advanced biofuels’ winding pathway to commercialization, no company is faring better than Solazyme.  Whether delivering biojet fuel for commercial flights or producing hundreds of thousands of gallons of advanced fuels to help the U.S. Navy launch its Green Strike Force in 2016, Solazyme has been on a marketing tear.

The company has also unveiled a steady stream of partnerships, with companies such as Unilever and Chevron, in the last few years, securing its place among the companies to watch in biofuels.  Earlier this month, the company made a splash at the Advanced Biofuels Leadership Conference in Washington, D.C., where it announced a new joint venture with Bunge Global Innovation, a subsidiary of agribusiness giant Bunge.  The partnership will build, own, and operate a commercial-scale renewable tailored oils production facility in sugarcane-rich Brazil.

But caught in the backwash of the attention and hype surrounding Solazyme is a more troubling development: the skewing of expectations around algae commercialization.

Not quite an algae company – “traditional” algae companies rely on CO2, sunlight, and water as inputs – Solazyme uses an algae platform that relies on cheap sugars, which it feeds to microalgae in closed steel fermentation tanks.  The sugar-dependent algae platform coupled with the company’s genesis in the traditional algae space no doubt contributes to its characterization as an algae company.

More accurately, it sits alongside a slew of promising companies chasing cheap sugars, including venture-backed startups like Amyris, LS9, and Codexis.  All of these companies have proven adroit at straddling the chemicals and fuel markets.  As discussed in Pike Research’s Biofuels Markets and Technologies report, these companies stand out in the advanced biofuels industry, rebranding their companies around the production of “renewable” or “tailored” oils.  More importantly, they are on a very different commercialization trajectory than the algae-to-fuels industry.

Like any good Shakespeare character worth his salt, Solazyme has expertly used appearance versus reality to its advantage, aligning itself with algae when the industry is hot, and distancing itself when it’s not.  Meanwhile, the long-term impact of the “Solazyme Effect” on the algae industry remains unclear.  On one hand, the company’s recent success has provided important cover for a young algae industry still clawing its way towards commercial viability in the harsh, post-Solyndra landscape; on the other, the Solazyme Effect may be feeding unrealistic expectations about algae’s near-term potential.  If the Solazyme star flames out, the algae industry could suffer collateral damage, further delaying development timelines.

Green Crude Outlook

With or without Solazyme, though, things are starting to heat up for green crude.  Promising companies like Sapphire Energy and Origin Oil are making headway.  As with any new technology, the real test for the algae industry will be managing expectations while marching towards commercial viability.

At the end of the day, what algae has going for it is (potential) scale and infrastructure.  As a biofuels platform capable of producing fuels that can be dropped-into existing pipelines and engines – ground, aviation, or otherwise – the road to commercialization is less onerous from a marketing standpoint than it has been for ethanol or first-gen biodiesel.  And as a renewable energy platform, algae could very well be one of the killer apps that enhances our existing energy infrastructure by cleaning up wastewater or soaking up CO2 exhaust from industrial facilities.

But all this will take time and money.  As Katie Fehrenbacher rightly notes in a recent article at GigaOM, it’s a long, long (long) road for algae fuel.  Pike Research’s Algae-Based Biofuels report projects that biofuels production from algae will rise to just 61 million gallons by 2020, partly owing to early production being soaked up by low-volume, high-value markets like biochemicals and nutraceuticals.  Although we profiled Solazyme in the report, the company’s production forecasts did not factor into our global projections.

For those looking for relief at the pump in the near-term, don’t hold your breath as we don’t see much change in these projections, especially given the growing emphasis on production for non-fuel markets in the near-term.  Nevertheless, algae’s long-term prospects continue to shine.


Why Upstart Automakers Tend to Fail

— April 16, 2012

Did you hear how GM has had to recall 6,000 vans and SUVs due to faulty steering gear that could lead to a loss of steering control?  No?  How about when the company asked for the roughly 8,000 Chevrolet Volts on the road to be taken to a dealer for adjustments to the battery packaging?  Needless to say, that Volt story got a lot more play than the steering gear recall.  Although this may be unfair, as recalls are incredibly common – the U.S. Department of Transportation has an entire website devoted to them – and the Volt situation was not even an official recall, it is not surprising.   New vehicle technologies will tend to attract extra scrutiny, as consumers look to see whether they work and opponents look for a misstep.

This recall issue highlights just one reason why it is so difficult for a start-up company to succeed in the car market.  Unfortunately, the news has been full of stories on start-up EV and PHEV technology manufacturers and battery companies filing for bankruptcy or experiencing serious troubles.   Aptera Motors, Bright Automotive, Azure Dynamics, Th!nk Global (which was briefly owned by Ford about ten years ago) and Ener1 have all filed for bankruptcy over the last nine months.  The Fisker Karma plug-in sedan has been reportedly been plagued with problems including an embarrassing breakdown during a Consumer Reports test.  These stories confirm to me that it is not merely difficult to succeed as a new entrant in the automotive industry, it’s next to impossible.

To begin with, making roadworthy vehicles is hard. This may seem obvious, but it’s surprising how advocates for new, clean vehicle technologies are willing to convince themselves that a newcomer with little experience in large-scale manufacturing can quickly start producing attractive, safe, reliable vehicles.  Add in the development and integration of a new propulsion technology and this becomes even harder.  Consider the need to make it affordable, and you’ve reached a degree of difficulty that is impossible to surmount without huge financial resources and a lot of time to develop a market-ready product.

The Long View

Because it’s hard, companies have to be equipped to deal with technological hiccups.  GM is in a much better position to ride out its Volt battery problems than Fisker and A123 are with the A123 lithium ion battery recall.  A123 has estimated that it will spend $55 million to replace the battery packs for five of its customers.   That is over one third of the company’s estimated $149.4 million market cap as of today.  By contrast, GM is expected to pay around $9 million to fix the Volt battery issue; the company’s market cap as of today is estimated at $39 billion.

Also, while the bad PR is going to hurt Volt sales, GM is better positioned to recover than a start-up company that may be depending on its one and only product.  To its credit, A123 acknowledged responsibility and has promised to replace the batteries.  However, its stock has fallen and the company is now the target of a class action lawsuit filed by shareholders, leaving some analysts wondering if A123 will be able to secure the additional capital it needs to pay for the battery replacements..  Fisker also quickly fixed the problem with the Consumer Reports’ Karma, but there are lingering questions about the company’s viability, especially given the Karma’s $108,000 price tag.

Finally, even if all goes well with a product introduction, there is a natural risk associated with forecasting demand for a new technology, as noted by my colleague Dave Hurst.  Again, the companies most likely to be able to take the long view on a new technology, withstand bouts of bad PR, and marshal the resources to fix any problems are the big auto companies.  I don’t think we are going to see a start-up company ride in on a white horse and remake the automotive industry.  Like it or not, we have to depend on the big legacy auto companies to make the shift to electrification or other alternative technologies (although whether they have to be pushed or will jump is another matter).  Fortunately, there has been some good news from the auto OEMs recently.  Ford has announced it is expanding its electrified vehicle development facility, and the new Toyota Prius C hatchback is moving briskly in its first three months of sales.


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