Green Tech at a Crossroads: In Search of the Green Tech Google

A year ago, solar-technology start-up Ausra was ready for the big time. There were plans on the table to raise hundreds of millions of dollars to build giant power plants and to conduct an initial public offering of Ausra shares by 2010.

Then the recession hit. Ausra executives refocused on more modest goals, such as building small solar units, and selling equipment for industrial operations like desalination and food processing. It also is trying to sell to utilities, rather than build massive solar plants itself.

“Utilities are really in a great position to build large-scale projects,” said Katherine Potter, communications vice president at Ausra. “You need to walk before you can run, but the technology is there.”

That IPO goal, it’s fair to say, is off the table for the foreseeable future. And as executives came to accept that Ausra had to change its business, the Palo Alto, Calif., company cut about 10 percent of its 108 employees.

Ausra isn’t the only green-tech company dealing with reduced expectations. Despite high hopes, $14.5 billion in worldwide venture funding over the last two years, and cheerleading from the Obama White House, 2009 could be a make-or-break year for many green-tech outfits. And the stakes may be greater than the fortunes of a few entrepreneurs and their investors.

Save The World, Make Money

Can the United States simultaneously lean on green-tech investment to help fix its broken economy, wean itself off dependence on foreign fuel sources, and address climate change concerns? President Obama, for one, appears to be a believer in one of the fundamental underpinnings of green business: you can make money while helping save the world.

“One of the key points that…I will repeat again and again during the course of my presidency is there is not a contradiction between economic growth and sound environmental practices,” Obama said when he named his energy and environment team in December. “I think that the future of innovation and technology is going to be what drives our economy into the future. And the energy economy is going to be part of what creates the millions of jobs we need.”

Green-tech entrepreneurs and investors are well aware of these lofty goals. But these days, they’re more focused on other issues, such as finding the money to stay in business and landing customers.

“We had closed a round of funding in October for the next stage of vehicle development–then all of that went off the table in about six days,” said John Waters, the CEO of stealthy electric-car start-up Bright Automotive, which restructured two months later and managed to find alternative funding.

The question isn’t whether the green-tech movement will whither away. Already, there is a growing consumer niche for green technologies, from rooftop solar panels to low-power consumer electronics made from recycled materials.

But how big can this industry be, how long will it take to get there, and who will lead the way? The societal and political will to reduce fossil fuel use is arguably higher than ever. Yet renewable energy, excluding hydropower, is still just 2.5 percent of the U.S. electricity mix, while almost half still comes from burning coal. That’s not exactly the picture of a county on the cusp of change.

“It’s relatively clear that you can make good returns for investors in clean tech–the outlook is pretty good,” said Dennis Costello, a managing director at venture capital firm Braemar Energy Ventures. “But it’s going to take a lot longer–probably more like decades–to change the total energy production portfolio because the (current) infrastructure is expensive and well-established.”

Building From The Ground Up

Reinventing the energy infrastructure is like trying to redevelop a city, from the traffic signs to the skyscrapers. In a lousy economy, the attractive projects are the most affordable and practical. The green-tech equivalent of flashy homes or skyscrapers–giant projects like solar farms–will be the toughest to get built.

Right now, “practical” means companies with a strong information technology component that help make existing electrical systems more efficient and companies that provide relatively low-tech, people-intensive consulting work. As Google became a tech powerhouse by doing the relatively mundane task of Web searches better than anyone else, the company most likely to break out of the green-tech pack is the one that does simple things such as improve energy efficiency better than the rest.

Out of the $787 billion in the stimulus package, about $39 billion in spending is set aside for energy, with much of it aimed at creating “green collar” jobs.

Businesses specializing in energy efficiency, such as home energy auditors, stand to benefit from measures like the $5 billion set aside to weatherize the homes of low-income people and $4.5 billion to make federal facilities more energy-efficient over 10 years.

Other building-related businesses, including home solar installers, stand to gain. Changes to renewable-energy subsidies in the bill will deliver an “adrenaline boost” to the solar industry and create 67,000 jobs this year, according to Rhone Resch, the president of the Solar Energy Industry Association.

Making The Network Smarter

Cisco Systems arguably became one of the most powerful companies in high tech because no one did a better job of directing packets of data around a computer network.

On electrical networks, there’s a similar need for so-called smart-grid technologies to improve automation. And a hefty portion of the $4.5 billion in planned government investments to the grid infrastructure over the next 10 years could add rocket fuel to that niche.

Although it covers many technologies, the basic idea behind the smart grid is to add communications and data reporting to the existing electricity network to make it more efficient and reliable. Smart-grid companies are capital-efficient, compared to other parts of the energy business: the total amount of venture capital invested in smart-grid technologies last year globally was $345 million, out of $8 billion for green tech overall, according to the Cleantech Group.

Companies such as Tendril and Greenbox provide in-home displays or Web-based software for homeowners to manage energy consumption using so-called smart meters that can communicate information back to utilities in real time. Google, which is developing a Web-based home energy management dashboard, argues that just surfacing more detailed data with smart meters and software can cut energy use 5 percent to 15 percent.

Outside the home, the 200,000-mile electrical-distribution grid also needs more intelligence. Companies such as start-up Silver Spring Networks–an outfit some think has a good chance of going public–and General Electric are working on ways to add networking smarts to the hardware along the grid. Adding communications to transformers and other distribution points can, for example, alert a utility of the location of a problem along the grid and prevent an outage.

IT-related companies bring another high-tech tool to the grid: The “platform” concept. PCs, for example, took off because they offered a common platform for which software developers could write applications. The same could be said of databases or even Web browsers.

So it is with the creaky old electrical grid. Smart-grid advocates aren’t sure what will be the proverbial killer application of a Net-savvy power grid. But they predict that real-time updates on energy supply and demand will lead to many new applications, some aimed at helping consumers find the cheapest time to run their dishwashers; others to help utilities more efficiently control the flow of electricity around the grid.

“Just like the Web in the mid-’90s became a fantastic new platform, where millions of new applications were conceived, we’re looking at the same thing in a decade’s time on the grid, where we end up with a platform where there are lots of unimagined applications that will sit on top of the upgraded energy infrastructure,” said Drew Clark, director of strategy for IBM’s venture-capital group.

IBM, through its systems integration arm, is working on a number of smart-grid pilot projects around the world, including in Texas and Malta. “The government is giving utilities more leeway to invest in IT–that’s not lost of VCs, and it’s not lost on IBM,” Clark said.

Getting Leaner and Meaner

The driving force for smart-grid technologies is efficiency. It’s no surprise, then, that outfits such as EnerNoc and Comverge are among the green-tech companies to go public in the past few years. They sell so-called demand-response software, which throttles down energy use to lighten the load on the grid during peak times.

Here’s how it works: A customer gets paid to let the utility temporarily turn off a fan at a factory or reset the thermostat on a building’s air conditioner. Shaving energy use a little bit across several customers means the utility doesn’t need to turn on expensive and dirty auxiliary power plants to meet peak demand. It saves money, and it reduces carbon emissions, one air conditioner at a time.

Networking and software tech can also help manage wind and solar energy. Andy Kruse, the CEO of small-wind turbine maker Southwest Wind, envisions wind turbines that can communicate with utilities through wireless Internet connections to shift voltage during times of peak demand and to get software updates. Some solar-electric panel installers have developed Internet gateways that tell customers and installers when panels have a problem and need to be fixed.

Adding more intelligence to what’s already there, like using sensors to better monitor wind turbine performance, may seem incremental. But when times are tough, the companies that sell affordable products are the ones most likely to thrive. Just ask Wal-Mart.

“There will be massive amounts of software optimization developed over the next decade” in the name of energy efficiency, said Rob Bernard, Microsoft’s chief environmental strategist. Software user interface design also plays a key role in engaging consumers with better home energy management systems, he added. “It will be like going from your old VCR (to) TiVo.”

From a carbon emissions point of view, efficiency is the proverbial low-hanging fruit. A landmark 2007 study by consulting firm McKinsey found that the cheapest way to reduce greenhouse gas emissions was by reducing consumption in the first place–making appliances, vehicles, buildings, and power stations more efficient.

Many energy experts, including Amory Lovins, chief scientist at the Rocky Mountain Institute, say efficiency should be the cornerstone of a rebuilt energy infrastructure because the technologies already exist, and they have the quickest impact. “We know how to save half the oil and gas, and three quarters of the electricity in this country,” he said at a forum on clean tech last year. What’s preventing wide-scale adoption are “institutional barriers” such as regulations that reward utilities to sell more, not less, electricity.

Laying A Foundation

Certainly, changing something as big and old as the energy business isn’t easy. Scientific and engineering advances in energy storage are badly needed to make the electricity grid flexible enough to use renewable-energy sources at a large scale.

There’s a wide range of technologies being pursued: zinc air batteries to charge consumer gadgets, flywheels that dispatch stored energy to smooth the flow of electricity on the grid, and “flow batteries” that enable huge tanks holding liquid electrolytes to dispatch megawatts of electricity within minutes. Having one megawatt of storage–enough to power a large retail store or about 300 U.S. homes–helps a utility stabilize the grid, and more smoothly pull in wind and solar energy.

But the slumping economy makes completing big projects difficult. In 2007, oil-tycoon-turned-clean-energy-advocate T. Boone Pickens announced plans to build a $6 billion wind farm large enough to power 1.3 million homes. But when financing became tough late last year, Pickens had to admit that he wasn’t sure when it will get done.

Solar energy, perhaps the most glamorous of green-tech businesses, is also poised for a shakeout, industry executives say. Solar outfits received 40 percent of green venture investing last year, according to the Cleantech Group. But price competition and manufacturing costs are making it a rough business.

Abu Dhabi-based Masdar PV, for example, last year said it was investing $600 million to build two thin-film solar-cell manufacturing plants, which would produce enough solar cells for roughly 100,000 homes. Now that private financing is so hard to come by, that’s a war chest few companies can muster without government aid.

“Shock To Trance”

The flow of venture capital to green-tech start-ups exploded from 1 percent of venture capital in 2001 to 10 percent last year. But getting beyond the early stage to high-volume sales has proven difficult. Can the government help?

“Where there is technology risk, this is where government support like loan guarantee programs has to come in,” said Scott Brown, the CEO of project finance firm New Energy Capital. “This so-called valley of death (from product development to commercial scale) is a tough problem.”

But there are risks to taking taxpayer dollars. Beyond irking the public by investing in technologies that don’t pan out, some companies are wary of letting politicians and lobbyists pick the winners and losers of green tech, as they essentially do now with military contractors.

It’s also still unclear how effective future climate regulations will be in getting utilities, automakers, and other big polluters to adopt new technologies. In the power sector, for example, about a third of utilities are actively investigating smart-grid technologies, said Tendril CEO Adrian Tuck. But another third are still tentative, while another third aren’t doing much at all.

The energy industry invests about 1 percent of its sales in research and development, General Electric CEO Jeffrey Immelt lamented last year. By contrast, Microsoft earlier this month said it intends to invest $10 billion this year in R&D, or 6 percent of last year’s revenues.

The size and sustainability of consumer demand for green-tech products is also an open question. Interest in energy independence in the United States peaked after the oil embargo of the 1970s, only to fade when energy was cheap again. President Obama referred to the rise and fall of alternative-energy interest as “shock to trance,” in which consumers buy fuel-efficient cars when gas prices are high but then go back to buying SUVs when they fall.

Matt Golden founded San Francisco-based Sustainable Spaces to be sort of a real-estate developer in an energy-focused redevelopment project. For a few thousand dollars, his company retrofits homes to be more energy-efficient, starting with simple things like insulation and moving on to more expensive options, such as ground source heat pumps.

Clearly, high energy prices are a strong incentive for consumers to explore solar power for their home or for a business to get energy-efficient computing gear. Golden’s bigger concern is about the long term–figuring out how to make his corner of the green-tech industry grow so that it positively affects millions of people.

“There are great plans (from politicians) and talk of money, but none of it has hit the ground yet,” Golden said. “It looks good for the future. But at the moment, we’re in a painful place.”

Martin LaMonica
CNET News