Investors are increasingly turning to large-scale projects as the renewable energy market matures. Wind and solar projects are now frequently measured in utility-scale megawatts, not kilowatts, and require lengthy time-lines and large budgets to complete. “Utility-scale generally means ‘really big,’ which implies project finance, not venture capital,” serial entrepreneur Bernard David told the Wharton Alumni Forum in San Francisco. The main source of funding for such projects thus comes from banks, private equity funds, utilities and governments, noted David, a fellow at Wharton’s Initiative for Global Environmental Leadership (IGEL).
But there are still good opportunities for venture investors in smaller-scale projects, said Jon Krahulik, the global head of clean technology banking at Bank of America and a fellow member of the panel that discussed the question, “Can Venture Capital Really Influence Environmental Sustainability?” Krahulik agreed that venture investment “seems more challenging around the commodity/capital-intensive areas.”
The more interesting opportunities “are elsewhere in the value chain,” he added, “such as micro-inverters and other technology to boost performance.” Micro-inverters turn the current from a single solar panel into current that can be distributed to a power grid. “Also worth investigating are some of the evolving ownership/financing models.”
Bank of America is exploring distributed generation on a very large scale. In June, the company announced a joint venture with industrial real-estate developer Prologis and utility NRG Energy to develop the biggest rooftop solar-generation project in the world. Plans call for it to generate a total of 733 megawatts — enough power for 100,000 homes — for residential users in 28 states. The U.S. Department of Energy is providing a $1.4 billion loan guarantee toward the $2.6 billion overall cost of this enterprise.
Big Projects Spawn Niche Opportunities
The consensus among panelists was that small-cap venture investors, whose primary market is high-risk/high-reward startups, can find attractive prospects in the renewable energy industries. Many such targets are emerging companies that supply products to large-scale wind and solar farms. An example is Japan’s Loopwing, which designs wind turbines that sharply reduce vibration and noise.
Wind installations are growing fast.Around the world, 35.8 gigawatts of wind power were added in 2010, according to the Global Wind Energy Council, bringing the total to 194.4 gigawatts. That’s a 22% increase from the 158.7 gigawatts installed by the end of 2009. And more than half of all the wind power added in 2010 was outside Europe and North America, which had been the biggest markets.
China alone has more than 52 gigawatts of installed wind power, surpassing the second-place U.S. total of 42 gigawatts. And thanks in part to huge government subsidies and tax incentives, China could have a massive 100 gigawatts by 2020. In addition, China is the world’s largest producer of wind-energy equipment.
Spain is also rapidly becoming a major wind player, said panelist Andrew Chung, a director at Lightspeed Venture Partners in Palo Alto, Ca. “It’s pretty aggressive what they’re trying to do in Spain,” Chung said. “Iberdrola is a really large player, the No. 1 developer in the world, and Spain became the largest wind producer in Europe last year.”
Other developing countries with big investments in wind last year included Brazil, which installed 326 megawatts, and Mexico, which added 316 megawatts. In North Africa, Egypt, Morocco and Tunisia added a total of 213 megawatts.
Off-shore Wind Farms Face Obstacles
Much of this global development has been taking place offshore, where winds tend to be far more consistent than on land. But delays have kept work from starting on the first U.S. offshore wind farm, the Cape Wind Project off Cape Cod in Massachusetts, for 10 years since it was first proposed. The 130-turbine, 420-megawatt project has been through review processes with no fewer than 17 federal and state agencies and has had to fight a vocal and well-funded opposition campaign from Cape Cod residents who argued that it would spoil the offshore view. The $2.6 billion project now has a Construction and Operations Plan approved by Interior Secretary Ken Salazar. But even assuming that funding is in hand and no further delays intervene, construction will take two more years.
Offshore wind development has been considerably easier in Europe than in the United States, but it faces hurdles even on the Continent. Analysts expect a 93% drop in orders for new British-made offshore turbines in 2013. Among the reasons cited by London’s Guardian newspaper are “planning problems, difficulties securing finance and cost overruns on existing projects.”
Forum panelist Robert W. MacDonald noted that “large offshore projects like Cape Wind are not our market. Generally, the larger projects have high visibility, longer time frames and bigger capital demands, said MacDonald, the managing partner of Craton Equity Partners in Los Angeles. “You can’t go into them thinly capitalized, because they can easily take two or three years more than you were expecting.”
The obstacles to offshore wind development, which is twice as costly as on-land projects, have caused a slump in turbine manufacturing that might open a venture-capital window. “The turbine market will come back, but maybe not soon to 2008 and 2009 levels,” said Chung. “It’s not a bad time to be a wind developer for that reason. Because the turbine makers are on the ropes, developers are in a powerful position to negotiate pricing.”
On Land Wind Farms Are Less Controversial
So-called viewshed objections have been rare in the case of large on-the-ground wind farms in economically challenged but wind-rich regions of Texas and New York State. Farmers and ranchers receive substantial subsidies for making their land available in such places.
In June, Google announced that it was investing $102 million in the Alta Wind Energy Center in Tehachapi, Ca. The utility-scale wind farm has a planned output of 1,550 megawatts. And this wasn’t Google’s first investment in Alta, which broke ground in 2010. Google’s new infusion brought its total commitment to $157 million.
The search-engine giant’s money is coming from its core business rather than its investment arm. Google will use electricity from Alta Wind to power the company’s data centers. Google’s $102 million is complemented by a same-sized investment from Citigroup; the two companies will hold leveraged leases over a total of 270 megawatts of Alta’s generation capacity.
Google’s renewable energy investments now total $780 million, with most of that capital committed in 2011. And as Bloomberg News reported, “All except two of the company’s investments in clean energy projects were structured as tax-equity financing, tapping government incentives that encourage large companies to back promising projects that often have yet to generate income.”
Alta has now attracted $631 million in funding. The wind farm is connected to Southern California Edison, which has a 25-year power-purchase agreement. California is committed to generating 33% of its electricity from renewable energy sources by 2030, which will require a vast purchase of clean power. A total of 27 states and the District of Columbia now have binding commitments to increase their use of renewable energy. Such commitments alone are enough to spur investment in large-scale solar and wind projects.
Other opportunities in the wind industry include the development of longer turbine blades that can generate power in less-robust wind areas. And high-voltage transmission lines to carry wind- and solar-generated energy to cities are urgently needed.
Still another avenue for venture capital lies in the development of large-scale storage systems for the use-it-or-lose-it energy that big wind farms produce. This need is acute among land-based ventures, which generate most of their power at night when demand is low. “The battery industry is in the early stages of figuring out storage options,” says Chung, making companies that offer effective energy-storage solutions excellent candidates for venture capital.
Making Steam from Solar Heat
One of the biggest trends in utility-scale solar power is a technology that uses heat from the sun to boil fluids to produce steam that can run conventional turbine generators. Called concentrated solar power (CSP), this technology uses huge reflectors to boil the fluids and works well in regions with intense sunlight, such as the desert Southwest.
Venture capital backers of this technology include DBL Investors, which has a stake in BrightSource Energy (formerly Luz II), a major CSP player based in Oakland, Ca., that has filed to raise $250 million in a public offering this year. BrightSource is developing a 392-megawatt CSP project in California’s Mojave Desert with backing from sources that include Draper Fisher Jurvetson, Google, Morgan Stanley and the French utility Alstom.
Panelist Cynthia Ringo, managing partner at DBL Investors in San Francisco, said the BrightSource project “can generate as much power as a nuclear plant, with no danger except to 39 desert tortoises. It cost $1 million per tortoise to move them.” Tortoise problems caused the Mojave plant to be stalled for several months in 2011 as it waited for U.S. Bureau of Land Management approval. The project was greenlighted again in June.
BrightSource hasn’t made money so far. It had losses in both 2008 and 2009, and lost $71.6 million in 2010 on revenue of just $13.5 million. But investors plainly like what they see, and the company has 14 power-purchase agreements to deliver 2.6 gigawatts of power to the Pacific Gas and Electric Co. and Southern California Edison. BrightSource estimates the revenue opportunity at $4 billion. While land-use questions will continue to pop up, the company has control of 110,000 acres in California and the Southwest for further expansion. Two other BrightSource projects are under development in California.
Distributing Power to Grids from Rooftop Solar Panels
Not everyone is convinced that CSP represents the future of solar power. “In general, utility-scale solar is a growing area,” says Lightspeed’s Chung. But he adds that CSP “hasn’t been an early area for investors to really take off on. There have been so many players, with a lot of startups claiming the superiority of different [solar] technologies. Meanwhile, the cost of regular flat-panel solar is coming down rapidly with the price of silicon, and that doesn’t require a big investment in the development of mirrors, heat sinks and frames. At Lightspeed, we think that large farms of conventional panels will win in the long run.”
Conventional panels can also be used in rooftop solarprojects like the one that Bank of America has invested in, which will collect solar power from homes and distribute it to a grid. Unlike CSP, such projects don’t have to deal with “land acquisition challenges, power line shortages, water supply problems, endangered species and vocal environmentalists,” as the environment and energy publication Greenwire has noted.
DBL has put its money on conventional panels for distributed solar generation too. DBLhas invested in Solaria in Fremont, Ca., which designs and manufactures conventional silicon products to maximize yield in photovoltaic systems. Solexant, a San Jose, Ca., producer of nanotechnology-enabled thin-film photovoltaics, is another DBL venture.
Still another is SolarCity, a major player in distributed generation. The company, based in San Mateo, Ca., developed a model in 2008 that gives homeowners the option of no-money-down leases. This appeals to consumers who are daunted by up-front photovoltaic costs. SolarCity now has 15,000 customers, has expanded to the East Coast, and received a $280 million investment from Google earlier this year. Other investors include Draper Fisher Jurvetson and Elon Musk, the CEO of all-electric car maker Tesla Motors and a first cousin of SolarCity CEO Lyndon Rive.
The success of SolarCity has spawned other players in the solar-leasing business. These include SunRun, which closed a $55 million Series C round in 2010 with investments led by Sequoia Capital; and Sungevity, which has pulled in $25 million from venture firms and individual investors that include the actress Cate Blanchett.
SolarCity’s rooftop systems also generate tax advantages. The company collects the 30% federal tax credit on residential solar installations and sells it to investors or banks with taxable incomes. Solar City also is eligible for renewable energy credits that can be sold to other companies, and it has set up zero-emission solar-powered battery charging stations for electric vehicles. “Clearly, we believe that solar is a growth area with applications in different parts of the value chain,” said Ringo. “It’s going to be a huge market, and SolarCity is a solar integrator that has expanded rapidly.”
Companies like SolarCity have helped the solar market grow. The total annual manufacturing output of all solar companies in 2000 was just 300 megawatts with worldwide sales of only $2.5 billion, according to a report by ScottMadden Management Consultants. By 2010, the global market had climbed to $71.2 billion. The U.S. market grew from $3.6 billion in 2009 to $6 billion last year, according to the Solar Energy Industries Association. Congress boosted the industry in 2008 by extending the 30% federal investment tax credit for both residential and solar installations for eight years. Still, the business remains uncertain. The late summer 2011 bankruptcies of three American solar companies — Solyndra, Evergreen Solar and SpectraWatt (representing nearly a fifth of domestic solar panel manufacturing) — was sobering, and a boon to the growing Chinese industry.
But renewables like wind and solar are still a tiny part of the worldwide energy mix. Non-hydroelectric renewables supplied just 1.8% of total global energy consumption in 2010, according to the BP Statistical Review of World Energy. Such renewables are growing rapidly, however, and accounted for fully half of the 194 gigawatts of new global generating capacity installed last year, thanks largely to the expanding size of the projects.
The renewable market continues to have its ups and downs. Investment in global clean technology took a 33% dive in the second quarter of 2011 after recording outstanding first-quarter results. But renewable energy, large and small, had a very good 2010 and grew 32% worldwide.
Meanwhile, wind and solar hardware costs per megawatt of generation capacity have been rapidly dropping. Photovoltaic prices have fallen 60% since mid-2008, while the price of wind equipment has gone down 18% in the past two years. “Photovoltaic efficiency is improving by leaps and bounds,” says Robert Giegengack, a professor in the department of earth and environmental science at the University of Pennsylvania. “The large renewable market is somewhat artificial, because there are huge subsidies. But unlike ethanol, wind and solar projects have a positive energy balance when they are done properly.”
For large investors, big wind and solar present a ripe opportunity, along with many challenges. And venture investors can benefit from the fact that these maturing technologies will need plenty of support from innovative suppliers.