William,
Here is some additional info on funding. The article has some nice graphs.
Susan
Energy technology
Beyond the bubble
Apr 19th 2001
From The Economist print edition
Is energy technology the next big thing?
TECH is in trouble, right? After all, the Internet boom has turned spectacularly to bust, and the Nasdaq is far below its peak. Yet there is one corner of the technology world that may be the exception: energy technology (ET).
This newish sector consists of a rag-bag of companies at the innovative end of the stodgy electricity industry. ET ranges from micropower, such as fuel cells and microturbines, to renewables and snazzy software, such as that used for sophisticated metering. Much of this has been in development for years, but recently ET seems to have become almost as fashionable among investors as the Internet once was.
Investment has been flooding in: Britain’s Impax Capital, Switzerland’s Sustainable Asset Management, America’s Nth Power and even financial giants such as Merrill Lynch and J.P. Morgan now have big funds investing in this area. Despite the bleak market for public offerings, ET firms—including Capstone, which makes microturbines, and AstroPower, a solar energy firm—have found it relatively easy to float their shares. Britain’s Innogy says that it will soon float its Regenesys division, which has developed novel fuel-cell technology.
Two years ago, few investment banks, let alone ordinary punters, even knew ET existed. As word got out that information-technology gurus such as Paul Allen and Bill Gates were putting money into the sector, the big banks began to take it more seriously. However, as the first chart suggests, investors only began to view ET as a technology play with the much-hyped offering in November 1999 of Plug Power, a fuel-cell firm. A flurry of other public offerings followed. Investors piled in, regardless of whether they could distinguish a fuel cell from a jail cell, and ET shares rose strongly, tracking the Nasdaq for months.
That eventually had its drawback: the Nasdaq’s collapse pulled down ET shares. Masroor Siddiqui of Goldman Sachs reckons they had a combined market capitalisation of $40 billion-50 billion at their peak, but are worth under $20 billion now. That is painful, but hardly the implosion that dotcoms suffered. The main reason is that ET is unlike the Internet in one important respect: it takes much more than two bright kids in a garage to make energy technology work. As investors began to understand this last year, the sector and the Nasdaq parted ways. This divergence accelerated as industrial giants such as ABB, DaimlerChrysler, GM, Texaco and Toyota unveiled ET investments.
The really big breakthrough came in December: California’s electricity crisis. Thanks to a botched deregulation of the power sector, that state has endured a series of outages that have cost businesses vast sums of money. As its woes have dragged on and on, investors have been reminded of the fragility of America’s creaking electricity grid and the strains introduced by deregulation—as well as the dramatic solutions offered by various energy technologies. “California has been a giant wake-up call for investors,” says Paul Lancaster of Ballard Power Systems, a Canadian fuel-cell pioneer.
Interest has grown in technologies that bypass the grid altogether, such as micropower. As part of their response to the crisis, Californian officials are signing long-term contracts to buy power at prices several times historical levels: at the new level, even fuel cells can compete. The crisis has also prompted state and federal officials to introduce legislation that would remove obstacles to micropower.
One big winner in all this has been Capstone. Ake Almgren, the company’s boss, says that there are two main reasons for this: Capstone’s microturbines can be deployed quickly—within eight weeks of an order, he claims—and precisely where the demand is, which gets around bottlenecks on the grid.
California or bust
There is a snag, however. The California crisis may not be entirely good news for ET, for two reasons. One is that the hype may be coming just a little bit too soon. Anthony Earley, the chairman of DTE Energy, a big American electricity concern that owns the Detroit Edison utility, gushes that ET will be the main driver of future growth for his firm. DTE has put money into energy venture-capital funds, which have stepped up their investments dramatically in the past year (see second chart, above). It has also taken direct stakes in firms such as Plug Power. However, even Mr Earley concedes that the timing of the California crisis is awkward, as most ET firms are not yet ready for the commercial market. “We just wish we had product right now, because we could sell a gazillion of them,” he says.
The ironic result is that the biggest beneficiary so far of the trend toward distributed generation is probably an old-economy company: Caterpillar, the world’s biggest manufacturer of diesel generators. The firm’s sales of those durable but dirty little engines had already been growing by 20% a year since 1996, but have now received an added boost. Caterpillar has even embarked on a new strategy: now, says James Parker, head of its electric-power group, instead of merely selling machines, it will offer to operate and service them on site—and sell guaranteed power output.
Even Caterpillar may be transforming into an ET firm soon, however. Mindful of diesel’s foul emissions, Mr Parker says his firm is shifting rapidly to cleaner micropower: within a few years, natural-gas units are expected to make up 30-40% of his division’s sales. Might Caterpillar ever distribute squeaky-clean fuel cells through its vast dealer network? Mr Parker is cagey, but his reply is revealing: “We are technology-neutral. Whatever our customer needs, we will provide a solution.” If, as rumours suggest, Caterpillar really is looking into such investments, then fuel cells would hit the big time. Christine Farkas of Merrill Lynch says that Caterpillar, along with other established firms such as GE and ABB, is likely to play an active role when the fragmented ET industry eventually consolidates.
There is another reason why California’s crisis may not prove an unmitigated boon for ET, argues Steven Taub of Cambridge Energy Research Associates, a consultancy. The relaxation of environmental rules, in order to get more power plants online, will not help the cause of clean micropower. Nor will speeding up the approval process for traditional plants: a single 500MW plant can crank out more power than 16,000 micro-turbines (several years’ output for Capstone). “Many of the potential vaccines against the ‘California flu’ could undercut the opportunity” for ET, says Mr Taub.
These are pitfalls, to be sure, but on their own they are unlikely to do more than delay for a couple of years the arrival of the most promising energy technologies. As Mr Taub points out, however, there is a more worrying possibility: a backlash against deregulation so fierce that it stalls the move towards competitive markets in electricity. If that happens, then it would not be merely ET that loses. Everybody would.
economist.com
Copyright 2001 The Economist Newspaper Limited. All rights reserved. |
