Advances in alternative energy technologies promise to reduce the world’s dependence on fossil fuels. Largely, however, they remain just that—a promise. So, where are the opportunities to invest in the evolving energy environment?
At Commonfund Forum 2016, a panel discussion took on this question. Excerpts from the exchange follow. The discussion was moderated by Commonfund Managing Director, Strategic Solutions, Stuart Ames. The panelists were: Robert Armstrong, Director, MIT Energy Initiative and Chevron Professor of Chemical Engineering, MIT Sloan School; Phil Deutch, Managing Partner, NGP Energy Technology Partners; and Ethan Levine, Director, Commonfund Capital.
Stuart Ames: Yesterday, one of our panelists said, “You know, we’re not going to need oil in 20 years, except for airplanes.” I Thought, “What … no oil in 20 years?” Estimates are that fossil fuels power about 80 percent of our energy usage. Aircraft only account for a small piece of this amount – about 2 percent. If that manager is right, the implication is that over the next 20 years we’re going to transform power generation for the remaining 78 percent. As an investor, I think there must be some ideas here, so we’re going to talk today about how we may be able to make some money in next generation energy.
BEYOND OIL AND GAS: EMERGING ENERGY INVESTMENTS
Ames: When we think about all of the alternative energy investments that were made in the 1970s, ‘80s and ‘90s it seems as though we haven’t had any brand name successes while there have been disappointments. What’s changing?
Ethan Levine: At Commonfund, we think in terms of two buckets: first, clean energy, which encompasses infrastructure like renewable solar and wind and, second, what we call clean tech. We have a handful of portfolio companies in each of those buckets. Success has been mixed across each bucket.
Phil Deutch: If you look at public companies such as First Solar or Sun Power, these are multi-billion dollar, hugely cash flow positive companies in what I call “energy technology.” Energy is roughly 8 percent of GDP. Apply all the technology coming out of places like MIT, Cal Tech or Stanford to the energy industry, and you have a significant area of the economy that’s going to experience the same type of disruption that we have seen in others. That’s what has changed. So many parts of our economy have been disrupted by technology, I truly believe that it’s now time for energy. If anyone disagrees, they’ll have to explain to me why technology won’t work here when it has worked in so many others.
Robert Armstrong: I think it will work, and, in fact, if you go back to the question about the’70s and ‘80s, what did we do that made an impact? Solar for one—that’s when it got going with silicon research. Silicon is now 20 percent-plus efficient. The battery technology in your cell phones and other consumer products started in the ‘70s. Actually, it began with an effort to figure out how to electrify transportation. It was lithium battery technology that ended up not being safe, but with more research it morphed into today’s lithium-ion technology.
Deutch: In the U.S., 50 percent of all solar installations have been done in the last three years. The growth curves on wind power are stunning. Alternatives are still a small part of the energy infrastructure and there are risks—it’s capital intensive and there’s regulatory risk. But that’s true elsewhere. Uber faces those problems as does Airbnb. Yet they’re managing to make it happen.
Levine: There’s a lot of disruption that could occur in the energy space. But, the question for venture investors is where to achieve the best risk-adjusted returns – a capital-efficient industry like IT or a more capital-intensive industry like energy. Investors tend to favor capital efficiency.
Deutch: Good point, but our investment philosophy is to go for singles and doubles and advance runners around the bases. That’s the prudent way to approach energy technology. The people who have made money for investors have had a vision, but they’ve not forgotten fundamental valuation approaches, incentives and alignment.
Armstrong: There’s opportunity in technologies that can make existing power systems more energy efficient and environmentally responsible. For example, 85 percent of the world’s power plants use a thermal process for making the steam that powers electrical generators. At the back end is a condenser to convert the steam back to water before recycling it back into the process. There’s new technology coming out of modern material science that coats the condenser in a way that makes heat transfer seven times better. It is just now coming out as a new start-up company. This is an example of new technology that can make today’s systems much more efficient. If you can improve efficiency a couple of percentage points, it could have a huge impact on both our energy resources and greenhouse gas emissions.
Ames: One of the challenges facing energy companies is high capital requirements. How do we overcome that challenge to make these companies viable long-term investments?
Armstrong: The challenge is to find the sweet spots where, at least early on, you can work within existing systems. In today’s solar market, the sensitive price point is in so-called balance of systems, which includes non-module component cost, installation cost, permitting cost and such. We are beginning to see innovations that optimize balance of systems and lower costs; that can have a big impact and could potentially be quite profitable.
Deutch: When you invest in energy technology companies, they never fail because of technology or a lack of capital. We don’t make bets on technologies that just don’t work. That’s better left to government or research universities. Too much capital is really a business model question. To me, it’s not the capital intensity that’s the problem. It’s the discipline with which capital is being used.
Armstrong: I think an interesting example is in the area of solar where the two big competitors are photovoltaics, which is very modular and can be done on a small scale, versus the so-called concentrated solar power, where mirrors are used to focus sunlight on a heat transfer fluid used to run a thermal power plant. The difference between those two in terms of capital requirements is striking. If you want to get into the concentrated solar power business, you need at least $1 billion whereas photovoltaics allow you to go small scale and learn by doing a gradual scale-up.