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- 1. ‚SolFocus sounds like a typical Silicon Valley startup: Eight em- ployees, big ideas—and zero profit. Yet in mid-May, the phones at the eight-month-old company wouldn’t stop ringing. The callers were venture capitalists, and they were dan- gling millions of dollars in front of the Palo Alto, California– based solar panel maker. Ty Jagerson, vice president of business development, says as soon as he’d start talking to one VC, another would call offering money. “It was complete- ly insane,” Jagerson, 35, says. Up and down Sand Hill Road, the venture capital hub south of San Francisco, the financiers who bankrolled the technology boom of the 1990s are chasing their next big thing: alternative forms of energy. As oil and natural gas prices climb, venture capitalists are investing hundreds of millions of dollars in young, often money-losing companies that hope to harness the power of the sun or the heat inside the Earth. They’re pouring millions more into companies that cook up gasoline and diesel substitutes from corn, sugar and soybeans. In all, U.S. VC funds invested a record $739 million in renewable energy in 2005, up 36 percent from Spurred by high oil prices, the backers of the 1990s technology boom are hunting for the Google of clean energy. By Edward Robinson PUMPED Evangelist: Venture capitalist Vinod Khosla is pushing ethanol. VCs Get COVER STORY: THE POWER OF GREEN PHOTOGRAPHS BY ANDY FREEBERG Bloomberg Markets August 2006 37
- 2. 38 2004, according to Cleantech Venture Network LLC, a re- search group based in Ann Arbor, Michigan. VCs haven’t buzzed like this since the Internet captured investors’ imaginations in the ’90s. Alternative energy stocks have surged the way dot-com shares did in 1999—before the bottom fell out of the Nasdaq Stock Market. The 40-stock WilderHill Clean Energy Index has rocketed since its August 2004 debut, gaining 69 percent as of June 5. Mutual funds that invest in green power and other clean industries have exploded, gaining an average of 39 percent in the 12 months ended on May 3. (See “Ecofriendly Funds,” page 42.) As they did in the late ’90s, stock investors are baying after compa- nies that have yet to turn a profit. Pacific Ethanol Inc., based in Fresno, California, for example, lost $611,763 in 2005 on sales of $38 million. Its stock? Up 143 percent in the 12 months ended on June 5. The frenzy troubles Silicon Valley pioneer Vinod Khosla, who co-founded Sun Microsystems Inc. in 1982 and, then, as a partner at Menlo Park, California–based VC firm Kleiner Perkins Caufield & Byers, helped finance Amazon.com Inc. and Netscape Communications Corp. “We need to be cau- tious that this doesn’t become like the dot-com bubble,” says Khosla, 51, a champion of ethanol. “We don’t want to get ahead of ourselves.” For now, the alternative-energy bulls are charging. They say a collision of powerful forces—from the soaring price of OPEC crude to the booming economy of China, to growing concern that global warming threatens our planet—is about to usher in a new era of green power. Oil prices have tripled during the past three years, and the first energy crunch of the 21st century has begun to rip through the world’s fossil fuel–based economy. In the U.S., the largest energy consumer, $70-a-bar- rel oil has sapped consumers’ confidence and raised the threat of stagflation, a toxic combination of accelerating infla- tion and slackening economic growth last seen in the ’70s. President George W. Bush has urged the nation to break its “addiction” to foreign oil and find new, cheaper sources of power. Bush’s ranch in Crawford, Texas, has a geo- thermal system. Today, the world is straining to feed its seemingly insatiable appetite for en- ergy with oil, natural gas and coal. To- morrow looks even worse. China, now the No. 2 energy consumer, devours 6.5 million barrels of oil a day. By 2025, it will gulp 14.2 mil- lion a day, according to the U.S. Department of Energy. Emerging economies such as India’s will swallow still more. Global warming, meantime, has vaulted from scientific journals to front pages worldwide. The news is everywhere: Glaciers are melting, polar bears are drowning and each year sets new heat records. In April, Vanity Fair, chronicler of the Hollywood A-list, confronted the issue by declaring “Green is the new black.” Julia Roberts, who won an Oscar playing en- vironmental crusader Erin Brockovich, graced the cover, with Al Gore, George Clooney and Robert F. Kennedy Jr. at her feet. Country singer Willie Nelson, the long-haired Texas rebel who twangs “On the Road Again,” has started a compa- ny that sells biodiesel at truck stops in Middle America. As President Bush, a Republican, touts alternative fuels, Gore, his Democratic opponent in 2000, warns of the catas- trophes that lie ahead if we keep spew- ing greenhouse gases into the air. Gore’s environmental documentary, An Incon- venient Truth, opened in U.S. theaters on May 26. The film raked in $17,292 per screen, besting The Break-Up, a comedy starring Jennifer Aniston. Kleiner Perkins and Menlo Park–based VC firm Foundation Capital have held private screenings of Gore’s film for partners and clients. Climate change is no longer the buga- boo of a few scientists. About 85 percent of people in the U.S. believe it’s probably happening now, according to a March ABC News/Time magazine/Stanford Today, the world is straining to satisfy its demand for energy. Tomorrow looks even worse. COVER STORY: THE POWER OF GREEN ������ ��� �������������������������������������������� FILE vcline4 ���������������������������������� ���������������������������������� ��������� ��� ��� ��� ��� ��� ��� ��� ������ ��� � � � � � � � �� � � � � � � � � � � � �� � ���������������� ������������ ����������������������� ��������������� Bloomberg Markets August 2006
- 3. 39 University poll. Goaded by $3-a-gallon gaso- line, thawing icecaps or both, some consum- ers are changing old habits, and entrepreneurs and companies are responding. General Motors Corp. has discontinued the Hummer H1, its hulking gas guzzler. At Toyota Motor Corp., U.S. sales of the hybrid Prius coupe doubled in 2005. Honda Motor Co. is build- ing a diesel engine that it says will be cleaner and more fuel-efficient than gasoline- powered models. (See “Honda: Engines of Change,” page 50.) S o where will VCs find the green in green? That depends on whom you ask. Khosla, who withdrew from Klein- er Perkins as a full-time partner in 2004 to start his own firm, Khosla Ventures, a few doors away, is betting on ethanol. He says the fuel may help the U.S. break its dependence on overseas oil, which he calls a threat to national security. Erik Straser, 36, a partner at nearby Mohr Davidow Ven- tures who once worked at the top-secret Los Alamos Nation- al Laboratory in New Mexico, says the cure to our energy ills is right over our heads. New solar-power cells may one day reshape the global electricity industry, he says. Lee Bailey, chief operating officer of Santa Monica, Califor- nia–based US Renewables Group LLC, says he’s not counting on big, new ideas. Instead, Bailey, 54, has spent $38 million for a stake in a mothballed geothermal power plant in the pine-covered hills of northern California. Workers there are drilling new steam wells and restoring a 70-ton turbine. Then there’s Nancy Floyd, who has seen promise—and profit—in green power since she went to work for the Public Utilities Commission in Vermont in 1977. Co-founder of San Francisco–based Nth Power LLC, Floyd, 51, is wagering on biodiesel, a fuel made from soybean and canola oils, among other bets. “A lot of VCs have woken up to the sheer magnitude of op- portunity in the energy markets,” says Ira Ehrenpreis, a partner at Technology Partners, a Palo Alto–based VC firm. Venture capitalists could use a winner. Many of them are still nursing losses from the Nasdaq bust. After that rout, institu- tional investors pulled back, and VCs’ money dried up. Investment flows into venture funds plunged to $4 billion in Mohr Davidow’s Erik Straser, above, sees a bright future in solar power. Nanosolar’s Martin Roscheisen, below, is developing new solar cells. Bloomberg Markets August 2006
- 4. Bloomberg Markets August 200640 2002 from a record $106 billion in 2000, according to the Washington- based National Venture Capital Association. VC funds posted a neg- ative return of 6.8 percent from 1999 to 2005. And so the deals keep coming. In April, five venture capital firms, among them Kleiner Perkins, clinched the biggest clean-power deal the VC industry has ever seen. They invested a combined $50 million in Altra Inc., a Malibu, California–based ethanol company. In May, venture capitalists from Goldman Sachs Private Equity Group met with executives at SolFo- cus as the startup raised $15 million. People have dreamed of finding cheap, clean sources of energy since the oil-price shock of the ’70s. So far, the hopes for alternative energy have far outstripped the reality. Green power is expensive. Even now, after oil and natural gas prices have surged to record highs, it’s still usually cheap- er to generate electricity by burning fossil fuels than it is by using solar panels, wind turbines or underground steam. In May, Rosemead, California–based Southern California Edi- son agreed to pay 6.15 cents per kilowatt-hour for electricity from renewable sources, plus an additional, undisclosed rate to ensure energy would be available during peak hours. Power produced by natural gas–fired plants costs 4–6 cents per kilo- watt-hour. Solar power costs U.S. homeowners as much as 30 cents per kilowatt-hour—double or even triple the price of gas- or coal-generated electricity, according to Jefferies & Co., a Los Angeles–based investment bank. Strip out state and federal incentives designed to promote renewable power—subsidies that might disappear when the political winds shift—and the economics of green look even worse. Take biodiesel. In late May, the fuel cost $2.99 a gallon in Washington state. Regular diesel cost $3.15–$3.30. A biobargain? Not quite. U.S. biodiesel actually costs closer to $4 a gallon. The federal government pays distributors as much as $1 for every gallon of biodiesel they sell. Because it’s relatively expensive, green power has never really caught on. In 2005, wind turbines, solar panels and other alternatives to fossil fuels generated about 357 billion kilowatt-hours of electricity, or 9.4 percent of the juice used in the U.S., according to the U.S. Department of Energy. That’s down from 11 percent in 1989. Oil, coal and natural gas generated 72 percent. The rest came from nuclear power, a proven alter- native to fossil fuels that doesn’t con- tribute to global warming but carries its own environmental hazards. “Alternative energy has been just around the corner for 20 years,” says J. Stephan Dolezalek, a partner at San Bruno, California–based VantagePoint Venture Partners. Once a green-power doubter, Dolezalek is now backing clean-energy startups. Institutional investors that invest in VC funds are warming to clean en- ergy, too. The $130 billion California State Teachers’ Retirement System, for example, is investing $250 mil- lion in alternative energy through VC and private equity funds. “We’re not head over heels in love with this sector, but we’re moving pru- dently to invest in it,” says Margot Wirth, a money manager at the teachers pension fund. To green-energy skeptics, VCs have a familiar reply: This time, things are different. The economic, environmental and cultural stars have finally aligned for a new era of alternative power, they say. “Something has really changed,” says Floyd of Nth Power, which has invested solely in alternative energy since 1997. “This industry isn’t just for the Birkenstock set anymore; it’s got serious capital behind it now.” That includes corporate cash. General Electric Co. has made wind turbines since 2002 and solar systems since 2004. Now, its GE Energy Financial Services arm plans to ����������������� ����������� FILE SIZE NOTES vcdec3 14p0 x 18p7 DECORATIVE ��� ��� ��� ������������������������� ������������������������������ �������������������������������� ������������������� ��� ��� ��� ���� �������� ��� ���� ���� ����� �������� ����� ������ COVER STORY: THE POWER OF GREEN ‘Alternative energy has been just around the corner for 20 years,’ one VC says.
- 5. 41 Bloomberg Markets August 2006 triple its renewable energy fund to $3 billion by 2008. “The growth opportunity is so apparent, so we’re going after it,” says Kevin Walsh, managing director of GE Financial’s re- newable energy unit. Khosla, the former Kleiner Perkins VC, has become a leading ethanol evangelist. A Republican, he says U.S. depen- dence on Middle Eastern oil threatens the nation’s security. Ethanol is not only cleaner than gasoline; it’s ultimately safer for the country, too, he says. His firm has invested an undis- closed sum in Altra and other ethanol startups. “Oil is a fundamental component of our economy and, argu- ably, nothing but trouble,” Khosla says in a 12-page white paper he distributes to U.S. lawmakers and investors. Khosla has allied himself with national se- curity hawks such as R. James Woolsey, 65, di- rector of the Central Intelligence Agency from 1993 to ’95. “We are so locked into oil that we’re unprepared to substitute another fuel,” says Woolsey, 65, who advises VantagePoint Part- ners on alternative energy investments. “What if a terror attack or a regime change in Saudi Arabia takes 6 or 7 million barrels off line for a year? Would the price of oil go to $100 or $200 a barrel?” K hosla, a native of Pune, India, with close-cropped gray hair and deep-set eyes, made his name developing net- work computing companies such as Cerent Corp. and Juniper Networks Inc. Kleiner Perkins turned an $8 million investment in Cerent into $2 billion. That record has won Khosla entree to Washington power brokers. He’s delivered his pitch on ethanol to Democratic Congressional leaders, such as Nancy Pelosi of California, as well as Republicans such as senators Richard Lugar of Indiana and John McCain of Arizona. The U.S. government is already pushing ethanol, whether consumers want to pay for it or not. The Energy Policy Act of 2005 requires that oil refiners—which blend ethanol with gaso- line as an additive—double biofuel consumption by 2012. For now, at least, consumers are paying the freight: For the past eight years, corn-based ethanol has cost them an average of 49 cents a gallon more than gasoline. With about 6 million flex-fuel ethanol vehicles already on California mothballed the Bottle Rock geothermal plant in 1990. Lee Bailey, below, has bought a stake in the plant and is financing its rebirth. MARKHAMJOHNSON(BOTTOM)
- 6. 42 U.S. roads, Khosla says his plan isn’t grandiose. “When we started with the Internet, every telecom carrier said, ‘No way. We have a 100-year-old infrastructure, and it will never change,’ and in less than 10 years, it did,” he says. “I think the same thing can hap- pen in energy. I have no doubt that we could replace most, if not all, of our fuel needs with ethanol in 25 years.” Bailey of US Renewables isn’t waiting for Khosla’s eth- anol revolution. Instead, he’s dusting off another decades- old idea: geothermal power. The Bottle Rock geothermal power plant sits atop the largest subterranean steam field in the world, about 50 miles (80 kilometers) north of Napa County wine country. When Bailey first saw Bottle Rock in 2005, it had been idle for 15 years and was overgrown with weeds and littered with stacks of rusting metal pipes. He had to sidestep bear droppings as he surveyed the derelict plant. “It was a com- plete mess,” he says. Nonetheless, US Renewables, which is investing a Bloomberg Markets August 2006 $100 million fund in alter- native energy projects, bought about 88 percent of the plant last October and is financing its rebirth. Back in the ’80s, Bailey, a lanky, 6-foot-5-inch law- yer from upstate New York, served as general counsel of Rochester Hills, Michigan– based Energy Conversion Devices Inc. The company developed the batteries for GM’s short-lived EV1 elec- tric car. After directing a Clinton Administration program that promoted sales of state companies in Russia and South Africa, Bailey joined Santa Monica, California–based Rustic Canyon Partners, founded by Thomas Unterman, former chief financial officer of newspaper company Times Mirror Co., which is now part of Tribune Co. Rustic Canyon, with $800 million under management, invests part of the fortune of the Chandler family that built the Los Angeles Times. Bailey formed US Renewables in 2004 with Rustic Canyon as lead investor. Making the drive to Bottle Rock through the rice-growing ut wis Mutual funds are striking gold in green stocks. Worldwide, funds that invest in alternative energy and other environmen- tally friendly industries posted an average return of 39 percent in the 12 months ended on May 31, according to data compiled by Bloomberg. Managers of the best-per- forming green funds say the boom has only just begun. Rising oil prices and growing concern over global warming have sent green power stocks soaring. Companies involved in water treatment, recycling and waste management are gaining, too. “People know that we are not on a sustainable path and that in the next five, 10 or 15 years, the main problems will be environmental,” says Nicolas Rochon, who helps manage the 198 million euro ($248 million) Performance Environnement fund at Paris-based Financière de Champlain. The fund re- turned 51 percent in the year ended on May 31, the best showing among green funds worldwide, according to Bloomberg data. (See table.) The fund was launched two years ago, with a mere $400,000 in assets. Rochon, 28, says many in- vestors believe they’ll profit by looking out for the environment. Alternative energy stocks have already surged the way dot-com shares did in 1999. The 40- stock WilderHill Clean Energy Index has rocketed since its August 2004 debut, gaining 69 percent as of June 5. During the past decade, in- vestors have poured money into mutual funds that follow environmental, social or reli- gious guidelines. The assets of such funds ballooned to $179 billion in 2005 from $12 billion in 1995, according to the Washington-based Social In- vestment Forum. Ecofriendly funds represent only a fraction of that universe. The seven U.S. green funds tracked by Chicago-based Morningstar Inc. have a com- bined $619 million of assets under management. Managers of green funds typically invest in small compa- nies that they think are poised for fast growth. Altshuler Sha- ham Green Fund, which returned 36 percent in the year ended on May 31 and has 403 million shekels ($90 million) in assets, supplements its small-cap picks with stocks of large companies it believes are committed to ener- gy efficiency, such as Milwaukee- based automotive systems manufacturer Johnson Controls Inc. and Toyota City, Japan– based Toyota Motor Corp. “Investing in large con- glomerates that invest in energy-efficient products helps offset the volatility of our small-cap holdings,” says Yotam Irroni, an analyst at Tel Aviv–based Altshuler Shaham Mutual Fund Management Ltd. Among the Altshuler Ecofriendly Funds ���������������������� ������������������������������������ ������������������������� ��������� ��������������������������� ������������ ������������������������������ ����������������� �������������������������������������������������������������������������������� ���� ���� ����� ������ ����������� ������������ �������������������������������������������������� ������������������������������������������������ COVER STORY: THE POWER OF GREEN
- 7. 43PHOTOCREDIT PHOTOCREDIT s nibh ea green fund’s biggest picks are Spanish wind power company Gamesa Corp. Tecnologica SA, Canadian organic food distributor SunOpta Inc. and Chinese solar panel maker Suntech Power Holdings Co. Rochon invests in 70–80 stocks to reduce the volatili- ty of his fund’s returns. He also picks companies with contracts that guarantee stable sales. Performance Environnement invested in Paris-based Sechilienne SA, which has a contract for biofuel power in Guadeloupe. Jackson Robinson, who start- ed the Boston-based Winslow Green Growth Fund in 1994, hunts for sound, small companies that have run into some trouble. For example, Robinson, 64, bought shares of Danville, Con- necticut–based organic food dis- tributor United Natural Foods Inc. in 2000, when a new CEO was struggling to upgrade the company’s computer systems. At the time, the stock traded at $8. On June 5, it traded at $33.36. As oil prices have soared, al- ternative energy has emerged as the hottest investment area for green funds, Robinson says, add- ing that the rush to these stocks reminds him of the Internet share frenzy of the ’90s. “There are hundreds of companies in this space, and many will not survive,” Robinson says. For now, at least, mutual fund managers—and their inves- tors—are seeing green. DEEPAK GOPINATH fields north of Sacramento, Bailey says he doesn’t have the patience to finance new solar or hydrogen technology. Bottle Rock plans to go on line by December, a little more than a year after he invested in it, he says. “Going into the lab for years and then developing a technology into a commercially viable product takes a long time,” he says. “It could be 10 years before you can exit.” B ottle Rock draws volcanic steam from reservoirs 10,000 feet underground and pumps it through al- most two miles of pipe to a turbine and generator. Housed in concrete walls almost 2 feet thick to withstand earthquakes, the $60 million facility was state of the art when it opened in 1985. “It was the Cadillac of plants,” says Louis Capuano, chief executive officer of ThermaSource Inc., an oil and steam well driller in Santa Rosa, California, and a minority stakeholder in Bottle Rock. Five years after going on line, the steam wells clogged. With natural gas then at $1.46 per million British thermal units—four times less than it cost on June 5—Cali- fornia shut the plant rather than fix it. Bottle Rock no longer made economic sense, Capuano says. Now it does, Bailey says. Twenty states have passed laws requiring utilities to buy a portion of their electricity from alternative sources. California has required its utilities to buy 20 percent of their power from non-fossil-fuel plants by 2017. On May 16, Bottle Rock landed a 10-year contract from San Francisco–based Pacific Gas & Electric Co. Bailey says Bottle Rock will generate 25 megawatts of electricity an hour by December, enough power for 25,000 homes, and is capable of putting out more than twice that much. At Mohr Davidow, a Sand Hill Road mainstay founded in 1983, Straser says he sees a bright future for solar power. A na- tive of Manhattan Beach, near Los Angeles, Straser got a Ph.D in engineering from Stanford in 1988. As a student, he pat- ented a system that uses wireless sensors to monitor satellites and power plants. After working at the Los Alamos lab and Interval Research Corp., a technology incubator funded by Microsoft Corp. co-founder Paul Allen, Straser joined Mohr Davidow in 1998, at the age of 28. At a restaurant near his office, Straser pushes aside his stir-fry and grabs a pencil to diagram how rising energy costs are press- ing companies to seek alternatives like solar power. “Solar is all about cost performance now, and those companies that can move the cost needle down, that’s the only goal that matters,” Straser � � � � � � � � � �� ���� ������ ������������� ������������������������� �������������� ��������������������� ����������������������������������� �������������������� ���������������������� ���������������������� �������������������������� ���������������� ��������������� ������������������ ����������������������� ����������������� ����������������������� ����������������� ������������� ���������������������������������� ����������������������� ���������������������� ������������������������������� ������������������� ������� ������ ����� ���������� ������� ���� ������ ����� ���������� ���������� ���� ���� ���� ����� ������� ������������ ����������� � ����� ����� � ���� ����� � ���� � ���� � ���� � ���� � ���� � ���� ��������������������������������������������������������������������������������������������������������� ������������������������������������������������������������������������������� Silicon Valley pioneer Khosla says ethanol could help the U.S. end its foreign-oil addiction. Bloomberg Markets August 2006
- 8. 44 says, scribbling on the butcher paper covering the tabletop. In early 2005, Straser met with Martin Roscheisen, 37, a fellow Stanford-trained engineer, who’d assembled a team of 30 Ph.D.-level scientists and engineers in an office park in Palo Alto. They were developing a new type of solar technol- ogy that cost less to produce than typical silicon panels. Google co-founders Sergey Brin and Larry Page were early investors in the company, called Nanosolar Inc. A few months later, Mohr Davidow led a $10.5 mil- lion round of financing for Nanosolar, which includ- ed Benchmark Capital, the Sand Hill Road VC firm that funded EBay Inc. “Given that we invested in the company before the prod- uct was developed, there was a technical risk,” Straser says of Nanosolar. “But we dove in deep on the technology, and we could see how a breakthrough manufacturing process could unlock a huge economic advantage.” For 30 years, solar cells have been fashioned from silicon wafers similar to the ones that semiconductor manufacturers like Intel Corp. use to manufacture computer chips. The rigid, delicate panels are expensive to make, costing customers about $5.40 per watt, and must be mounted in modules on rooftops or other exposed surfaces. Using nanotechnology, the science of building microscopic materials from single atoms and molecules, Nanosolar’s scien- tists created a “photovoltaic ink” that converts sunlight into electricity. The ink is coated onto flexible, foil-like strips that wind through roll presses similar to those that print newspa- pers. The thin film of ink, which is 1/100th the thickness of a silicon-based solar cell, can be attached to walls or any other flat surface or integrated into roofing material. Roscheisen says this process will enable Nanosolar to make solar cells for as little as a 10th of the cost of silicon panels. Roscheisen says he doesn’t aspire to replace existing electricity sources with his PowerSheet-brand solar cells. Rather, he plans to market the product as a source of relief when electricity is most expensive—during the afternoon, es- pecially in the summer, when air conditioners tax the power grid. In California, electricity prices jump to 30 cents in the afternoon from 6 cents per kilowatt-hour at night. By draw- ing electricity from solar cells, customers can save money. “Solar is fundamentally about peak power availability and value,” Roscheisen says. Nanosolar, which has raised $100 mil- lion in capital, plans to build a factory in the Bay Area that can make enough solar cells to generate 120 megawatts of power by the end of 2007 and 430 megawatts by 2009. Right now, many solar companies are feeling growing pains. Worldwide sales of solar panels more than doubled to $11.2 billion in 2005 from $4.7 billion in 2003, according to Clean Edge Inc., a Portland, Oregon–based research firm. Solar cell makers that can’t buy the silicon they need face backlogs of as long as two years, says Jeffrey Bencik, an ana- lyst at Jefferies in New York. Nanosolar confronts commodity risks of its own. The company uses copper and indium, both of which have under- gone volatile price swings during the past year. Indium, a metal as scarce as silver, swung from $950 a kilogram in June 2005 to $1,035 in September, to $797.50 on June 5. An even bigger challenge is that Nanosolar’s “thin-film cells” are less efficient than conventional solar panels. They convert 14 percent of the sunlight that strikes them into electricity, whereas silicon cells convert about 20 percent. Nth Power’s Nancy Floyd has been involved in green power since the 1970s. She’s investing in biodiesel, a petroleum alternative. New solar technology could upend the $1 trillion global elec- tricity industry, Straser says. COVER STORY: THE POWER OF GREEN Bloomberg Markets August 2006
- 9. ROBBIEMCCLARAN Bloomberg Markets August 200646 Michael McGehee, a materials science professor at Stan- ford’s School of Engineering, says Nanosolar’s cells show prom- ise. “I’m excited about this technology, but it’s going to take a while,” he says. “There are always glitches you can’t predict.” Floyd of Nth Power has been confronting the uncertain future of alternative energy since her days at the Vermont Public Utilities Commission. Back then, she was fresh out of Rutgers University in New Jersey, with a master’s degree in political science, and says she didn’t know a watt from a volt. (Watts measure electric power, and volts are the unit of force that carries electricity.) Then President Jimmy Carter jump- started the renewable power industry with tax credits. Floyd was hooked. “There were a lot of new technologies coming on line, and there weren’t many entrepreneurs, so it was a mar- ket where you could really make a mark,” she says. In 1982, Floyd founded NFC Energy Corp., a wind power company in San Francisco that raised $30 million and erect- ed 130 wind turbines in the Altamont Pass that connects the Bay Area to the Central Valley. Floyd, who used to hike into the pass and use a device called an anemometer to measure the force of the wind, struck gold: In 1985, she sold NFC for 25 times its initial investment capital. A fter a two-year stint at Pacific Telesis Group, the telecommunications company now owned by AT&T Corp., Floyd co-founded Nth Power in 1993 with Maurice Gunderson, a thermodynamics engineer. It took them four years to raise their first fund. “Finding investors was a challenge,” Floyd says. It’s less chal- lenging now: In June, Nth Power closed its fourth fund at $200 million. Chevron Corp. and Electricité de France SA, the state- owned power provider, are among Nth Power’s investors. Floyd says alternative energy is still the wide-open indus- try she remembers, where an individual with little capital and a big idea can make a splash. Last November, she backed just such a person, a former airline pilot named John Plaza. In 2004, Plaza, 40, quit his job at Northwest Airlines Corp., withdrew half of the savings in his 401(k) plan, took out a second mortgage on his Seattle home and sold his be- loved Ducati Supersport motorcycle. With the $300,000 he raised, he started Seattle Biodiesel LLC. Plaza picked biodiesel because it’s a tested, clean alterna- tive to petroleum. Like cooking oil, the fuel, which is more yellow colored than gasoline, can burn in any diesel engine with little modification. Unblended biodiesel emits up to 50 percent less carbon monoxide and 78 percent less carbon di- oxide than petroleum diesel, according to the U.S. Environ- mental Protection Agency. By July 2005, Plaza had raised $2 million from individual investors. Martin Tobias, a partner at Seattle-based VC Ignition Partners LLC, had come aboard as CEO. Plaza’s startup built a plant in a 10,000-square-foot (929-square-meter) warehouse on Seattle’s south side. It looks like an oversized chemistry set, with pipes snaking across the ceiling and connecting various tanks wrapped in silver-colored insulation. Plaza salvaged a dozen 7,000-gallon (26,500-liter) tanks from a brewery that was closing to hold vegetable oil and finished biodiesel. The plant receives soybean oil from Cargill Inc. and other growers by rail, heats it up to 200 degrees Fahrenheit (93 de- grees Celsius), uses a proprietary process to remove glycerin and then purifies the fuel. Plaza fills his Chevy diesel pickup directly from a tank at the plant, which makes 5 million gal- lons a year. Floyd visited the plant in the fall of 2005 and concluded that the company could prosper by catering to truckers and other fleet customers. Even better, biodiesel might eventual- ly be used by power plants or refined into heating oil. Last November, Nth Power took part in a $7.5 million funding round led by Technology Partners, a Palo Alto venture firm. “We don’t need a massive shift by U.S. consumers to get a venture return,” Floyd says. Plaza and Tobias are now rounding up $40 million to build the largest biodiesel plant in the U.S. at an old lumber mill port on the Olympic Peninsula, west of Seattle. It will be capable of producing 100 million gallons of biodiesel a year by mid-2007. John Plaza, a former airline pilot, founded Seattle Biodiesel. Made from soybeans and canola seeds, biodiesel burns cleaner than ordinary diesel fuel. COVER STORY: THE POWER OF GREEN
- 10. BLOOM B ERG TOOLS For a menu of venture capital–related Web sites, type VCPL <Go>. 48 Bloomberg Markets August 2006 To list the 40 stocks that make up the WilderHill Clean Energy Index, type ECO <Index> MEMB <Go>. To see how the index has performed relative to U.S. benchmark stock indexes, type COMP <Go>. Tab in to the second field in the Securities column, and enter SPX <Index> for the Standard & Poor’s 500 Index. Enter CCMP <Index> for the Nasdaq Composite Index in the third field in the Securities column. To base the comparison on the 12 months through June 5, enter 06/06/05 and 06/05/06 in the RANGE fields. Tab in to the PERIOD field, enter D, and press <Go>, as shown below. The WilderHill index jumped 53 percent in the 12-month period. The S&P 500 rose 5.7 percent, and the Nasdaq composite gained 4.5 percent. Type RV <Go> to use the Relative Value function to compare the stocks in the clean energy index on the basis of fundamental data that you can select. To rank the members of the index so that those with the highest market values appear at the top of the Relative Value screen, click on the Current Market Cap column heading and select Actual Descending. As of early June, Praxair Inc. topped the list, with a market value of $17.3 billion. Praxair is a Danbury, Connecticut–based company that produces industrial gases. MagneTek Inc., which makes power control products and is based in Los Angeles, had a market value of $72.8 million in early June, putting it at the bottom of the list. Type MOV <Go> to list the stocks that are most re- sponsible for moving the index up or down during the current trading day. JOHN DIXON How Have Clean Energy Stocks Performed? By the time the plant is pumping out biofuel, the young company will be facing formidable competition: On May 11, Chevron’s venture arm acquired 22 percent of Galveston Bay Biodiesel LP, a Houston-based company that’s building a 100 million–gallon biodiesel refinery. With Chevron’s distribu- tion network, Galveston could capture many of the custom- ers Plaza is aiming for. P laza shrugs at the challenge. “If the oil companies do that, and we’re on 100 percent renewable fuel as a country, and I’m dead broke, well, then I’ll feel like a success,” he says. For green-power fans, the biggest risk of all is oil. Ven- ture capitalists and stock market investors are all betting that high-priced crude is here to stay. “If oil suddenly drops to $50 a barrel on decreasing demand, then this whole thing could drop like a rock,” says Robert Wilder, CEO of Encini- tas, California–based WilderShares Inc., which tracks the WilderHill Clean Energy Index. An oil slump might bring an end to today’s green rush. Given the spiraling demand for power worldwide, however, cheaper oil alone won’t cure our energy ills for long. Ernest Moniz, co-chairman of the Energy Research Council at Mas- sachusetts Institute of Technology, which is researching non- carbon-based energy sources, says the world must come to grips with its appetite for energy and the environmental havoc being wrought by fossil fuels. There’s no time to waste, he says. “These are huge issues that have to be grappled with,” he says. “We’re talking about a transformation of the global energy infrastructure over the next few decades.” Time moves fast in Silicon Valley. In 1999, VCs were the he- roes of the New Economy. By 2002, many of them looked like goats. What many investors seemed to forget during those dark, post-bubble years is that, sometimes, the dreamers are right. In less than a decade, a seemingly quixotic startup with a goofy name—Google—has become one of the most-valuable companies in the world. VCs who can find a Google or Amazon or EBay of green power will make a fortune. And if they hap- pen to save the world along the way, well, that’s fine, too.„ EDWARD ROBINSON is a senior writer at Bloomberg News in San Francisco. edrobinson@bloomberg.net COVER STORY: THE POWER OF GREEN