Distributed Generation: A "Hot Corner" for Venture Capital?
Robert W. Shaw JR. IS A BETTING MAN. Shaw's Aretê Corp. venture capital fund has invested $100 million in energy technology. This year the Center Harbor, N.H., fund set aside $30 million to invest in micro-generation technologies. Already the fund has pumped hundreds of thousands of dollars into more than a half-dozen companies trying to develop microturbines, fuel cells and other promising small-scale generation.
"This is a hot corner," Shaw says.
Shaw bucks naysayers like Ralph Selvig of VentureOne Corp., a San Francisco firm that tracks the venture capital industry. Selvig insists the regulation-intensive utility environment simply doesn't draw investors.
"Realize [that] we had almost $6 billion get invested in the first half [of 1998], in venture-backed deals," Selvig says. "All industries, all stages, all regions of the U.S. And that's by venture firms managing a minimum of $25 million and up. The fact is, you've got 657 venture firms out there and you can count, probably on one hand, the guys that are doing the utilities' deals."
But those developing distributed power applications and the venture capitalists who believe in them point out that most of the business plans they're financing fall outside regulated power.
In fact, that's exactly what's creating opportunity for energy's subset of small generation systems - photovoltaics, microturbines and fuel cells, to name a few technologies. Furthermore, it's the utilities, from the U.S. and Europe, who are backing the venture capital firms. Utilities like Cinergy Corp., PacificCorp and Electricité de France.
To put the venture capital industry's new interest in small-scale power in perspective, one needs to look at what's happening with central station fossil and nuclear plants. Today, those plants supply 87 percent of the electricity used in the United States. Fuel cells and microturbines promise to play a greater role, helped by a growing track record of overseas installations where there are few central plants and many remote villages in need of power. Some 70 percent of the products and equipment produced in the U.S. for "off grid" power generation is exported for use in foreign countries. Experts predict 20 percent or more of all new generating capacity built in the U.S. over the next 10 to 12 years could be for distributed applications, representing a potential market of several tens of gigawatts.
However rosy the picture is painted by true believers, the reality is that Selvig is right: Maybe a handful of VC firms are investing solely in energy technology. A few more have moved outside their high-tech specialties to fund promising energy technology.
Not Quite the Right Time?
"It's changing," says Nancy Floyd, a principal in Nth Power Technologies Inc., which manages a $55-million fund in San Francisco. "You do have an increasing number of funds that are specifically focused on energy and I'd say environmental technologies because many of these energy technologies have environmental benefits." Floyd adds that most of Nth Power's investments in energy have been co-investments with top-tier, traditional VC firms, "people who are very interested in investing ¼ but only want to invest with somebody who's smart in this