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Distributed Generation: A "Hot Corner" for Venture Capital?

Fortnightly Magazine - October 15 1998

HOGEN uses cheap off-peak electricity to make hydrogen. In development is the UNIGENTM, which will then use the hydrogen for a fuel cell that will generate power to be sold back onto the grid at on-peak prices.

Electrolysis isn't a new technology, having been used in military and aerospace applications for 30 years.

Schroeder joined Proton Energy from AES Corp. His four co-founders had come from United Technologies Corp. Soon after the CEO's arrival, the company received $500,000 from Aretê and $200,000 from AES. Then, the business operated as a paper company for about eight months trying to attract other VCs.

"We learned there are a lot of people who claim to be in the venture capital business and who are not," says Schroeder of the company's early days. "There are mostly followers in the business. There are mostly people who - they wait for the first round. They're the last stage [of funding] before the IPO."

"One of the things that separated us from the pack," he says, "is most of the alternative energy companies ¼ are hurt by the falling prices of oil and electricity. We are actually helped, in the near-term plan, because we use electricity."

He notes that the microturbine market suffers from the low electricity prices caused by the marketer-pushed deregulation movement. "And it is really undermining some of the market potential of distributed technology, for good economic reasons."

In the near term, Proton Energy hopes to sell its electrolyzer products to industrial gas companies, to help lower their costs, which again, is difficult because no venture capitalist has invested in the industrial gas business, Schroeder says. Hydrogen by wire, rather than by truck, however, is an intriguing concept to industrial gas companies as a way of lowering their business costs.

Proton Energy is in its third round of funding, having raised about $7.5 million over three rounds. Investors include Solstice Capital and Connecticut Innovations.

Although the company is a full-scale manufacturer, it is testing its hardware and won't log revenues until 1999. It is discussing with industrial gas companies to sell through them, not take away their customers. The electrolyzer product, which uses 50 kilowatts, sells for about $200,000 and is expected to be sold for half that in two years. "These are going to be appliances," Schroeder says. "When you look at them, two or three years from now, that's what they're going to look like, very standardized, compact, solid state, very simple devices."

The electrolyzer-fuel cell unit that operates on 50 kW or 30 kW to make hydrogen and produce electricity might cost about $300,000, Schroeder says.

"Let's say it takes $300,000 to make 30 kW," he says. "That's $1,000 a kW. That's interesting. That's not spectacular. That's installed. It costs almost nothing to operate. And all you need to do is give us potable water."

It's the kind of thinking that's luring investors like Shaw and Floyd.

And it may be the kind of thinking that catapults energy to the forefront of private investors' portfolios.

Joseph F. Schuler Jr. is senior associate editor