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The Venture Financiers: Still Bullish on Energy?

Their numbers remain small, but investors in energy technology say California's energy crisis this summer may be a boon.
Fortnightly Magazine - December 2000

such as utilities participating in the venture capital efforts, Holman says that's all part of the evolution of deregulating markets. Holman uses the oft-repeated analogy of the telecommunications industry before it deregulated. "[Before deregulation], the product development and commercial introduction cycle, when AT&T was the only game in town, was very, very long."

Holman says that the research and development arm of AT&T developed such products as headsets before the industry deregulated, but let them sit on the shelf for years. Why? "In addition to having the inertia that comes with being a regulated monopoly, they didn't want to introduce new products that would potentially cannibalize their existing investment. It's the same deal in the power industry. ... What incentive does a monopoly utility have to promote and sell and incorporate into its own generating strategy distributed resources? The answer is 'none.'"

That's all changing, though. In addition to utilities starting to place their bets with VCs like Nth Power, several have shed their "cannibalization" fears of distributed generation and invested directly in DG companies, and the trend is continuing. Joining the likes of DTE and Avista in embracing DG, PPL Corp. in September put $10 million into FuelCell Energy Corp.

Such investments by utilities call into question whether the traditional research arm of the industry, EPRI, might be suffering financially from utilities putting their money elsewhere. Does EPRI see the venture capitalists as encroaching on their territory? "They're certainly not competitors," claims Fred Potter, director of commercial development at EPRI.

In fact, utility interest in venture capital and direct investment in power technology companies may well play a role in EPRI's redefinition of itself. Potter says that since some of its technology solutions might have wider applications, EPRI too might look to the venture capitalists. "It's something we're actively exploring," he says.

Launch of the Investment Cycle?

But has the investment buzz extended beyond industry insiders? Even Nth Power is tied directly to the energy industry, with partners including FirstEnergy, Cinergy, Alliant Energy, and PacifiCorp. Holman can't give any quantitative evidence, but his personal experience suggests that there is increasing interest from outside investors. "I certainly have gotten a lot more calls over the last six months from venture funds interested in opportunities in power technology than I had gotten in the prior 24 months."

Of course, potential investors always have two questions: first, "Is there really much opportunity out there?" and second, "Has the train already left the station?" In Holman's opinion, the answers are, yes, there is opportunity, and no, the train hasn't left the station.

"We still see interesting opportunities coming forward," he says. "Oftentimes, they're companies that have been around for some time—you know, two guys and a dog in a garage—working on technology. And now for the first time, they have an opportunity to get financing. ... I think we're still very, very early in the cycle of investment."

Deutch agrees: "We're in the beginning for energy technology."

As for whether the dot-com technology scare has seeped into energy VC, Holman acknowledges that such a ripple