I've been learning about venture capital funds for electric utilities. The lesson has run the gamut: from competition to cannibalization; from portfolios to the laws of thermodynamics; from the next new thing to the renaissance of a 19th-century technology.
Some might ask: Isn't venture capital just like gambling? Not so, say execs from two utilities now getting their feet wet in a venture fund. All the same, this story will take us to Atlantic City casinos before it's done.
The Romans Did It
In 1877, in Lockport, New York, Birdsill Holly set up the first commercial system in the U.S. for district heating (em a central plant providing thermal energy to multiple buildings in the form of steam or hot water. The idea wasn't new. The Romans in Pompeii had circulated warm water through open trenches to heat buildings and baths. Later, by the turn of the century, most electricity in North America was generated downtown, close to load. Like the Romans, utilities in New York, Denver, Boston, Seattle, Philadelphia and Kansas City were routing waste heat from generating plants through steam systems to serve local needs. (See, "The Renaissance of District Energy," by John L. Fiegel, president, International District Energy Association.)
District heating had declined by mid-century, driven out of fashion by rising economies of scale, which convinced utilities to build large central stations far from urban centers and closer to primary energy sources. But lately the pendulum has swung again. Natural gas combustion turbines promise cheap power in small bites. Attention has turned to distributed generation. Fuel-cell technology spun off from NASA's space program suggests that, before long, Americans will want their own PGs (em personal generators (em to run their PCs.
If that's true, however, then why do we now see a "renaissance" in district heating and cooling (em a technology that would appear to give individual users less control over their energy services? In fact, as confirmed by IDEA's John Fiegel, new projects in district heating and cooling are under way across the country, including in casinos in Atlantic City. "We're seeing something we've never seen before," he adds. "Competition from more than one district energy system in one city, such as in Baltimore, Boston and Chicago. That never happened in the past."
Power as a Byproduct
Nth Power Technologies Fund I, L.P., a venture capital fund for electric utilities formed in 1996, is investing in a range of energy ideas: 1) fuel cells; 2) distributed generation; 3) power quality; 4) transmission and distribution automation; 5) next-generation lighting; 6) "smart-home" products; and 7) communications, control and information. It's looking for a competitive edge for its limited-partner clients.
Nth Power operates like traditional venture funds in other industries. It bets on small-sized start-up companies looking to develop commercially viable products. The payoff comes when a portfolio company goes public or attracts a merger partner or takeover. Nth Power has attracted $50 million in capital from seven limited partners, including Cinergy Corp., PacifiCorp, KN Services, Inc., Sierra Pacific Resources, and Electricitè de France.
"Venture capital is about investing your time," says Nancy Floyd, principal for Nth Power. "My partners and I make the investment decisions. You couldn't possibly get utilities to agree on anything."
Maurice Gunderson, another Nth Power principal, is a mechanical engineer. I asked him about the market for new competitive energy products.
"I think it's fair to say that, in five to ten years, fuel cells will be fairly ubiquitous. If you're wiling to pay, you can buy a fuel cell now, at about a couple thousand dollars per kilowatt."
Gunderson continues: "The cost can come down now for the electronics, for the stack and for the processor or "reformer," which converts DC power to AC. But to get it down to a price that is affordable to a homeowner, you need more volume and size reduction. It will take three, five, or six years from now to become a consumer product."
Gunderson thinks fuel cells will be integrated closely with other appliances, where they offer thermodynamic advantages, such as supplying waste heat to meet thermal requirements.
"Now you come to an interesting question: Are you going to buy a fuel cell to generate electricity, or to heat water? Should I size the plant for my thermal needs, and sell the electricity on the grid as a byproduct, or should I size the plant for my electric needs?"
In most locations, says Gunderson, thermal needs will win out, leaving power as a byproduct.
"The grid becomes the clearinghouse for the byproduct, so there isn't much reason to for fuel cells not to be connected."
Cinergy and PacifiCorp are investors in Nth Power. Both companies belong to the Electric Power Research Institute and have learned a lot from meetings with companies that make up the Nth Power portfolio. PacifiCorp says it closed down the R&D departments for Pacific Power & Light and Utah Power & Light back in the 1980s when the two companies merged. Cinergy, a registered holding company, has its own R&D department and is actively considering the idea of participating in a multi-utility R&D consortium.
David Engberg, director of technology development at PacifiCorp, confirms the thermal advantages of distributed generation.
"Distributed generation is very much in the middle of what we are looking at. There are several fuel cell or micro-turbine generators that are approaching commercial status.
"It's the nexus of power generation and thermal applications where commercialization potential exists. If a utility prefers to ignore or consider a fuel cell customer as not part of its business, it could lose the customer. Our view is that we're in the energy service business, broadly defined. Competitive restructuring will present many technology-driven threats and opportunities."
At Cinergy, Liz Lanier, v.p. and chief of staff for technology, confirms her company's interest in both distributed generation and district energy.
"We have some frustration with distributed generation, that the technology is not going along faster. Some companies fear products that cannibalize their own markets. But we feel we can use the new technology to get access to customers that we do not currently serve.
"We created a new company called Cinergy Trigen Solutions. We're exploring district heating and cooling, including a project for the new stadium being built for the Cincinnati Bengals."
Nth Power tells me that venture capital was nonexistent for telecommunications before the AT&T divestiture, but now totals $500 million a year. Curious, I called Ralph Selvig, director for VentureOne, a research firm that tracks the venture capital industry.
"There hasn't been much activity to date," says Selvig, speaking of the utility industry. Today we can't determine yet from our industry classification codes how many firms offer venture capital funds for utilities. But call back in the fourth quarter, when we update our codes." t
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