December 04, 2008
Re-energizing Energy Innovation: Experts Spar (Lightly) at Xconomy Forum
The role of technology entrepreneurs in rebuilding the U.S. energy economy was the main theme at Xconomy's latest forum Tuesday night. Topping the agenda was an all-star panel of local entrepreneurs, venture capitalists, and academic analysts, who shared their thoughts with a sold-out crowd of some 125 attendees at the British Consulate General in Cambridge, MA. The program climaxed with an intense, fascinating chat between Highland Capital Partners general partner Paul Maeder and energy-efficiency expert Amory Lovins, co-founder and chairman of the Rocky Mountain Institute.If there was a single takeaway message from the evening, it was that new technologies being developed by venture-backed energy companies-along with the smart application of some old ideas, like efficiency-have the potential to generate significant investment returns, while slowing climate change and helping to lift the U.S. economy out of recession in the bargain.
But taking full advantage of these technologies, all of the speakers agreed, will require some major political, cultural, and regulatory changes. As a new administration in Washington begins to confront the economic crisis and the ongoing national-security vulnerabilities created in part by U.S. dependence on foreign oil, Boston-area innovators and entrepreneurs are clearly looking for opportunities to contribute.The Maeder-Lovins conversation was so idea-rich that it deserves a post of its own, which we'll bring you in a day or two. But the panel discussion, moderated by Xconomist Bill Aulet of the MIT Entrepreneurship Center, produced its own wealth of worthwhile insights.
The panelists included Christina Lampe-Onnerud, CEO of lithium-ion battery maker Boston-Power; Jim Matheson, general partner at Flagship Ventures, which has investments in local energy startups Ze-gen, Mascoma, and Novomer; Bill Wiberg, general partner at Advanced Technology Ventures, which has investments in Great Point Energy, Coskata, and Rive Technology; and Donald Lessard, Professor of International Management at the MIT Sloan School of Management and co-chair of the MIT Energy Education Task Force.Aulet kicked off the discussion with the assertion that energy innovators have not established a lustrous record over the past few decades, with new technologies typically taking 10 to 40 years to reach the market. But Wiberg immediately disagreed with that premise, saying that 'It's not innovation that's been lacking, it's commercialization.' When energy prices waver, as they are now, investors' confidence about putting money into alternative energy schemes often wavers as well, Wiberg pointed out.Lampe-Onnerud countered that Aulet was correct, in a sense, in that many energy technologies are so complicated that it really does take decades to work out all of their kinks. In her own field of battery chemistry, Lampe-Onnerud pointed out that lead-acid and then nickel-metal-hydride batteries dominated from the 1850s all the way up to the 1990s, when the first lithium-ion batteries were commercialized-and that lithium-ion technology is still only beginning to show its potential. 'Energy storage devices are like little chemical factories,' she said-and many other energy technologies are equally complicated.
'It's not a one-component problem,' Lampe-Onnerud said. 'If we could have one resolution tonight, I'd want to inspire people to work more collaboratively, because these things are really hard.'Lessard argued that the pace of energy innovation is limited by existing models for regulating and investing in energy technologies. 'Anything that requires behavioral change or regulatory change is going to be hard,' he said. 'It's very hard to bank on regulatory reform.' The energy business involves such complex politics and extensive regulation, in fact, that 'it's an environment where if you were a smart startup, you would never go,' Matheson chimed in. 'Which is why the venture industry has shied away from it. But now we're all trying to go there together.'Wiberg pointed out that in certain venture-funded areas, such as biofuels and coal-to-gas technologies, there is already 'a lot of pilot activity for large-scale production.' But the financial crisis means there's going to be a period of uncertainty for many of these companies, he said, as the hedge funds and private equity firms that were active in early-stage energy investing fall out of the market. 'How do the companies that were planning on raising hundreds of millions of dollars on the private and public markets adjust their business plans and still get the capital they need? That's incomplete,' said Wiberg. 'But we're optimistic, even in this environment. These are enormous markets, and there is a lot of innovation going on, and an increasing number of great entrepreneurs are getting involved.'Matheson faulted venture investors for focusing too heavily on the 'black boxes,' the core technologies at their portfolio companies, and too little on 'how you add unique value in a value chain.'
Many first-generation alternative energy projects will fail, Matheson predicted, because they're producing commodities for which there is no market, or no sustainable price. Matheson cited Flagship portfolio firm Novomer (profiled here and here) as an example of a company that has only expanded as fast as it is able to find markets for its products (in this case, alternative polymers synthesized from carbon dioxide).Provoked by the panelists' comments about the limits of new technologies and the importance of market factors, Aulet asked, 'Is technology overrated when it comes to energy innovation?' Lessard answered more or less in the affirmative, saying rebuilding the nation's energy economy 'is going to require as much regulatory and 'mechanism' engineering astechnological engineering....it's behaviors, policies, business models.' (Lessard said out that the new energy minor for MIT undergraduates 'is all about thinking across these domains,' a point that drew enthusiastic applause from the audience.)Technology 'is only part of the solution,' Wiberg agreed. 'It's the fundamental underpinning, but before we make an investment we look at the full value chain. Is there a breakthrough that is going to allow you to compete in a commodity market?'On the technology question, Lampe-Onnerud pointed out that for a startup, having a strong patent position can be invaluable.
Boston-Power has 43 patents worldwide on lithium-ion technology, she said. 'That's allowing us to win really strategic deals and meet customers who have unmet needs and have them trust that we will be around.'Aulet suggested that the venture capital model might have to be adjusted to help more laboratory solutions to energy problems find their way into the marketplace. Matheson agreed. 'Everything around the VC industry innovates, but the VC industry itself innovates very little,' he said. 'But a whole capital supply chain has started to form over the past couple of years, with the VC industry, private equity, public market investors, hedge funds, the whole financial industry figuring out how to support innovation.' Matheson said that, in particular, he'd like to see venture firms figure out how to finance service-based startups in energy-related areas like carbon trading. 'A lot of money is going to be made without necessarily having new technology at its core,' he said. 'Whether the venture industry is going to get behind those non-technology-related innovations will have a big part in driving their value.'Aulet then asked the panelists to say briefly which new energy technologies they think have been getting too much attention, and which have been getting too little.Lampe-Onnerud said she believes most strongly in solar energy. 'Solar is the only way to go, and I believe [solar energy] has to be stored in battery applications,' she said. 'Fuel cells will be used as a backup for homes and buildings, but not for portable power. You will see batteries as the storage mechanism for many projects, including vehicles, wind, and solar.'Matheson named water-that is, ensuring an ample supply of clean water or fresh water for industrial purposes-as a problem equal in stature to energy. 'Water is the next oil,' he said. 'We've got to get our arms around that.
It's going to get more expensive.' And Matheson pointed out that energy technology and water technology are intertwined: an astonishing 20 percent of the energy used in California, for example, goes toward moving water around.Lessard said 'There is too much focus on energy sources, and not enough on energy waste and energy usage. There are some very boring solutions that could get at the low-hanging fruit very quickly.'Wiberg declined to name which energy innovations he thought would be winners and losers, saying, 'We are not very smart about figuring that out. Venture funds are going to make a lot of money on cleantech, and they're going to lose a lot of money on cleantech.' But Wiberg did second Matheson's point about water: 'People don't pay for water and they don't realize the true cost of water,' he said. 'We have spent four years looking for a good investment in the water area, because we see it as a trend that's critical.'Before the discussion ended, Aulet launched a 'lightning round,' asking the panelists to name the one thing they'd advise President-elect Barack Obama to do about energy policy, given the opportunity.Wiberg: 'Getting a real price on carbon is the number-one issue-put a cap-and-trade mechanism in place immediately so that people can make decisions that incorporate the true cost of carbon.' (Lessard made a point similar to Wiberg's, but unfortunately I wasn't able to get it down accurately in my notes.)Matheson: 'All of these cross-disciplinary issues have to be under one roof. The Department of Energy was started to manage nuclear power. We've got to have a cross-functional department.'Lampe-Onnerud: 'In addition to creating financial incentives and disincentives, creating public awareness would be extremely important.
People want to do the right thing, if they know how.'Aulet gave himself the last word, paraphrasing Thomas Friedman's new book, Hot, Flat, and Crowded: 'What we should want are 100,000 people doing 100,000 different things in 100,000 different labs and schools. Anything we can do to promote that innovation ecosystem worldwide-not just in Boston, or just in the U.S.-would be the greatest thing the new president could do.'