Evaluating renewable energy companies

» 24 Mar 2009

As part of my job at GreenMountain, I work with a lot of renewable energy startups. As a result, my friends are constantly telling me about new startups that they’re excited about. This often leads to a discussion of how I evaluate renewable energy companies. The companies that my friends think are on the way to the top are rarely the ones that I think will win, so I think I should try to explain myself.

First off, my goal is to predict whether the company at hand will be able to produce huge amounts of energy from renewable sources at prices that rival fossil fuels. In most of the world, this is not currently possible– fossil fuels are still cheap. There are regional exceptions, like residential solar power in ridiculously sunny places like the American southwest, but generally, no renewable energy company has yet succeeded.

Thus, the interesting question is: what do you need to do to win?

You must scale to huge.

A few years ago, I worked at an environmental foundation in Maine. For the last 8 years, the foundation has produced their own biodiesel from excess frialator oil from two nearby seafood restaurants that boomed in the summer. While I worked there, I was able to buy biodiesel for my Passat at whatever price the local gas station was charging for regular diesel.

It was brilliant, but the only reason it worked was that we got the frialator oil for free. I personally burned around 10% (50 gallons) of the annual biodiesel yield from the two seafood restaurants. I was driving fewer miles than the national average, and in a 42 mpg car. It’s still a great idea, but biodiesel from frialator oil will never scale to huge.

Breakthroughs in the lab are not enough.

Every few weeks, I hear news of a breakthrough in solar cell technology in a laboratory setting. Usually, it’s the Grätzel cell again. If not, it’s often a new manufacturing technique that is purported to be cheap in high volume, but which is currently being produced in very low volume. Even the largest cell producers don’t have a good idea of how cheap their cells will be when they scale beyond GW levels. (Maybe they’re pretty good at 10 GW, but that’s pushing it.) Claiming to be able to make those predictions accurately when you’re below 1 kW is not credible.

You will not challenge Vestas soon.

In the more established renewable industries, like big wind, there are just a few players. Vestas, for example, sells about 25% of the large wind turbines in the world. They have around 20,000 employees and have been producing turbines for 30 years. They do over €1 BN in sales per quarter. Designing a MW-scale turbine takes years, never mind testing.

Most startups could not fit one large turbine blade in their offices. If you’re a big wind startup with a plan to compete on that scale in the next few years, you are not credible. You might be able to do it, but you need a ten year plan.

Higher efficiency at higher cost is not an automatic win.

In small wind, a common approach is the shrouded wind turbine. The general idea is to add a shroud around the wind turbine that channels wind into the blades. So far, nobody has been successful with this approach– the economics dictate that the marginal cost of blade extension beats that of shrouding. This is not to say that shrouded turbines will always lose, just that so far, nobody has been able to get an increase in efficiency that outweighs the increase in cost.

Concentrating photovoltaic systems face the same problem– can you add a concentrating mirror cheaply enough that it’s worth the cost? The jury is still out on that one.

Lower cost with lower efficiency is not an automatic win.

For years, solar cell companies have been trying to make “thin film” solar cells, i.e. cells that are manufactured by depositing a coating a few microns thick on a substrate, usually metal. Because thin film cells are so thin, they use very little material, so they’re much cheaper per unit of area than conventional cells. Unfortunately, they’re also less efficient. In the long run, thin film cells may still win, but so far it seems that, despite massive investments in R&D, the efficiency penalty outweighs the cost savings.

Every engineering challenge comes with a counterpart in marketing.

To win in renewable energy, you can’t be just a brilliant engineer. You also need a team that can sell your products. It’s like preventing car theft– it doesn’t do any good to lock one door of your car, even if you lock it really carefully, and the lock is really strong. You have to lock all the doors, every time you leave the car. In the same vein, your heat recovery system may be brilliant, but if you marketing efforts look amateurish, you’re sunk.

The ocean, sun, wind, and rain are harsh.

Most energy systems have to survive outside for their ~20 year lifetime. If they can’t, you have lost. Ocean power systems, for example, have to survive scouring from ice and abuse from drifting trees. Wind turbines have to survive hurricanes; solar panels must endure hail. If you’re a slippery businessman, you might be able to sell a product good enough to give you 5 years to change your identity and escape to a country missing the requisite extradition treaty, but that won’t solve our energy problem.

Please note in the comments respectable axes of evaluation that I have omitted.