Small generation sector analysis

During the August 2003 blackout, New York City was nearly smothered by darkness. Most buildings were dependent on the power grid for their electricity – so when the grid went down, they did, too. One spot in Manhattan did keep its lights on: the Central Park police station, powered by its own electric fuel cell.

As with many previous catastrophic events in the nation’s electric history, last year’s blackout renewed interest in fuel cells and other forms of distributed power like photovoltaic cells and microturbines. The small-scale power market was worth $2.8 billion in 2003 and is expected to rise to $6.1 billion by 2008, according to the market research firm Business Communications Company (BCC).

Yet despite concerns about the grid’s reliability, small-scale power is just a tiny fraction of U.S. power capacity. The total U.S. small-scale market was only about 5,000 megawatts last year, 0.6 percent of a total national capacity of 900,000 megawatts in 2002, the most recent year for which statistics were available, according to the U.S. Government’s Energy Information Administration (EIA) and BCC. Though the distributed power market increased 20 percent between 2002 and 2003, it is still well below the sky-high capacity of over 8,000 megawatts in 2001.

A fuel cell in an office building is generally cleaner and more reliable than obtaining power from a coal plant connected to the grid, but distributed power is not quite worth the price – yet. Efficient fuel cells, for example, cost at least 50 percent more than traditional power’s eight cents per kilowatt hour, according to the EIA. Even with subsidies in enviro-conscious states like California, setting up distributed power technologies still costs more than buying from fossil fuel-based utilities, says George Zirnhelt, president of Power Systems Research, a power industry research firm.

VCs aren’t exactly flooding the sector with capital, but many existing companies are searching for ways to cut costs to make distributed power affordable. And with each blackout or terror warning –half of Greece lost power this week, raising concerns about the Athens Olympics – investor interest and product demand inch forward.

Public companies

Capstone Turbine

The Herring Take: In the past six years, Capstone has shipped 2,500 of its microturbines, small, low-emission distributed power devices that run on a variety of fuels, such as natural gas. Though the technology has spawned imitators, Capstone’s technological head start and 74 patents worldwide keep the company in the lead on the microturbine technology. However, the hardware $1,000-per-kilowatt capacity cost is still not competitive with fossil fuel prices, and the Capstone system is focused only on smaller buildings with peak loads up to 750 kilowatts. Four years after a successful IPO, Capstone reports revenue above $16 million, but doesn’t expect to be profitable until 2007.

FuelCell Energy

The Herring Take: Founded in 1969, it took FCE almost 30 years to develop a commercial product, but now it is one of the leaders in the nascent fuel cell sector, and the only company to offer high-temperature fuel cells. While competitors’ low-temperature fuel cells require external processing to extract hydrogen, FCE’s technology can mine hydrogen from natural gas, propane, or coal gas, then process it into energy. Though the company is years away from profitability, FCE earned almost $34 million in revenue in the year ending October 2003. It has extended a worldwide footprint through partnerships with Marubeni in Japan and DaimlerChrysler subsidiary MTU in Germany to supplement proceeds from fuel cell stations built for customers such as Sheraton Hotels and the Los Angeles Department of Water. FCE claims to have installed more megawatts of stationary fuel cell power in the last three years than any other company, but the technology is still immature, and depends on government subsidies for sales.

Vestas Wind Systems A/S

The Herring Take: The 100-year-old Danish company has been making wind turbines for 25 years, and claimed 23 percent of the 8,000-megawatt global wind market in 2003. While Vestas has succeeded in the United States and elsewhere, largely because of subsidies for renewable energy, the recent expiration of a U.S. production tax credit (PTC) subsidy for wind power manufacturers decreased the company’s U.S. market share in 2003. A renewal bill could pass Congress this summer, but may be slowed down by election-year politics, and the American Wind Energy Association is forecasting little to no growth in wind-generating capacity for 2004. Even with a new PTC, the obvious obstacles to wind power remain: if there’s no wind, the turbines will produce no electricity, and it’s still expensive and inefficient to store the surplus power produced in times of plenty.

Xantrex

The Herring Take: Headquartered in Vancouver, but with facilities everywhere from California to Spain, Xantrex’s products convert power from sources like fuel cells and wind turbines into electricity. In addition to distributed power conversion, the young company’s now-profitable revenue stream – up 31 percent to $136 million in 2003 – is bolstered by programmable power for research and manufacturing applications and mobile power for cars and electronic devices. High-profile conversion customers include renewable power arms of multinationals like BP Solar and GE Wind, but Xantrex is still largely dependent on its partners increasing energy capacity.

Private companies

Konarka

Founded: 2001

Employees: 25

Funding (millions): $32

Number of rounds: 3

Key investor(s): Ardesta, ChevronTexaco, Draper Fisher Jurvetson, Eastman Kodak, Electricité de France, Swiss Federal Institute of Technology, Good Energies, Massachusetts Technology Collaborative, New Enterprise Associates, NGEN, Partech, Presidio Venture Partners, Prime New Energy, SDL Ventures, University of Massachusetts, Vanguard Ventures, Zero Stage Capital

The Herring Take: Konarka boasts an impressive list of investors, an international technical team that includes Nobel Laureate Alan Heeger of the University of California at Santa Barbara, and a product – cheap photovoltaic strips – with thousands of applications that could come out next year. Advancements in nanomaterial science give Konarka an ease of production and cost far below that of traditional solar cells. Just as simple calculators can now be powered by a solar strip, Konarka’s technology could one day power laptops or mobile phones, greatly reducing electricity needs from wall outlets. But before the product hits the market, German electronics giant Siemens plans to release a competing solar cell technology with similar applications, and other startups like Nanosolar and Nanosys could soon adapt their research to enter the same market.

Nanosolar

Founded: 2001

Employees: under 30

Funding (millions): $6.5

Number of rounds: 1

Key investor(s): U.S. Venture Partners, Benchmark Capital, StanfordUniversity

The Herring Take: Nanosolar is targeting the 12 billion square meters of rooftops in the United States – and beyond. The company has produced a nanoengineered liquid that can be painted or sprayed onto materials which self-assembles into tiny solar cells. It sounds like the stuff of science fiction, but Nanosolar claims its potential product will cost one-tenth the price-per-area of traditional silicon solar cells, although they may be slightly less efficient. Nanosys, a Silicon Valley company with a more diverse potential product line, has a rival solar spray in the works. With solid VC backing and an R&D contract revenue pipeline above $12 million, Nanosolar is an early-stage company to watch.

PerfectPower

Founded: 2000

Employees: 7

Funding (millions): N/A

Number of rounds: N/A

Key investor(s): N/A

The Herring Take: In April, Perfect Power opened the world’s largest solar power community, GreenWood Ranch Estates, 520 five-acre lots in Arizona. Along with several smaller developments, the ambitious startup hopes to break ground on two similar developments this year. PerfectPower doesn’t actually manufacture anything – it acts as an integrator for all of the parts, from solar panels to batteries, that form the solar energy backbone of a building. The company’s president, John Balfour, has 25 years of experience in the energy industry, from energy consulting for a division of Daimler Benz to an Arizona newspaper column as “The Energy Doctor.” When Mr. Balfour claims his company can make residential solar power cost-effective, he may sound overly optimistic, but PerfectPower’s revenues have already reached the low millions, and the company estimates the total contract value of GreenWood Ranch will generate $20 million. And since the project’s grand opening, the company has had more new business offers from building developers than in the previous four years combined.