Cleantech Perspectives: July 2012

Hello, and welcome to the first issue of PwC’s Cleantech Perspectives. We are excited to share some of the thoughts and insights we have gleaned from our groundbreaking project work and research in the cleantech industry.

Each quarterly issue of Cleantech Perspectives will feature a segment on renewable energy, emobility, smart grid, and tax policy. In addition, we will feature a rotating topic; this month we focus on the biofuels market. For our inaugural issue, we have also included an interview with Ira Ehrenpreis, the leader of the Cleantech investment practice at Technology Ventures.

This month's headlines include:

  • Tax Incentives for Renewables Investments: Where the Market is Heading in the Post-Cash Grant Era
    As the sun sets on the Treasury cash grant program, PwC sees significant opportunities for renewable energy investors. However, successful investments require careful tax planning for both operational and compliance purposes.

  • Fleet Sustainability: How Fleets Can Help Jumpstart EV Adoption
    Fleet operators are challenged with managing operating costs, the largest component of which is fuel, and meeting sustainability goals. This article lays out eight reasons why fleets are an attractive market for electric vehicles, despite OEM focus on consumers.

  • Introduction to Renewable PPAs: Achieving Success in the New Competitive PPA Environment
    The tightening market for renewable energy power purchase agreements (PPAs) is likely to drive developer consolidation and the abandonment of less feasible projects. After a quick PPA primer and assessment of the market, PwC lays out the key challenges and opportunities for utilities, developers, and investors.

  • The Future of Microgrids: Their Promise and Challenges
    Microgrids hold the promise of new on and off-grid applications, but bring with them a host of challenges, including safety. PwC lays out the benefits and risks for decision makers.

  • Algae Biofuels: Co-products to Fuels
    Second generation biofuels from algae-based sources hold the promise of revolutionizing fuel consumption. However, innovative biofuels companies are increasingly aware that they will need to pursue co-products in a diverse range of industries as a bridge to realizing their full potential.

  • Interview with Ira Ehrenpreis of Technology Partners
    While short-term cleantech investment activity fluctuates, Ira Ehrenpreis takes a longer view. He notes that “some of the best and brightest in the world are choosing to bet their careers on cleantech companies" and that this era will be viewed "as a renaissance period for the cleantech industry".

Read other issues of Cleantech Perspectives:

Download: Tax Incentives for Renewables Investments - Where the Market is Heading in the Post-Cash Grant Era

Tax Incentives for Renewables Investments - Where the Market is Heading in the Post-Cash Grant Era

Since the American Recovery and Reinvestment Act of 2009, many US renewable energy projects have relied on the Treasury cash grant program to help underpin their financing structures. The cash grant program provides reimbursement for 30% of eligible costs incurred to install technologies such as wind, solar, biomass, and hydrogen fuel cells. The cash grant is available only for projects that began construction prior to the end of 2011, and further extension of the program by Congress is uncertain at best. In addition, the production tax credit (PTC) for wind energy projects is slated to expire at the end of 2012.

Despite the slated wind down of the Treasury cash grant program and the uncertainty in the wind markets, there has been significant activity among investors in several types of renewables projects. However, each requires both operational and compliance planning.

When do major federal energy tax credits expire?

Wind - December 31, 2012

Solar - December 31, 2016

Biomass - December 31, 2013

Biofuels - December 31, 2011

Cellulosic biofuels - December 31, 2012

Fuel cells - December 31, 2016

Grandfathered Cash Grant Projects

Many developers took steps at the end of 2011 to meet the "begun construction" safe harbor for renewables projects. Where successfully achieved, the safe harbor allows the project to qualify for the Treasury cash grant as long as it is completed prior to the expiration date for the underlying tax credit. Many developers with grandfathered projects need financing to complete them and are actively seeking investors.  Potential investors need to conduct a thorough due diligence on these opportunities, not only for standard operational and financial issues but also to check that the project successfully meets the safe harbor standard and will be completed in time to qualify for the cash grant program.

Solar Projects

New development in 2012 has focused largely on solar projects.  The long remaining window for investment tax credits (ITCs) and sharp drops in equipment prices make solar projects increasingly attractive and perhaps near grid-parity in more expensive electricity markets.  In addition, a recent IRS private letter ruling concludes that the value of a power purchase agreement that is inextricably linked to a particular wind energy facility need not be separately valued for depreciation purposes.  If similar principles can be applied to other technologies and also to the ITC or cash grant, the result may be favorable for investors.

Biomass Projects

Numerous companies are working to get biomass projects underway to have them placed in service prior to the December 31, 2013 deadline.  It should be noted that the eligibility rules under the cash grant program are somewhat more generous than for the underlying PTC; in particular, cash grant applicants typically can include some or all of their biomass handling equipment in eligible basis. 

Return of Tax Equity Structures

For projects begun in 2012, tax "appetite" for both depreciation deductions and tax credits is back at the forefront of financing issues.  Many developers resolve this challenge by bringing in a "tax equity" investor as a partner or through a leasing transaction.  When properly implemented, a tax equity structure allows efficient current monetization of these benefits.  Although tax equity investing traditionally has been driven by financial institutions, many non-banks have started to evaluate investment opportunities that can yield tax benefits while making progress on their sustainability agendas.

Compliance Issues

Recent trends in the Treasury cash grant program suggest that companies should be prepared for increased scrutiny of their grant applications and perhaps also for tax credit claims.  IRS guidance issued last fall describes procedures for overpayments of cash grants, signalling that the IRS apparently will exercise its authority to audit the exclusion of cash grant amounts from income and expect inclusion in income and/or repayment where it concludes that Treasury overpaid grant applicants.  Accordingly, companies should plan to devote attention not only to getting their applications through the Treasury review process but also to post-award recordkeeping and compliance.  

Even as the Treasury cash grant program winds down, there are significant opportunities for renewable energy investors.  Successful investments must be planned with careful attention to tax -- not only to ensure efficient use of PTCs or ITCs but also to place projects into service before applicable statutory deadlines.

Contact

Matthew Haskins
Principal
(202) 414-1570
matthew.haskins@us.pwc.com

© 2012 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved.
PwC refers to the US member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.

This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

Download: Fleet Sustainability - How Fleets Can Help Jumpstart EV Adoption

Fleet Sustainability - How Fleets Can Help Jumpstart EV Adoption

Today’s fleet operators are faced with the ever increasing challenge of reducing operating costs while meeting new corporate and government sustainability goals.  Meanwhile, growing global demand and geopolitical conflicts are driving large fluctuations in gasoline prices, which exacerbate the challenges of managing fuel costs, the largest component of ongoing fleet operating costs.  It is expected that these factors would drive a large shift in fleet purchases to alternative technologies, which can reduce fuel consumption and hedge against large price fluctuations.  Leading companies with large fleets have indeed anticipated these changes and have begun to incorporate advanced technologies and alternative fuels into their fleets with resulting large savings.  Similarly, some taxi operators have shifted a portion of their fleets to Hybrid Electric Vehicles (HEVs) since ten-plus-years of in market operation have proven these vehicles to be robust and economical.1  Despite these actions, the level of broader fleet adoption remains relatively low, limited in many cases by fleet vehicle supply and options.  Outside of HEVs, many of the major original equipment manufacturers (OEMs) have focused more advanced technology development on consumer vehicles such as the Nissan Leaf and Chevrolet Volt – the first two modern plug-in electric consumer vehicles to market – while initial commercial electric vehicle development has been primarily carried out by niche players and aftermarket upfitters.

Despite relatively high gasoline prices (as of July 2, 2012, the nationwide average for regular unleaded was $3.36 / gal and the price in California was $3.77 / gal2 ), plug-in electric vehicles and other alternative fuel vehicles are still struggling to attract customers in large numbers (with the one exception of the Prius HEV).  General Motors recently halted production of the Volt for five weeks due to soft demand.3   Consumers’ concerns with range and initial acquisition costs make electric vehicles – even extended range electric vehicles like the Volt – too uncertain a proposition to drive significant market demand.

On the other hand, fleet customers represent a significant opportunity to grow the electric vehicle (EV) and other alternative fuel vehicle market.  With more than 16.3 million vehicles in operation, they likely possess enough capacity to drive initial ramp-up scale in the battery industry and OEM supply chains to make electric vehicles more cost efficient for general consumers.

Eight key parameters make fleets an attractive market for electric vehicles:4

  • Total Cost of Ownership Approach: fleet operators consider the total lifecycle cost of a vehicle versus only its initial acquisition cost when making purchase decisions
  • Route Predictability: route dedicated EV infrastructure as well as EV battery size can be optimized for fleet applications, helping to minimize costs
  • High Utilization Rates: high annual mileage helps to accelerate the payback period
  • Centralized Parking Facilities: central depots help to reduce the reliance on public charging infrastructure and provide for economies of scale for installing multiple chargers
  • Maintenance Costs: high mileage electric drive vehicles tend to have lower maintenance costs
  • Lower Electricity Rates: fleet operators can benefit from commercial electricity rates, especially when employing dedicated charging facilities
  • Alternative Business Models: due to larger purchasing power and access to capital, fleet operators can benefit from leasing strategies and other business models that make EVs more attractive
  • Corporate Sustainability: EVs can help commercial and government enterprises meet reduced emission and fuel consumption targets

The growth in commercial and fleet electric vehicles not only can provide the scale economies to make EVs more cost effective for retail consumers, but they can also influence the growth of a public charging infrastructure, thereby delivering the positive externalities and network effects to alleviate potential EV customers’ range anxiety. From a commercial development and public policy perspective, fleets represent an attractive means of increasing EV adoption and reducing dependence on petroleum for transportation.

Fleet Sustainability Levers:

  • Right Sizing
  • Advanced Technology Vehicles
  • Operating Efficiencies

That being said, from a fleet operator’s perspective, EVs and other alternative fuel vehicles represent only a partial solution. These technologies should be employed as part of a broader fleet sustainability strategy that incorporates other sustainability levers, such as right sizing and operating efficiencies.

Comprehensive strategies can deliver total lifecycle cost savings of over 10% with simultaneous emissions reductions greater than 20%. The overall lifetime savings are primarily a result of annual fuel cost reductions of up to 40%, which significantly improve annual fleet operating expenses. Right sizing of vehicles and fleets can account for 50% of the lifetime savings. Advanced technologies and operating efficiencies each account for about 25%. Operating efficiencies include vehicle load reduction, other vehicle design elements, driver engagement programs, and telematics and other routing technology. The leading fleet operators are employing all of these strategies. Other large fleet operators, including utilities companies and telecom providers, are also starting to explore these practices due to the significant operational savings. In general, utilizing all three levers provides a robust solution that can deliver sustainable results, increase environmental as well as financial savings, and help fleet operators meet operational targets.

 

Levers

Right Sizing

Advanced Technology / Alternative Fuel Vehicles

Operating Efficiencies

 

Definition / Examples

Vehicle right sizing: the practice of using vehicles appropriately configured for most missions versus vehicles configured for the occasional use

Fleet right sizing: eliminating underutilized vehicles
Electric propulsion technologies (e.g., HEV, PHEV, EV)

Alternative fuels (e.g., CNG, LNG, Biodiesel)

Electric power takeoffs (EPTO) to electrify the worksite
Vehicle load reduction: use of light weight materials and appropriate tool/equipment load out)

Other vehicle design elements: aerodynamic shields, low rolling resistant tires

Driver engagement programs: training and incentives to encourage more fuel efficient vehicle usage

Telematics and other routing technology
 

Benefits

Provide 50% of lifetime savings
  • Reduced upfront acquisition cost
  • Reduced operating costs through fuel reductions
  • Reduced emissions levels
Provide 25% of lifetime savings
  • Reduced vehicle lifecycle cost
  • Reduced emissions level
  • Reduced exposure to volatile fuel markets
  • Reduced employee exposure to noise and particulate matter
  • Greener public perception
Provide 25% of lifetime savings
  • Improved fuel efficiency
  • Improved safety levels
  • Reduction in vehicle clutter
  • Reduced vehicle wear
  • Reduced emission levels
 

Contacts

Richard Meyer
Director
(949) 437-4385
rich.meyer@us.pwc.com

Oliver Hazimeh
Partner
(312) 298-2237
oliver.hazimeh@us.pwc.com

  1. U.S. Department of Energy, Energy Efficiency and Renewable Energy, Alternative Fuels and Advanced Vehicles Data Center, HEV Sales by Model 1999-2011
  2. U.S. Energy Information Administration. "Gasoline and Diesel Fuel Update", http://www.eia.gov/petroleum/gasdiesel/, viewed as of July 3, 2012.
  3. "Electric Cars Face Issues in US," Voice of America Press Releases and Documents, 9 March 2012, 2012 Federal Information & News Dispatch, Inc.
  4. "Fleet Electrification Roadmap, Revolutionizing Transportation and Achieving Energy Security," Electrification Coalition, November 2010

© 2012 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved.
PwC refers to the US member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

Download: Introduction to Renewable PPAs - Achieving Success in the New Competitive PPA Environment

Introduction to Renewable PPAs - Achieving Success in the New Competitive PPA Environment

Power Purchase Agreements, also known as PPAs, are contracts between two parties―one party generates electricity and the other is looking to use or purchase that electricity. In essence, the PPA is an agreement to purchase a certain amount of power for a certain price and for a certain amount of time, thereby reducing variability of costs and profits.

There are multiple uses for PPAs. They have historically been used by utilities to procure power from independent power producers, and by large users, such as municipalities or large corporations, to obtain preferential and steady rates from utilities.

More recently, PPAs have become increasingly used in the renewable energy space as procurement and financing tools.  The sellers of renewable energy PPAs are project developers or independent power producers that own the technology or the project assets. The buyers of renewable energy PPAs range from utilities that need to meet their regulatory obligations related to Renewable Portfolio Standards (RPS), which is known as the compliance market, to companies, municipalities, cooperatives and individuals who want to use renewable energy, which is referred to as the voluntary market.

Another stakeholder significantly affected by the PPA is the project investor. Since the PPA, along with existing tax credits, drive project profitability, the PPA is considered critical by potential investors. The PPA, in effect, reduces cash flow uncertainty and increases the security of the returns on their capital investment.  For example, "Feed-in Tariff" type PPAs can basically make an investment in a solar project look like an investment in AAA rated bonds, and many investors do not consider investing in projects that have not secured PPAs.

Renewable PPA Environment is Rapidly Evolving

The compliance renewable energy market has grown significantly in the last few years and is expected to continue to outpace the voluntary market. Compliance demand in 2010 was 55 MWh compared to 36 MWh voluntary demand, with compliance demand estimated to increase to 150 MWh by 2015.1   While RPS requirements range across states, they generally stipulate that 20% or more of the power sold by utilities must come from renewable sources.  This regulatory requirement is the main driver of renewable PPA market demand for the last few years.

As utilities get closer to meeting their RPS requirements, their need to enter into PPAs for new renewable energy projects diminishes. With the reduced appetite from utilities to enter into PPAs, project developers are finding it more difficult to secure such agreements, putting pressure on PPA prices. This was the case in late 2011 and early 2012, where in California, the number of RPS contracts procured by large investor owned utilities in 2011 dropped by about 40% from 2010, and those signed in 2011 fetched prices 25% lower than 2008, with many pricing below the market price referent.2

Reduced PPA prices affect project economics and lower the return on investment (ROI) for potential investors. Reduction in the number of PPAs and PPA prices impact the investor and reduce the number of potential investors, creating significant competition between developers to obtain both the PPA and investment capital. It is believed that 2012 is the beginning of a period of consolidation between developers and the abandonment of less feasible projects.

Achieving Success in the New PPA Competitive Environment

The current PPA market conditions pose a number of challenges and opportunities for each PPA stakeholder:

  • From the perspective of the PPA buyer, the current downward pressure on PPAs provides a great market opportunity to procure renewable energy at competitive prices for potential resale or future consumption. To take advantage of this opportunity, buyers need to:
    • Understand how different technologies can best help them
    • Know how to operate a robust RFP process
    • Assess alternative project developer and financing options
    • Take advantage of all available federal, state, and local tax incentives
  • From the perspective of the developer, these are challenging times. Those with the ability to structure, negotiate, and value PPAs effectively as well as execute on project delivery will be in a better position to benefit and survive. To best meet the challenges of increased competition, developers need to:
    • Understand detailed customer needs (e.g., PPA prices, desired solution offering, integration requirements, service needs, etc.) and state-level market dynamics for their target segment(s) (e.g., residential, commercial, or utility)
    • Leverage structured processes for managing project risk throughout a project’s lifecycle
    • Build strong portfolio management and working capital management capabilities
    • Develop a robust set of project execution partners that understand the key levers to reduce project costs and minimize overall project cycle time
  • From the perspective of the investor, the issues are more complicated. On the one hand, a reduced number of profitable projects mean that the investor may not be able to take advantage of tax incentives and may have to compete with other potential investors for projects with PPAs. On the other hand, the increased competition between developers may move more of the project profits to the investor. To best navigate this complex market, investors need to:
    • Understand the energy markets and the value of the PPA relative to the investment and returns
    • Examine other potential structures and sources of value
    • Fully comprehend the risks and benefits of the project as well as the overall market to best negotiate

In all cases, a thorough understanding of PPAs, their structure, valuation, and negotiation is an asset that all stakeholders can use to their advantage during these challenging times.

Contacts

Brian Carey
US Cleantech Advisory Leader
(408) 817-7807
brian.d.carey@us.pwc.com

Ali Rusta-Sallehy
Manager
(415) 498-5142
ali.rusta-sallehy@us.pwc.com

  1. National Renewable Energy Laboratory. "Status and Trends in U.S. Compliance and Voluntary Renewable Energy Certificate Markets (2010 Data).” October 2011.
  2. California Public Utilities Commission, “Database of Investor-Owned Utilities' Contracts for Renewable Generation.” 2012.

© 2012 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved.
PwC refers to the US member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

The Future of Microgrids - Their Promise and Challenges

The Future of Microgrids - Their Promise and Challenges

For some, microgrids hold the promise of becoming a basic “building block” in the implementation of the next generation smart grid infrastructure. However, as is the case with most new technology, there will be significant implementation challenges to overcome.

In many respects, microgrids are smaller versions of electrical grids. Like electrical grids, they consist of power generation, distribution, and controls such as voltage regulation and switch gears. However, they differ from electrical grids by providing a closer proximity between power generation and power use, resulting in efficiency increases and transmission reductions. Microgrids can also be integrated with renewable energy sources such as solar and wind power. The use of renewable energy introduces the need for energy storage and/or off-peak energy source integration, something modern microgrids are designed to manage. Security and independence from potential grid interruptions such as blackouts and brownouts are also considered microgrid benefits, especially for critical applications running at hospitals and military bases.

This benefit is illustrated by the performance of the Sendai microgrid at Tohoku Fukushi University. While the overall electrical grid was compromised during the devastating 2011 earthquake and tsunami, the microgrid, using distributed generators and batteries, continued to provide power to a variety of facilities.

Microgrids can meet the needs of a wide range of applications in commercial, industrial, and institutional settings. Larger microgrid applications include communities ranging from neighborhoods to small towns to military bases. Another largely untapped application is the “off-grid” area of the world where one billion-plus people live without regular access to electricity. These “off-grid” areas are currently served (if at all) by diesel generators or similar small scale electricity generating equipment.

Overall, the microgrid's structure makes it a viable platform for large entities to reduce energy costs and generate revenue through the sale of energy during periods of peak demand. Additionally, microgrids can efficiently and effectively provide "off-grid" areas with regular access to electricity as well as "keep the lights on" in times of crisis for critical applications like a hospital.

Challenges to Microgrid Adoption

Utilities have been reluctant to endorse microgrids. The valid historical argument has been the safety concern of unintentional “islanding”, that is, a part of the grid that has become separated from the grid but not shut down during a black out. The safety concern is that unintentional islanding can be dangerous to utility workers, who may not be aware that a circuit within the “island” still has power. Secondly, islanding may prevent automatic re-connection of devices into the grid. Existing grid protocols address this concern in that they dictate that all distributed power generation must shut down during power outages. To address these concerns, new inverter technologies are designed to integrate renewable energy sources such as solar and wind while allowing safe operation in island mode.

Another challenge has been the lack of established standards for microgrids. A positive step in addressing this was the 2011 adoption of the Institute of Electrical and Electronics Engineers (IEEE) standard P1547.4, “Guide for Design, Operation, and Integration of Distributed Resource Island Systems with Electric Power Systems”. The standard provides best practice guidelines for implementing different ways a microgrid can island and re-connect, all while seamlessly providing power to users of the microgrid. Another step in creating standards is the establishment of the Consortium for Electric Reliability Technology Solutions (CERTS) in 1999. This group consists of national laboratories, industry, and universities that collaborate on research and develop technologies to protect and enhance the reliability of the U.S. electric power system, including furthering the development of microgrid designs.

CERTS is investigating optimal microgrid design and have field tests in operation. For example, CERTS established the Microgrid Test Bed Demonstration with American Electric Power to demonstrate the integration of small energy sources into a microgrid. The project included three advanced techniques, collectively referred to as the CERTS Microgrid concept, which has reduced the need for custom field engineering solutions needed to operate microgrids.

Perhaps the key ‘tipping point” for the adoption of microgrids into the overall smart grid architecture is cost. As costs for key microgrid elements such as renewable energy sources (e.g., solar), energy storage (e.g., batteries, supercapacitors), advanced load generation controls, and smart switches continue to decline, the economics for microgrids for specific applications will become cost competitive compared to traditional power sources.

Microgrids – What’s Next?

Although the technical immaturity, utility reluctance, and current cost structure of microgrids will limit their application to niche markets in the short term, the future for microgrids is promising. Power equipment companies now investing in pilot microgrid projects and currently available market opportunities will be well positioned for market leadership as the demand for microgrids increases over time. However, perhaps the largest benefactors of microgrids will be foresighted utilities, communities, industrial parks and the like, that will leverage microgrids to optimize their energy costs with the added bonus of generating revenue opportunities by selling energy back to the grid during periods of peak demand.

Contacts

Brian Carey
US Cleantech Advisory Leader
(408) 817-7807
brian.d.carey@us.pwc.com

Allan Miller
Director
(408) 817-5190
allan.g.miller@us.pwc.com

© 2012 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved.
PwC refers to the US member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

Download: Algae Biofuels - Co-products to Fuels

Algae Biofuels - Co-products to Fuels

Introduction

With the backdrop of rising petroleum and diesel prices, increasing public pressures to reduce carbon dioxide and other greenhouse gases (GHG), and growing government concerns about dependence on imported energy, the future for biofuels is promising.

Today, about 3% of world fuel demand is being met by biofuels. Most of that production comes from first generation biofuels including ethanol and biodiesel. These first generation biofuels - primarily derived from corn, soy and sugar feedstock - are commercially developed but have high costs and limited scalability. New technologies such as algal biofuels aim to address these weaknesses.

Next Generation Biofuels Outlook

Biofuels from algal technology have a number of inherent advantages over first generation biofuels. First, algal biofuels provide food chain independence. Algal biofuels do not compete with arable land nor are they susceptible to price volatility associated with other feedstock commodities such as corn and sugar. Algal technologies also provide very high yields and the possibility of producing highly specialized strains through genetic engineering. Realizing this potential, governments have provided significant research and development funding. However, there are still significant barriers to overcome for algal biofuels to be commercially viable as a fuel. Technological challenges in cultivation, harvesting, and extraction have limited algae’s cost competitiveness as a feedstock. And despite years of research, algae biofuel markets are nascent with full commercialization and capacity build out projected only in the next 5- 7 years.

Achieving the Promise of Algal Biofuels

To improve their near-term viability, algal biofuels producers are redefining their go-to-market strategies by focusing development on high value co-products. Co-product end-markets are very diverse and include human nutrition, animal and fish specialty feeds, industrial chemicals, cosmetics and pharmaceuticals. These end markets are generally less price sensitive and provide more differentiation opportunities than fuel. By pursuing co-products, companies can monetize their investment in the near-term until algae biofuel becomes price competitive.

But implementing a co-product strategy is not so easy. Each co-product market presents a new challenge – with very different channels to market, product requirements and entrenched competitors. Given that multiple co-product end-markets are addressable from the same algal biomass, producers will be challenged to build the right internal operational capabilities required to successfully sell into and support those diverse markets.

To support these new strategies, algal producers must be willing to tune their business models and value chain position to address co-products. Many leading pure play producers are developing partnerships or forming co-development agreements with leading end-market players (e.g., large consumer products and cosmetics companies) to share risks, reduce costs, and hasten time-to-market. While this approach has become the primary market expansion strategy for several leading algae companies, there are other strategies to consider. Some algae producers have explored vertically integrating into end markets. For example, one industry leader is producing branded cosmetics products instead of simply being a feedstock provider. Another strategy is for companies to license their technology to third-party developers. This strategy is the lowest-risk, but also presents limited upside in the long term.

Each business model option comes with its own implementation challenges. Companies must evaluate and select the right business model(s) based on their time-to-market targets, risk appetite, investment goals, access to capital and most importantly, their ability to build the operational capabilities needed to enable their go-to-market strategy. In conclusion, the market opportunity for next generation biofuels looks promising, but algae producers must identify synergies with other products and end markets, successfully provide higher value services and co-products, and then transition to fuel.

Contacts

Brian Carey
US Cleantech Advisory Leader
(408) 817-7807
brian.d.carey@us.pwc.com

Alex Payne
Manager
(617) 530-4435
alex.payne@us.pwc.com

© 2012 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved.
PwC refers to the US member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

Download: Interview with Ira Ehrenpreis of Technology Partners

Interview with Ira Ehrenpreis of Technology Partners

The information contained in this document is provided 'as is', for general guidance on matters of interest only. PricewaterhouseCoopers LLP ("PwC") is not herein engaged in rendering legal, accounting, tax, or other professional advice and services. The views expressed herein are those of the individual interviewed and are not those of, and should not be attributed to PwC. Before making any decision or taking any action, you should consult a competent professional adviser.

For this article, PwC interviewed Ira Ehrenpreis, General Partner of Technology Partners and a recognized leader in both the venture capital industry and the cleantech sector. Ira has been with Technology Partners since 1996, where he leads the firm's Cleantech investment practice, investing in energy technology, water technology, and advanced materials opportunities.

PwC: Venture capital investment activity in the cleantech sector has fallen this year. Do you think investors are feeling skittish for any particular reason?

Ira: Given the long-term nature of venture investing, it can often be misleading to get too caught up in quarter-to-quarter or even year-to-year fluctuations. Technology Partners has the benefit of more than twenty years of experience investing in the cleantech sector -- we made our first energy investment long before the moniker “cleantech” even existed. With more than two decades of hindsight, far from being disheartened by the recent percentage drop in cleantech numbers, we are instead encouraged by the clear long-term trend of upward growth.

This year was not just the year of the 7 billionth person, it also marked the 1 trillionth dollar invested in the cleantech sector since 2004. And this trillionth dollar has come on top of tremendous growth in cleantech outlays: investment has grown 29% annually since 2004, from $52 billion to $243 billion. Indeed, the total investment in cleantech startups during the so-called down years of 2009-2010 was still greater than the cumulative investment from 1995-2005, and cleantech saw $9 billion in VC investments and $41 billion in M&As in 2011, the highest M&A volume ever for the sector. The last few years also saw the greatest increase in corporate commitment to cleantech innovation in the history of the energy industry.

More importantly, the momentous migration of top entrepreneurs and executives into the cleantech sector provides the most significant barometer behind our enthusiasm. What is telling is that some of the best and brightest in the world are choosing to bet their careers on cleantech companies. Many of these cleantech newcomers hail from traditional energy companies, a transition unheard of in the past. The extraordinary improvement in the quality of leaders we see today compared to just a few years ago is perhaps the single most significant driver of cleantech growth. With strong entrepreneurial leadership, enhanced corporate development activity and heightened global government support we are bullish as we look ahead. When we look back at this era, it will not be judged by quarterly vacillations in dollars invested, but rather as a renaissance period for the cleantech sector.

PwC: What are your thoughts about cleantech's seeming reliance on government subsidies?

Ira: There is nothing new or concerning about the federal government's support for clean technology. Assistance to energy companies through federal funding has helped drive the U.S.'s growth and dominance in the global markets for nearly two centuries. Starting in the 1800's, the government began federal support for this country's energy infrastructure by offering land grants for timber and coal, and later helped move energy innovation forward by giving tax incentives and R&D dollars to the oil and gas and nuclear energy sectors, respectively. From this perspective, clean technology companies are no more reliant on federal dollars than other energy innovators have been throughout history. In fact, the irony of recent criticism leveled at the current administration for providing "too much" support to clean tech companies is that government assistance to clean technology trails historical federal assistance to industry competitors by a significant margin. As a percentage of inflation-adjusted federal spending, the nuclear and oil and gas industries have benefitted from subsidies as high as 1/2 to 1 percent, respectively, of the federal budget in the early years of their existence compared to only 1/10 of one percent going to aid clean technology companies today. In hard and fast dollars, federal subsidies reached an average high of $3.3 billion and $1.8 billion, respectively, for the nuclear and oil and gas industries over their nascent first 15 years, whereas subsidies to the renewables market have averaged less than $0.4 billion to date. The reality is that current renewable energy subsidies are not out of line with historical spending in the energy sector and the recent criticism over government spending on cleantech is unfounded. Viewed more broadly, the U.S. government has stepped in and aided virtually every nascent industry providing critical infrastructure to our nation -- utilities, telecommunications and transportation -- and its modest support of clean tech today is no different.

PwC: In the past, venture capitalists have funded everything from electric vehicle start-ups to utility-scale solar. Which cleantech sectors do you think VCs will focus on in the future?

Ira: At Technology Partners, our portfolio is a microcosm of the full breadth and diversity of the cleantech sector. We have invested in a vast array of innovative companies developing everything from novel approaches to renewable energy generation, new technologies for making cleaner and more efficient use of coal and natural gas, innovative techniques for materially improving storage capability, and the next generation of automobiles and automotive applications.

More importantly, we believe it is important to stay open to investing in innovations across cleantech sectors and to lead, rather than to follow, investment trends. Through our 28 year history, Technology Partners has proven itself a front runner in investing in sectors before they become fashionable: Technology Partners invested in Tesla at a time when others questioned the wisdom of a venture firm investing in an auto company and now "electrification of the vehicle" is a well-defined sector in its own right; likewise, Technology Partners made its first battery investment so long ago the moniker "storage" did not yet even exist. There is no doubt that the opportunities to invest in cleantech are greater and more promising than they've ever been and that entrepreneurs are bringing their smarts and experience to bear in cleantech in ever-increasing numbers. We believe that the coming years will prove to be an exciting time for the cleantech sector generally and will set the stage for some of this century’s most promising cleantech innovations. We remain committed to being open-minded, to exploring new ideas and sectors, and to partnering with the creative entrepreneurs whose vision and dedication will provide the next wave of solutions to our mounting energy challenges.

PwC: If a cleantech start-up has a really promising technology, but it requires significant capital and scale to prove out/commercialize, how would you recommend that this company approach growing their business?

Ira:There are multiple ways that young cleantech startups are dealing with the capital-intensive nature of developing and commercializing new technologies.

First, it’s critical for startups to bifurcate the risk phase of technology development from the growth phase of the company's maturation. Cleantech capital focuses on the former, while traditional forms of energy capital, such as project finance, fund the latter. The good news for cleantech startups is that once they’ve passed the risk phase, there’s more money flowing into the energy industry than is being deployed in the IT and Life Sciences sectors combined. But, because risk-stage capital is more limited, the focus of an entrepreneur should be on how to minimize the costs of solving technology risks to most efficiently arrive at the steps of commercialization. Once the company's technology is proven, project finance and other low-cost forms of capital should be available to support the company's growth.

One path to funding a start-ups' risk phase is to go after corporate dollars. Investment by corporations in cleantech start-ups has historically been a low priority. At its best, corporate interest in cleantech was a matter of social responsibility. At its worst, it was nothing more than greenwashing. Today, however, corporate investment is proving essential to the funding of cleantech start-ups. Corporate leaders are turning to the cleantech sector for innovations to fuel their own businesses. Like never before, corporations are recognizing that investing in new technologies is not only ‘green’ for the environment, but also ‘greens’ their bottom line. In recent years, corporations have not only partnered with cleantech start-ups to leverage emerging technologies, but have gone so far as purchasing cleantech start-ups as a way of supplementing their R&D efforts internally. Start-ups seeking capital to fund risk-phase projects and product development should therefore carefully consider the possibility of a corporate investment.

Beyond corporate help, governments around the world are providing assistance to clean-tech start-ups seeking aid. Although the United States lacks a comprehensive federal funding program, other nations are funding cleantech at an impressive rate.

PwC: There has been some controversy about whether the venture capital model is a good fit with the cleantech industry. What are your thoughts on this? If VCs do not fund the industry, who will?

Ira: We see no controversy. We see only the opportunity to create some of the most successful companies of this century. Venture capital has always looked for huge markets that have been historically under-innovated where technology will play a critical role in ushering in change and providing a foundation for the next generation of pioneering companies. The semiconductor, biotech, enterprise software, personal computing, and consumer medicine industries have all fit this bill and been past beneficiaries of venture innovation and entrepreneurship.

The energy industry, from this perspective, is ripe for venture dollars. The energy industry has been a dinosaur in terms of innovation with little historical focus by incumbents on finding new ways to produce and consume energy. Venture capital has always stepped in to fund the technology and risk phases of innovation. Today, with the help of venture dollars, entrepreneurs across the globe are developing improvements to the overall way we produce and consume energy and are spearheading companies whose innovations are poised to solve some of the world’s most fundamental and pressing problems of our time. In this sense, the energy industry is the new beneficiary of venture interest and enthusiasm.

Beyond the opportunity for innovation, the venture community's interest in cleantech is heightened by the sheer size of the market opportunity. The energy market is among the largest markets in the world: global demand for energy tops 500 quadrillion BTUs every single year. Putting the enormity of this market into perspective, in the US alone, consumers spend more on energy every single year than they do on wireless communication, e-commerce, and medical devices combined.

Furthermore, the energy market, and the cleantech sector in particular, are on the cusp of explosive growth. The IEA projects that global energy demand will increase 40% by 2035, and that electricity demand in particular will grow to just over 9 Terawatts over the coming decades. Combined with replacements to retiring power plants, this growth represents 6 Terawatts of generation capacity that must be built in the next 25 years - more electricity generation than currently exists worldwide.

And we can expect renewables to provide over half of that new generation capacity: nearly 3 Terawatts of clean energy, representing over $5 trillion of investment in the next 25 years. In fact, so much renewable power is projected to come online in the next 20 years that if we lined up enough solar panels end to end to meet this expected growth, our array would circle the earth over 900 times.

With so much room for growth and innovation, there is the vast potential for venture capitalists to fund companies that will help solve the world's emerging energy crisis while delivering returns to investors at the same time. Far from viewing the energy industry as a poor fit for venture dollars, we at Technology Partners see the energy industry, and cleantech in particular, as a prime target for venture investment and a perfect fit for our objectives.

PwC: Do you think traditional automotive companies will dominate the EV space or do start-ups have a chance?

Ira: Technology Partners believes that innovative start-ups, like our own Tesla Motors, will play a key role in the future of EVs. Time and again, innovators have leapfrogged industry incumbents and paved the way for change and adoption of new technologies. The photography, music and computing industries are all examples: the landscape of each has changed dramatically over the last 30 years as incumbents have been forced to innovate in the face of innovating start-ups. In a similar fashion, Tesla is widely credited as having catalyzed the traditional auto companies to start, or in some cases to resurrect, their own EV programs. In 2007, Robert Lutz, then Vice Chairman of General Motors, said that the Tesla Roadster inspired him to push GM to develop the Chevrolet Volt, a plug-in hybrid sedan.

Beyond a cleantech start-ups' potential to leapfrog and inspire the incumbents, we expect more incumbent "disruption" in the coming years. To begin with, Tesla's successful deployment of its battery-powered drivetrain has disproved the incumbent view that the development of a fully electric, battery-powered drivetrain supportive of long distance travel could not be achieved. Ford famously abandoned the more efficient EV for ethanol when its engineers determined that the battery and battery management systems of its cars could not give its vehicles the needed range. Tesla's innovation, along with those of other auto industry start-ups, have begun the process of closing the technology gap and have put added pressure on incumbents to innovate. Perhaps in the face of this, incumbents are stepping forward to partner with start-ups and leverage their skill and innovation. In the case of Tesla, Daimler, Toyota, and Panasonic have all entered into partnerships with the company, exemplifying the way in which startups are partnering with incumbents.

Henry Ford once said that if he asked his customers what they wanted they would have said “faster horses.” So yes, entrepreneurship and innovation have always played a critical role in developing the future – in general, in the auto industry historically, and in the auto industry today.

PwC: Some people are bearish on the U.S. cleantech industry, but bullish on the global one. How do you feel?

Ira: It is inexcusable that the US still lacks a long-term, strategic federal energy policy. Eight straight presidents have bemoaned the dangers of imported oil and pledged to change course, yet in that time frame foreign crude imports have increased by a factor of ten, and still no comprehensive energy legislation has ever emerged from Congress. A venture capitalist would show the door to an entrepreneur without a long-term business plan. Savvy investors are similarly reluctant to invest amidst an unpredictable policy environment.

While American clean energy policy languishes in congressional gridlock, a global cleantech arms race has begun in earnest overseas. Globally, policy support for cleantech has never been stronger and nations across the globe are scurrying for investment dollars. In Europe, strong government support has led to progressive and successful renewable energy programs which have resulted in dramatic developments, like the near grid-parity cost of solar production today. Remarkably, Germany has managed to create one of the largest solar markets in the world despite receiving less sunshine than Minnesota. And the story doesn’t end in Europe: in Brazil, for example, clean technology has become so mainstream that in their parlance the term "alternative energy" refers to gasoline rather than to clean technology and the Brazilian government has set its sights on tripling the nation’s installed renewables base by 2020.

But the front runner in the cleantech race has clearly been China. After opening the door to clean technology by enacting comprehensive reforms to encourage investment, China has seen the lion’s share of cleantech growth and is rapidly reshaping the global playing field. In the past year, China overtook the US as the global leader in wind energy, with 42 gigawatts of installed capacity. 41 of those 42 gigawatts were installed in just the last five years. By 2014 China will account for 20% of all clean energy investments globally, matching the combined $50 billion annual investment by the US and Canada. Beyond 2014, it is clear that China is poised to continue its rapid expansion while America appears likely to stagnate.

For many cleantech firms, remaining competitive means establishing production facilities overseas. My own portfolio is exemplary as several of the cleantech firms we've invested in are either selling or manufacturing globally from their US headquarters.

Deeya, based 17 miles from my own office in Palo Alto, manufactures in Gurgaon, India and sells its flow batteries into rural India.

CoalTek, with its lab in Atlanta and pilot-facility in Peducah, Kentucky, is focused on product deployment in Inner Mongolia, China.

Powergenix manufactures its nickel-zinc batteries in Shenzhen and is focusing on the Chinese market for its rollout.

Tesla sold a large percentage of its Roadsters into the international market.

Solexel, based in Milpitas, California, is successfully partnering with Asian governments and other corporates to focus its manufacturing efforts there.

Accelergy has a dual focus on both China and US.

FloDesign, based in Boston, is focused on Brazil and other international markets for the deployment of its next generation wind turbine.

In short, while US policy seems trapped somewhere between fiscal austerity and partisan gridlock, it is a renaissance moment for the cleantech industry globally – in terms of both innovation and deployment.

Contacts

Debi Gerstel
US Cleantech Chief of Staff, PwC
(408) 817-7430
debi.gerstel@us.pwc.com

Ira Ehrenpreis
General Partner, Technology Partners
ira@technologypartners.com

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