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Alternate Power: A Change Is In The Wind


The words "solar power" conjure up images of ungainly rooftop panels mounted by die-hard environmentalists. But Jigar Shah plans to change all that. As CEO of Baltimore-based SunEdison LLC, he dreams of the sun supplying up to 10% of the electricity needed in many parts of the country. And now he has the financial muscle to embark on his vision. On June 9, SunEdison announced a $60 million fund, financed by Goldman Sachs (GS) and Hudson United Bank (HU), to oversee BP Solar's (BP) installation of 25 electric systems on Staples (SPLS) and Whole Foods Market (WFMI) stores, along with other locations. The recipients get reliable power at a guaranteed price, providing a hedge against cost spikes during periods of peak electricity demand. The financiers catch a ride on a global solar market that's already more than $7 billion per year and expanding at a rate of more than 30% annually. "The growth opportunities are tremendous," says Shah.

The new dawn isn't limited to solar power. An array of alternative-energy, energy-efficiency, and other green technologies -- together known as "cleantech" -- are beginning to boom. A host of forces is responsible for the trend: high prices for oil, gas, and coal; expanded government incentives and mandates; advances in technology that are reducing costs; concern over global warming; and investors looking for the Next Big Thing. "What has changed dramatically is the number of mainstream institutions that have decided they can make money in this area," says Dan Reicher, president of New Energy Capital Corp. and a former top Energy Dept. official. "Who would have thought two years ago that Goldman Sachs would be investing in wind and solar power?"

SHIFT IN THE GROUND

Indeed, an increasing number of major corporate players like General Electric and Siemens (SI), traditional venture-capital firms such as Kleiner Perkins Caufield & Byers, and even states are putting money into the market. In its so-called Green Wave Initiative, California plans to use $500 million from two state pension funds -- CalPERS and CalSTRS -- to seed proposals for alternative energy. "Clean technology is becoming the enabling technology of the 21st century industrial society," says Nicholas Parker, chairman of Cleantech Venture Network LLC, which tracks the field for its investor members.

But cleantech comes with daunting risks as well as opportunities. The big uncertainty: Its economics and profitability vary dramatically with changes in energy prices and government policies. "For a long time, with low gas and coal prices, renewables of all kinds couldn't compete," explains Jerry Peters, senior vice-president at Hudson United Bank. But now, with natural gas rising to more than $7 per million BTUs and eastern coal up to $60 per ton, average U.S. electricity prices, by state, now range from 5 cents to 16 cents per kilowatt hour (kwh). In some states, that's a 25% jump since 1995. At the same time, technological improvements and economies of scale have significantly lowered the costs of alternatives. Wind-power costs have declined to as little as 3 cents to 5 cents per kwh, making wind cost competitive. That's one reason why GE's wind business has soared from $500 million in 2002 to a predicted $2 billion this year.

Yet wind power wouldn't be growing at its current U.S. rate of 37% per year without government mandates and incentives. When Congress delayed renewing the 1.8 cents per kwh credit for wind power last summer, for instance, the business tanked until the credit was restored.

The delicate interplay of prices and policies is even more complicated for solar power, which is still at least 3 to 5 times as costly as conventional sources and thus dependent on subsidies. Germany has become a leader in solar electricity because of what Erik Straser, general partner at Mohr, Davidow Ventures, calls a "masterful" policy: When companies or individuals install photovoltaic panels, the government pays them about four times the going rate of electricity for any power that flows back into the grid. The approach has been "successfully copied by South Korea, Japan, and Spain," says Straser. "It's a way for a country to take a fundamental step toward energy independence."

While that may seem a high price to pay for energy alternatives, such policies are paving the way for a lower-cost future. Because of the growing worldwide market and manufacturing advances at big silicon-panel makers like Sharp Corp. (SHCAY), installed costs for solar systems have been dropping at a steady 5% per year for the past decade -- and should continue to do so. By 2010 or 2015, predicts SunEdison's Shah, solar electricity will be cost-competitive in some parts of the U.S.

In the meantime, U.S. subsidies are fueling growth. The federal government offers tax credits for wind, solar, and other renewables. In addition, 19 states have so-called renewable portfolio standards, requiring that a percentage of energy come from green sources. That has created a market for renewable energy credits that utilities can trade to meet the goals.

As a result, SunEdison's solar power project, for instance, brings many financial benefits. Hudson Bank gets revenue from sales of electricity and renewable-energy credits, while Goldman Sachs gets a write-off from the tax credits and accelerated depreciation. "This is a great example of how innovative financing and the right technology can deliver solar or alternatives now," says Raymond Crespo, vice-president at Energy Conservation & Supply Inc., a New York consultancy that helps office buildings and retailers improve energy efficiency.

BUBBLE AHEAD?

Meanwhile, venture capitalists are betting that innovative new technologies can bring down the costs of solar power far faster than the current 5% rate of decline. In early June, San Jose (Calif.)-based Miasolé, which uses the technology underlying computer disk drives to make thin-film solar cells, snared $16.5 million from venture-capital firm Kleiner Perkins.

On June 13, Nanosolar announced that it had closed $20 million in Series B funding from investors such as Mohr, Davidow Ventures, and Benchmark Capital Management Co. The Menlo Park (Calif.) company uses new materials and processes to sidestep the problems of conventional silicon cells.

While promising, these technologies carry plenty of risk. One of them might emerge as the eventual winner, or downturns in conventional energy prices or government policies could put a damper on the market. Some venture capitalists caution that the current rush to invest could create a bubble similar to the one that happened with fuel cells a few years ago. "Oil prices are on the front page, and there has been a bit of herd mentality," says Bill Green, venture capitalist with VantagePoint Venture Partners.

Still, high demand for energy around the world is likely to keep oil, gas, and coal prices high. And environmental concerns will bring more incentives for alternative energy and energy efficiency, not fewer. "If people are convinced that subsidies will remain, capital will follow," says Howard H. Newman, vice-chairman of private equity investor Warburg Pincus.

A powerful convergence of events, from global action against climate change to rising demand for oil, is happening. There will be bumps in the road, but renewable energy and energy-efficiency technologies look set to command an increasing share of investment dollars and markets.

By John Carey in Washington and Adam Aston in New York, with Justin Hibbard in San Mateo, Calif., and Ronald Grover in Los Angeles


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