Technology

The State of Green


Here's a look at some alternative energy sources such as wind, solar, and ethanol, and the challenges companies in those areas face

Talk to the pioneers of green technology and they'll tell you these days they spend less time hard-selling the allure of renewable energy, and more hours managing shortages of materials, labor, and manufacturing capacity. Instead of evangelizing new markets, their focus has shifted to the practical: how to build new plants while driving down costs to make their products and services more competitive.

After all, you do get some headaches when your business starts to contribute to the economy in a meaningful way. In the U.S., the renewable-energy and energy-efficiency industries generated nearly $1 trillion in revenues last year and employed some 8.5 million workers, according to a July, 2007, study by Management Information Services, a Washington, D.C., consultancy.

Those numbers are growing by the megawatt. There has been no letup in the stream of new eco-focused companies, products, and technologies coming out of labs and garages around the world. The green sector continues to incubate new entrants faster than ever. Through the first half of 2007, venture capitalists poured $1.9 billion into U.S. and European startups, 10% ahead of the same period in 2006, a record year, says Nicholas Parker, chairman of the Cleantech Network, which tracks alternative energy.

New energy technologies, particularly in solar and biofuels, remain the most popular fields, attracting more than $1 billion for new ventures so far this year. But the latest hot spot, says Parker, is Energy Infotech, software used to find and eliminate waste in everything from lighting systems and manufacturing operations to utility grids. What follows is a look at some green sectors and the challenges companies in these areas face.

Wind

For wind, the key issues are no longer technical but operational. Fueled by green power mandates and federal tax credits, wind power has become the utility industry's first choice for an environmentally friendly source of power. The Energy Dept. expects wind-generated power to hit 46,200 megawatt hours this year, up from 14,100 megawatt hours in 2004.

The boom in demand has filled order books and triggered a wave of new factory construction in the U.S. At Siemens Wind (SI)—the No. 2 turbine maker in the U.S. after GE Energy (GE)—production is booked well into 2009. Indeed, four turbine makers opened new U.S. plants last year, and another three are slated to open their doors this year.

But the strong demand is taking its toll. Facing 30% annual growth rates, turbine makers' supply chains, manufacturing capacity, and installation crews have been maxed out. Meanwhile, prices for key materials such as steel (which is used to build windmill towers) are skyrocketing. That has contributed to a spike in prices of up to 40% for installed windmills—including the construction of bases, fabricating and erecting steel towers, and making and transporting the turbines—estimates Randy Zwirn, CEO of Siemens Power Generation.

The price of power generated by these new windmills has climbed, too. But the uptick comes at time when prices for natural gas power plants—a key benchmark for the power sector—have been headed up as well, due to shortages of many of the same materials. Wind power remains the most cost-effective renewable energy source, particularly in high-cost markets such as California and the Northeast, where state rules dictate that up to 25% of electricity come from green sources. "My focus is increasingly on getting capacity up and keeping quality high," says Zwirn.

Solar

Solar energy is following wind's rise, albeit from a much smaller base. Primed by state rebates in California and the Northeast, U.S. residential installations are expected to grow at 64% annually through 2010. Solar generation is expected to total just 1,000 megawatt hours this year (about 2% of the output from wind).

Still, the growth in demand for solar energy has strained the industry's evolving supply chains. In Germany, where the scale of investment is significantly larger, government incentives spiked demand so sharply that a global shortage emerged in the silicon used to make photovoltaic cells to power solar energy systems.

In the U.S., California is the hottest solar market, for good reason. Utility rates there are among the nation's highest, and blackouts are a staple of hot, sunny days. Financing terms are also among the best since utilities will buy back surplus power from solar-powered homes, and substantial rebates and tax credits from state and federal sources help cover up-front costs. (Here's a helpful database to see what incentives are available in your area.)

A homeowner in Portola Valley, Calif., for example, who installs a 5.8-kilowatt rooftop solar system for $50,000, will receive about $15,000 in state rebates and federal tax credits, according to Barry Cinnamon, CEO of Akeena Solar (AKNS.BE). Factoring in the savings of about $2,600 per year in lower power costs, Cinnamon says the system will pay for itself in about 10 years.

Further lowering the cost of converting the sun's photons into electrons will help put solar energy on more roofs. Even as the efficiency of conventional solar photovoltaics continues to creep up, the next big leap forward could come from lower-cost "thin film" solar materials. Produced continuously on giant rolls (much the way newspapers are printed), thin film is a central focus of utilities intent on developing large solar farms.

Ethanol

Of all the green initiatives under way, ethanol still sparks the most controversy. Critics continue to hammer the fuel: pointing out how turning corn into fuel requires too much energy to make into ethanol, has driven up food prices, risks depleting aquifers, and is intensifying farm-field runoff that causes dead zones in the sea.

Yet corn alcohol has so far proved immune to such concerns, shedding its roots as a small, sideline business run by farmers. Today, most of the farmers who bought shares in nearby ethanol facilities are wealthy, thanks to corn prices at $3.30 per bushel, up 65% in just two years, and the skyrocketing value of existing ethanol plants.

The industry is being driven by a host of well-capitalized startups and big energy and agriculture conglomerates including Archer Daniels Midland (ADM) and Cargill. With billions of dollars flooding into new facilities, total U.S. ethanol capacity has tripled to 6.2 billion gallons per year in five years, and is on track to double again by mid-2009. By then, ethanol producers will be able to supply from 5% to 8% of total U.S. fuel demand.

To fuel its growth, VeraSun (VSE) has been building and acquiring new ethanol plants steadily. It's on track to own nine plants, with the capacity to spew out a total of 1 billion gallons of ethanol by 2008. For CEO Donald Endres, the environment is not among the central worries facing VeraSun. Topping the list are operational challenges: how to recycle water and heat in its distillers to save money or how to boost output by selecting starchier varieties of corn.

VeraSun has started to capture the oil in post-processed corn to sell as higher value biodiesel. And to deliver the fuel, VeraSun has secured 100-car-long "unit trains," which railroads can haul to either coast from the Midwest in six days. "This is such a young industry," says Endres. "The more places we look, the more places we find to squeeze efficiency."

More so than for wind or solar, the ethanol industry is likely to be transformed by technologies still in labs (BusinessWeek.com, 12/18/06). At VeraSun, for example, new, more efficient enzymes promise to convert more corn starch per pound into the sugars that yeast transforms into alcohol. The yeast cells are also being tweaked to live at higher temperatures in higher concentrations of alcohol, so they can crank out more ethanol.

Both of these efforts promise to help deliver the holy grail of biofuels: "cellulosic" ethanol. Delivering up to eight times more energy than today's corn-based fuel, cellulosic ethanol is derived from new recipes that convert a higher portion of each plant into ethanol—not just the seeds, as in corn—as well as a wider variety of plant types, including corn stover, trees, and even unwanted weed plants.

To realize tomorrow's green dreams, a lot of mundane problems will have to be solved first. In cellulosic ethanol, for example, startups backing new biological tricks are still emerging even as incumbent corn ethanol makers are working out today's manufacturing kinks to turn tons of plant matter into barrels of fuel. "To make ethanol cheaper than gas—to make a path to cellulosic ethanol—you have to start solving the tough problems today," says venture capitalist and ethanol investor Vinod Khosla.


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