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The renewable energy industry is built on dreams. One of the fondest of these dreams is to produce a renewable hydrocarbon fuel, so that we can continue driving our cars without feeling any guilt. It is a dream that fuels several hundred companies globally, a large number of them in the US. Industry observers consider Sapphire Energy, a 2007 start-up based in San Diego in California, as one of the hottest of these biofuel companies. Sapphire has apparently developed a process to produce hydrocarbons — petrol, diesel and aviation fuel — directly from algae using sunlight, and they are chemically identical to those derived from crude oil. Sapphire says it is a few critical steps away from supplying the fuel to petrol stations.
In the past 18 months of its existence, Sapphire has supposedly proven the technology and supplied fuel for a few biofuel-based experiments, including test flights by Continental Airlines and Japan Airlines. The next few years would determine if this process would work on a commercial scale. Sapphire’s goal is to start producing 300 barrels per day (bpd) in three years, and 10,000 bpd in five years. “Once we demonstrate the process and economics work in 10,000 bpd, ramping up to hundreds of thousands or more of barrels per day is simply a matter of investment,” says Tim Zenk, Sapphire’s vice-president of corporate affairs.
We do not know yet whether it would work on a global scale, but several high-profile investors are backing the company — ARCH Venture Partners, the Wellcome Trust, Venrock and Bill Gates’s Cascade Investment. But then Sapphire has stiff competition from dozens of other VC-backed companies, also chasing much the same dream. Companies that claim similar results — with different approaches — include Solix Biofuels in Colorado, Solazyme in San Francisco and Synthetic Genomics in Sausalito in California. Florida-based PetroAlgae says it is close to completing a 5,000 gallon-per-acre plant to produce hydrocarbon fuel using algae. There are also many other firms trying to produce other environment-friendly fuels — the label is essential — such as ethanol from biomass.
A LONG JOURNEY
The search for clean fuel alternatives started more than a century ago
1876: William Adams discovers that Selenium produces electricity when exposed to sunlight
1908: Ford makes a vehicle that can run on ethanol
1954: Bell Labs develops the first photovoltaic cell
1973: The Satellite Skylab is powered by solar cells
1977: Brazilian scientists invent and patent the first industrial process for biodiesel
1978: The US congress passes the Energy Tax Act, encourages households to invest in energy conservation, wind and solar energies
1979: firm called Arco Solar embarks on a venture to create the world’s biggest photo voltaic manufacturing facility; Ethanol starts becoming popular
1985: The University of New South Wales creates solar cells with 20 per cent efficiency
1999: Installed Capacity of solar cells cross 1 gigawatt
2005: VCs begin funding renewable energy companies in large numbers
2006: Boeingspectrolab develops solar cells with 40 per cent efficiency
In the past one year, VCs in the US have been pouring money into biofuel firms. Biofuels Digest, a US publication that tracks investments in the sector, says that $680.2 million (about Rs 3,537 crore) of venture capital was invested in biofuel firms last year. Of this, $437 million was for cellulosic ethanol and $175.9 million for algae-based firms. That is a pittance compared to what is spent on searching for new oilfields to exploit, but a huge jump over the kind of funding biofuel start-ups could hope to attract five years ago. Still biofuel is only the second-most favourite area of renewable energy VCs. Their top choice is without doubt solar energy. In the past four years, VCs in the US invested $4.5 billion in solar energy start-ups.
VC investments in renewable energy continued throughout 2008 despite weak general economic conditions. According to the Cleantech Group, a research firm in San Francisco, $8.4 billion was invested in renewable energy globally in 2008. Greentech Media, a similar organisation, also based in San Francisco, puts the figure at $7.7 billion, but without including many deals in India and China. Solar energy firms mopped up $1.7 billion of VC money last year, and $4.5 billion in the past four years. A large number of these deals were at seed-stage, or Series A, funding. The money pumped into clean tech firms has resulted in a tremendous spurt in innovation. But industry watchers are worried that if the recession continues, the money might slow down — and the momentum of innovation would also slow down. Says Brian Fan, senior director of research at the Cleantech Group, “The overall funding will slow down this year, and we expect as much as 50 per cent valuations to be reset.”
However, early-stage funding could be different. Early-stage VC deals — in all sectors — are still continuing, according to the MoneyTree report from PricewaterhouseCoopers. The number of VC deals dropped in the last quarter of 2008, but the number of seed and early-stage deals were larger than in any quarter between 2002 and 2006. Even during a recession, VCs are keen to fund innovative ideas. However, highly capital intensive late-stage deals may be a different matter. From among the thousand-odd clean tech start-ups funded in the past few years, only those with breakthrough technologies will get the investments necessary for commercial scale plants. “Real innovation always gets funded,” says Wilber James, managing partner of Rockport Capital Partners. Many corporate giants started during recessions. Would some of the companies funded in the past three years turn out to be the next Chevron or Shell or GE?
Redefining The Solar Energy Map
There seems to be an inevitability to the solar energy industry that attracts entrepreneurs, investors and innovators. Selling solar energy modules and panels is in real danger of becoming a commodity business, but that does not prevent entrepreneurs and VCs from looking for innovation in a solar energy firm. One of the largest fund-raising ever in the sector was done by the Fremont-based Solyndra. It raised $600 million in its four years of existence. Solyndra has a plant that makes 120 megawatts of solar panels, and another one being built to make another 500 megawatts. It claims to have $1.2 billion worth of orders already.
Innovation in solar cells often focuses on science: to produce more efficient or cheaper solar cells. Solyndra relies on pure engineering to improve efficiencies of the system and reduce cost. All conventional solar modules are flat and mounted in flat panels. Solyndra’s module is cylindrical. This simple idea combined with some innovation has purportedly increased the efficiency of solar panels by roughly 25 per cent.
RAY OF HOPE: While companies such as Sapphire use algae to produce
hydrocarbons (left), others use concentrators to tap solar energy
A flat panel, to be always perpendicular to the sun’s rays, has to keep tracking the sun, and thus has to change orientation. Solyndra’s way of tackling this is to make the modules cylindrical. These modules are designed in a way to capture light from all sides. Direct light from one side, diffused light from the other side, and reflected light from the bottom. The hollow cylindrical modules also allow wind to pass through them without damage. Solyndra’s panel is apparently tested for winds up to 120 miles per hour.
Solyndra and other solar panel firms are betting on one thing: commercial rooftop space across the world. In the US alone, there is 30 billion sq. ft of space available, which can translate into 150 gigawatts of power if fully used. The space available globally is probably three times as much. “We need to optimise the cost for commercial rooftops,” says Kelly Truman, vice-president of marketing in Solyndra.
As all observers of the industry know, the main problem with solar power is the high cost. Making more efficient solar cells is one way of tackling this problem. The other one is to drive efficiencies into the manufacturing process — and to develop low-cost materials — so that the total cost of the system comes down. Among established players, SunPower is an example of the first type of companies: for some time, it has been making the most efficient solar cells in the world. First Solar is an example of the second: its manufacturing techniques claim to make solar electricity cheaper than ever. Start-ups are challenging both sets of companies through multiple approaches and making a big impact on the solar energy map.
For example, the Oakland, California-based BrightSource is building the world’s largest solar power plant in Mojave Desert near Los Angeles. Capable of producing 1.3 gigawatts of power when complete in 2013, this plant would use mirrors called heliostats to concentrate solar radiation, which in turn is used to generate steam to drive turbines and generate electricity. The company sources its technology from a subsidiary in Israel, where it is building a 100-megawatt and a 200- megawatt plant.
Concentrating the sun’s rays is an approach followed by several firms around the world, and many of them are claiming efficiencies much higher than plain photovoltaic cells. In Israel, start-up Zenith Solar has licensed concentrator technology from the country’s Ben-Gurion University and Fraunhofer Institute in Germany. The firm claims to increase efficiency five times while reducing the cost of photovoltaic cells from 80 per cent of the system to 10 per cent.
Prism Solar Technologies in New York uses holograms to concentrate solar energy, and reduces the amount of silicon needed in a panel and, thus, the cost. In Australia, Sunengy uses concentrators to focus solar energy on to solar cells partially submerged in water. Water keeps the system cool and protects it from high winds. Research papers published from Sunengy claim that costs can go to less than $1 a watt (currently solar electricity costs roughly $2 a watt). Says Philip Connor, inventor of the system and founder of Sunengy, “We need to achieve 50 per cent cost reductions in two years, 75 per cent in four, and coal replacement soon thereafter.”
Companies described above represent a fraction of the innovation happening in this field. Nanosolar in the Silicon Valley literally prints solar cells on a substrate, which supposedly speeds up manufacturing by about 100 times; Nanosolar has received $500 million in VC funding. A start-up from MIT, 1366, is using very thin wires to reduce the cost of conventional silicon solar cells, and bring solar energy costs on a par with electricity from coal by 2012. And it is a sector that is attracting global corporate giants. Samsung, IBM and Intel are all nurturing plans to enter the solar energy market.
Not surprisingly, Lux Research predicts the solar energy market to increase its size from $36 billion (5.5 gigawatts) to $70 billion (18.5 gigawatt) by 2013, with a few bumps on the way in the next two years. Some industry observers compare the advent of low-cost solar cells — at lower efficiencies — to the situation in the computer industry in the 1980s. “The current state of thin film technology is like the time when PCs made their appearance,” says Keshav Prasad, vice-president of business development at Signet Solar, a Silicon Valley firm. “PCs were much slower than the mainframes, but they caught on because they were much cheaper.”
While the solar energy industry seems to be on the verge of explosive growth, the biofuel industry seems set to catch up a few years later. For some time now, biomass energy, with ethanol from corn being the front-runner, has been criticised as not being so environment-friendly. In fact, studies had shown that corn-based ethanol creates more carbon emissions than fossil fuels in the long run. This is because of fertiliser use and land degradation, among other factors. Now, a Chicago-based company claims to put biomass-based ethanol as a top contender among carbon-neutral fuels.
It is difficult to manufacture ethanol economically with a low overall carbon footprint. One way to make ethanol economically is to learn how to convert any piece of biomass into a fuel, which obviates the need to use fertilisers or use areas meant for crops to generate the feedstock. There are several such research projects by firms, but Coskata is among the few that have processes that can use a variety of inputs. Its ethanol plants can take in any feedstock: scraps of wood, any twigs or leaves, old tyres or almost anything that has organic carbon in it.
The firm has proprietary microorganisms that can eat up carbon-based material and convert it finally to ethanol. But ethanol is not as energy dense compared to fossil fuels. “We can compensate for this lower density through lower prices for ethanol,” says Wes Bolson, chief marketing officer of Coskata. The company will be ready with a semi-scale plant by June, and is also designing a full-scale plant.
Biofuel firms have received a lot of investment, but many industry observers think that the sector has thrived on hype as well. Consider algae-based hydrocarbons, for example. There is no doubt that firms such as Sapphire, Synthetic Genomics and others are innovative. But their technology is still untested on a commercial scale. “No one has been able to scale algae-based methods,” says Eric Wesoff, senior analyst at Greentech Media. There is the additional issue of land area necessary to manufacture these fuels. However, recent studies have shown that biofuels are sustainable on a global scale. In a paper published two months ago, scientists Jürgen Metzger of University of Oldenburg and Aloys Huettermann from Germany’s University of Goettingen, showed that the world demand of energy by 2030 — based on projections by the International Energy Agency — can be met by cellulosic biomass grown in degraded land.
GAINING HEIGHTS: Companies are driving
efficiencies into manufacturing of solar
panels to tackle the problem of high costs
The economical viability of biofuels is difficult to calculate as the price of oil keeps fluctuating. Sapphire, for example, claims to make its bio-crude compete with oil when at prices of $60-80 per barrel (not considering subsidies). The price of crude is currently around $47 a barrel. So at current prices, bio-crude cannot compare with traditional crude. On the other hand, if crude oil prices are consistently over $100 a barrel, bio-crude suddenly becomes a very viable option. Observers cite the instability in the oil market as the major reason why renewable energy investments do not make economic sense (electricity prices, although different in different markets, are not so volatile). However, in spite of this volatility, biofuel companies have developed an impressive range of lab-scale technologies.
Several firms are developing technologies for biomass ethanol. POET, a grain-based ethanol firm in South Dakota, US, is building a 25-million gallon biomass ethanol plant in Iowa, to be ready in two years. Range Fuels, a Colorado-based firm backed by Khosla Ventures, will finish building its cellulosic ethanol plant in Georgia, US, by the end of this year. Sekab in Sweden is also close to commercialising cellulosic ethanol. As mentioned, Sapphire, Solis and Solazyme are developing renewable crude.
Seambiotic, whose parent company is in Israel, uses flue gas from coal power plants to grow algae, which in turn is used to produce biodiesel. The California-based Amyris Biotechnoloiges tries to reprogram the DNA of microbes to make renewable diesel and jet fuel. In a few years’ time, we may know if these processes succeed, or whether one of these companies can become an energy industry giant.
The Buck Doesn’t Stop Here
Solar Energy and biofuels have got the attention of VCs in the past few years, but there are a few other promising technologies too. Wind power and geothermal energy are no longer the hot favourites of VCs. There are, however, technologies within these areas that look promising. One is the enhanced geothermal systems (EGS), where water is pumped into cracks in rocks and taken out at high temperature. A report from MIT last year concluded that there is enough geothermal energy that can serve the earth’s energy needs for several thousand years, with the only long-term drawback being non-hazardous induced seismicity.
The largest EGS system being developed is in South Australia, which can one day generate 10,000 megawatts of electricity. EGS technology is, however, still inchoate and expensive. Google.org has funded two companies in this area: Potter Drilling and AltaRock Energy. Both are in early stages. Says Gregory Miller, managing director of investments at Google.org, “We deliberately choose areas that are not getting enough attention from VCs.”
High-altitude wind is another area with high potential. A demonstration project in Delft University in the Netherlands has shown feasibility by flying kites at high altitudes. Makani Power in California, in which Google.org has invested $15 million, is developing the technology to fly kites at altitudes between 800 metres and 10 km, and attach them to gensets. A medium-sized kite farm can generate 100 megawatts of energy. Like EGS, this is a technology that will serve the world in the long term. The seeds for both have already been sown.
hari at bworldmail dot com
(Businessworld Issue Dated 17-23 March 2009)