Green tech: Now comes the hard part

BOSTON--Even with positive long-term trends at their backs, a huge wave of newly created clean-tech companies will have to navigate a tricky business and regulatory environment to succeed.

At the MIT Enterprise Forum's "Power, Drugs, and Money" conference last Thursday, financiers and business people offered alternating upbeat and cautious advice on the prospects in clean tech, which has become one of the hottest areas for entrepreneurs and investors.

The positive scenario was summed up by Dennis Costello, an investor at Braemer Energy Ventures: the energy field is a great business to be in now because it is changing rapidly--a situation that favors small companies over incumbents.

Still, executives from both new and established clean-tech companies say that energy is complicated by politics, regulations, and large capital requirements on a scale that other industries don't have to contend with.

The question over green-tech start-ups' success--and the role they play in the massive energy industry--is worth tracking closely.

Thousands of new companies have been funded and formed in the past few years. But how and whether new technologies will be adopted is still unclear in many cases--a factor that can make or break new ventures.

For example, bringing energy efficiency technologies to household appliances has been considered "low hanging fruit" for 10 years but there's still much more than can be done, said Stephen Connors, a director at the Massachusetts Institute of Technology's Energy Initiative who spoke at the conference.

"These things are on the ground rotting at this point," he said. Connors also argued that many green-tech products are still not "plug-and-play" easy for consumers.

Financing is a challenge faced by a number of companies. Despite a lot of venture money going into the field, crossing from technology demonstration to a pilot project or commercial plant is referred to as the "Valley of Death" because there's a lack of funding for large-scale projects.

"There's a huge funding gap that exists," said Bill Davis, the CEO of Ze-Gen, which is developing a gasification process for turning municipal waste into electricity. "It's the defining challenge of this company going forward."

Ze-Gen needs to negotiate financing from people who are not necessarily familiar with the energy field or his company's new technology, he noted.

Nimby
Actually finding sites for some projects can also be burdensome because of environmental reviews or local opposition, Davis added. That sentiment was loudly echoed by Jim Gordon, the CEO of Cape Wind, a controversial wind project off the coast of southern Cape Cod.

That project--a proposed 420 megawatt off-shore wind farm, which would be the first in the U.S.--has faced intense political and local opposition. Gordon said wealthy Cape Cod residents, who don't want the wind farm to spoil their view of the ocean, have spent $25 million fighting the project.

Also in the cautious camp is Scott Anthony, the CEO of business consulting firm Innosight. In an interview with CNET's Green Tech blog published Monday, Anthony said many green-tech companies are falling into the trap of expecting too much from their technology.

"When entrepreneurs or an industry frame a problem purely in technological terms, often times they miss the mark and end up creating over-engineered products or solutions that never connect with the market," he said.

But for all the hurdles, the long-term trends are pointing in the right direction. Energy prices are expected to stay high, and countries are more willing to mandate regulations that favor energy security.

And even though the energy industry tends to be dominated by giant corporations, those incumbents are looking to academia and private sector start-ups for innovation.

"Energy is a huge industry. Most start-ups don't even to begin to comprehend that it will take decades for it to change," said Justin Adams, director of long term technology at oil giant BP, which is diversifying into renewable energy and biofuels. BP is very much looking outside the company for new technologies.

"Innovation in the energy industry from small companies is changing on the periphery at a pace that's unprecedented," he said.

Massive build-up predicted
If you're looking for another indicator of the inevitable "cleaning" of the energy business, check out what Daniel Yergin has to say.

A well-known author and prognosticator of world oil reserves, Yergin is chairman of CERA (Cambridge Energy Research Associates), the granddaddy of energy research firms which advises the world's incumbent oil and gas producers.

CERA earlier this month published a report titled "Global Climate Change Response Can Spur $7 Trillion in Clean Energy Investment by 2030." It's certainly not the first study to forecast a massive build-up of clean energy businesses, but it's significant coming from CERA, which predicts that oil production will increase over the next decade.

Among it's more provocative conclusions is the potential for "disruption" in energy, some of which could presumably come from industry upstarts.

From its study:

Clean energy technology could have disruptive rather than incremental impact. Modular and distributed PV could disrupt traditional central-station models of electricity production and distribution. Breakthroughs in cellulosic ethanol can disrupt the traditional vehicle fuel system if scale, logistics, and costs prove manageable. Conventional biofuel feedstocks, such as grains and oilseeds, may also produce serious unintended consequences such as disruption in global agricultural prices as well as land and water use patterns, as well as a policy backlash.

It's hard to draw a sweeping conclusion from all the discussion surrounding the green technology wave.

It's clear there's a lot of money being put behind new ventures and odds are that many of those won't work out. That's simply how the venture capital industry works: potentially big pay-outs but big risks as well.

But countering that exuberance is an understanding that the energy business is capital-intensive and extremely cost-competitive.

After all, a solar or biofuel company is delivering a commodity product in the end, no matter how sophisticated the technology is. The innovation lies in either novel business models (like renting solar panels) or how clean the technology is.