Cleantech Economics

Katie Fehrenbacher (@katiefehren), editor of Earth2Tech recently published an article titled “How Apple could revolutionize solar” (see article here: http://gigaom.com/cleantech/how-apple-could-revolutionize-solar/).

In the article, she quotes Bloomberg New Energy Finance solar analyst Nat Bullard (@SolarConstant), who points out “If any company could reliably integrate PV into consumer portable electronics, it is Apple. Given its other devices, it would likely make the simplest, most elegant integration. It may sacrifice some nominal performance (and greater freedom of choice) for the sake of simplicity and robustness – as it has done time and again in the past decade.”

Nat is absolutely right about this - the idea of solar integrated into consumer electronics products - by Apple - is fantastic, because Apple has uniquely been able to do things that that people (and Apple’s competitors) thought were foolish or impossible, until Apple showed otherwise (a shuffle-only MP3 music player? a smartphone without a physical keyboard? a tablet computer?). And sold tens of millions of iPhones, iPads, and other seemingly magical devices.

Reading Katie’s article makes me wonder, however, whether even Apple’s magic can overcome the relatively low power output of today’s best commercially available solar cells. Let’s do some quick napkin math on this, shall we?

Let’s consider the case of an iPhone 4, which uses a 3.7V 1420 mAh Li-Polymer battery. Would say putting a solar cell on the entire back panel of the iPhone 4 have enough juice to charge the battery in any kind of reasonable way?

For argument’s sake, let’s put the question of cost aside. (I’m also discounting hero cells, expensive multi-junction gallium arsenide cells and the like.) Let’s look at the highest efficiency commercially produced solar module, from SunPower, their new E20 / 435 panel, which are 20.1% efficient (module efficiency). This module has 128 Maxeon cells which are rated at 22.4% efficient (cell efficiency). The nominal power from the module is 323Wp, with a rated voltage of 67.2 V and current of 4.81 A.

Since I couldn’t find a spec sheet for the Maxeon cell, to make things simple, let’s just do a oversimplified calculation to reverse the typical losses from cell to module efficiency to get a nominal power figure for the cell:

323 Wp / 20.1% x 22.4% = ~360 Wp per module (reversing module losses)

360 Wp / 128 cells per module = 2.8 Wp / cell

In other words - each Maxeon cell can produce 2.8 Wp.

Now each cell is around 150 sq cm each. The back of the iPhone 4 is 67.5 sq cm. So assuming the cells just simply be downsized to the size of the iPhone 4:

67.5 sq cm (iPhone 4 back) / 150 sq cm (Maxeon cell) = 45%

So we could generate 45% of the Wp of a Maxeon cell, or 45% x 2.8 Wp = 1.26 Wp.

Now, the iPhone 4’s wall charger is rated at 5W (5V at 1A). So an iPhone 4 with a built-in Maxeon solar cell, exposed to full sunlight in ideal testing conditions for temperature and humidity - would take 4x as long as a wall charger (5 W for the wall charger / 1.26 W output for the Maxeon cell the size of the iPhone 4 = 3.97, or 4 rounded).

It takes around 130 minutes using the Apple wall charger to charge the iPhone 4 from a fully discharged state to 100% (see here: http://dailyiphoneblog.com/2010/07/13/image-iphone-4-charging-time-wall-charger-vs-usb-charger/).

The solar cell - in ideal conditions - would take 4 times as long - so 4 x 130 minutes = 520 minutes, or almost 9 hours. (Reality is likely far short of ideal conditions - there won’t be direct sunlight all the time, the phone will be in a purse or pocket, the owner will have the phone in his or her hand and will be covering the solar cell, etc.)

So - I’d love to dream that Apple’s magic will make a fantastic solar-integrated iPhone case that would charge the phone at a sufficient rate to make a meaningful difference in talk time, web surfing time, etc. However, today’s best commercially available monocrystalline c-Si solar cells are simply not efficient enough to make this a practical reality.

Unless, of course, Steve Jobs and Apple can do the impossible and/or foolish, and prove us all wrong, yet again.

A couple of weeks ago, cleantech VC Rob Day, Partner of Black Coral Capital, wrote a post on his blog, entitled “The Rise of Information-Based Cleantech.” (http://www.greentechmedia.com/cleantech-investing/post/the-rise-of-information-based-cleantech/)

Rob’s thesis is one I’ve heard a number of cleantech investors articulate over the past 18 months. The majority of big, capital-intensive investments - particularly in cellulosic and algal biofuels, CIGS thin-film solar, battery and EV companies have (thus far) failed to yield successful exits and returns above the cost of capital for investors. Most of these mega-rounds were done in the 2006-08 timeframe, before the economic downturn, at high valuations. Although many of these companies continue to make good progress on technology development and business models, they have suffered through successive down rounds as they burn through capital trying to achieve technology and manufacturing breakthroughs, reduce costs and scale up production.

So, what is it about information-based cleantech that makes it attractive as “the next big thing?” The same characteristics about traditional IT and software businesses - namely, disruption from:

• ever-increasing chip speeds along with the rise of virtualization that greatly reduces processing costs;
• the use of open-source software OS’s, databases, applications and development frameworks, along with the globalization and increased capacity in software development skills that vastly reduces the costs of application development;
• increased penetration of the broadband Internet as well as the rise of the cloud-based SaaS models that enables product delivery to customers at low cost

The ability of information-based cleantech applications to process huge amounts of data to determine trends, improve performance and save energy/water/waste heat/carbon/money/etc. has the potential to disrupt existing businesses that have depended largely on capital-intensive hardware improvements (such as better chillers, pumps, lighting controls, fan coil units, etc.). In other words - customers can reap the same benefits through cheap software applications, instead of expensive hardware retrofits.

VCs love software and Internet businesses. You can go from 0 to IPO for $50 million in a software business. An Internet business can go global from day one, with customers all over the world, with very low-cost distribution. A cleantech business, on the other hand, might take $200 million to $1 billion in invested capital before an exit. That is due to the difficulty of manufacturing advanced lithium batteries at scale, of competing with massive Chinese government subsidization of the entire solar and wind manufacturing value chains, of precision-engineering flow batteries, of effecting cost reduction in fuel cell hot boxes, of bringing a new electric vehicle from concept to market, and scaling up biofuels production from thousands of gallons to millions or tens of millions of gallons.

However, just as scaling enterprise software sales (as opposed to consumer Internet businesses) is difficult, laborious, time-consuming, and expensive - I believe the same dynamic exists in information-based cleantech. I believe this is due to two main reasons:

1. The customers that would buy IT-based cleantech solutions are conservative and don’t adopt new technologies easily. These include power and water utilities, building owners, manufacturing companies, transportation and logistics companies, etc. Existing incumbents have significant advantages in having global sales and distribution channels and longstanding customer relationships, that are very difficult for a newcomer overcome - even if a newcomer has demonstrably superior products and solutions.

2. There are very few areas where IT-based cleantech solutions can be sold in isolation from hardware and equipment. They exist - but in most cases, software applications still need to be bundled or integrated with hardware to achieve the intended customer benefits. This means that incumbent equipment providers still control the choke points and distribution channels to customers.

Let’s look at two IT-based cleantech segments: Home Energy Management (HEM) and wireless lighting controls.

HEM

The HEM segment saw an explosion of interest, from startups like Tendril, to large IT companies like Google and Microsoft. Google and Microsoft both recently exited the businesses, after it became apparent that they were simply unable to get anyone to pay for their products and services. This was because they were unable to convince equipment and power companies - thermostat manufacturers, appliance makers, air-conditioner makers, and local utilities to integrate their components with their HEM APIs.

Without data inputs and control over energy-consuming components, an HEM is simply a useless piece of software that can’t really tell how much energy a home is using, from what sources, and is unable to do anything to improve energy efficiency. Google and Microsoft simply lacked any leverage, and were unwilling to pay inducements to the ecosystem to achieve this integration (not because they couldn’t afford inducements, but because these payments would simply exceeded any potential revenues, thus rendering the business structurally unprofitable).

Despite the efforts by two dominant giants of the IT sector, neither could overcome the structural challenges posed by the hardware side of the business.

Wireless Lighting Controls

The wireless lighting controls business is populated by numerous IT startups from the wireless computing space. However, the lighting business is highly fragmented - and the choke points are controlled by the large players that own the customer channels.

This is due to how most lighting systems are sold. Customers - namely building owners and construction firms - don’t generally go down to Home Depot and buy light bulbs, light fixtures, and the like and integrate and install them. Lighting is generally sold through new construction projects, where a lighting design is specified by an architect, approved by the building owner, and given to the general contractor (GC) to implement. The GC sub-contracts the lighting system to an MEP (Mechanical, Electrical, Plumbing) sub-contractor that looks for the cheapest way to fulfill the design spec.

The simplest way for the MEP sub-contractor to do this is to simply buy a full lighting solution from a full-service lighting solution provider (such as market leaders like Philips, OSRAM, GE, or a whole tier of regional lighting solution providers) that can provide all the components in the solution - the electronic ballasts, fixtures, bulbs, wall switches, occupancy sensors and controls - as well as a warranty and O&M.

A small wireless lighting control company may have the best wireless lighting solution in the world - one that provides a fantastic ROI and benefits to a facilities manager as well as building occupants. However, there is virtually no chance this company can easily scale sales given how lighting is currently installed or sold. The most likely exit for an innovative lighting company would be to hope for an acquisition by a larger lighting solution provider. (While this may constitute a successful exit, an M&A valuation is generally less lucrative than an IPO to an investor.)

In summary - I agree that information-based cleantech businesses can be quite attractive  - and less capital-intensive than most other cleantech businesses. However, just because the products they develop are information- or software-based does not mean that scaling sales and customers is by any means easy, cheap, or quick.

Here are some questions I’ve been asking myself in the past few weeks. I don’t have the answers to these, and a fair amount of analysis (and guesswork) will have to go into formulating answers.

• What happens if utility-scale energy storage declines from $thousands/kW (I’ve read of anything from $900-3000/kW from various battery manufacturers, all-in, including power electronics, installation costs, etc.) to $hundreds/kW? Could wind or solar PV actually become baseload power, competitive with coal or natural gas plants that run at 70-95%+ capacity utilization?

• What happens if the world could actually save 5% of power demand through energy efficiency? 10%? 20%? What impacts would that have on the generation side in terms of actual need for new power plants, i.e. how many fewer plants would we have to install?

• Is smart grid really worth it? Or is it just a fancy way of saying ‘grid improvements’ that enables utilities to pass on capex charges to ratepayers? What if all HVAC, lighting and appliances became 10% more efficient (new build + retrofits)? Would that obviate the need for trillion-dollar grid capex and the utopian vision of a two-way digital grid? In other words - if all my major sources of demand in buildings becomes efficient because equipment suppliers are all going there already - do we need to spend all this money doing slow, expensive grid improvements?

• There are around 1 billion cars in the world today, and virtually all of them run on liquid fuels. How many years would it take to transition all light vehicles over to EV/PHEV/hybrid, given aggressive government incentives/rebates/mileage standards? What’s the aggressive case (20 years? 30 years?), and how much would this translate to in actual savings in oil consumption?

• What would it take for lighting to be sold as a service, instead of as equipment? I.e. if the major lighting equipment suppliers sold lighting subscriptions instead of capital-intensive equipment? What about heating as a service, or cooling as a service? Let the equipment suppliers finance the installation capex (they generally have pretty big balance sheets and can get low cost of capital) instead of landlords.

• Is Jevons Paradox real? (see here for a description: https://secure.wikimedia.org/wikipedia/en/wiki/Jevons_paradox ). If my air conditioner, lights and refrigerator get more efficient, will I be tempted to leave my lights on all the time and turn my thermostat down? Isn’t there some point where efficiency outstrips human laziness or greed?

OK, when I start talking about “Jevons Paradox” I know it’s time to stop asking questions…

If anyone has seen good, rigorous analysis on any of the above, I’d appreciate you pointing me to the relevant studies or reports.

Thanks!

Hi! and many thanks for visiting.

I’m starting this blog, Cleantech Economics (boring name, I know, hopefully I’ll find a better one soon) for two reasons:

• To have a place where I can write down ideas and analysis on the future of energy, economic development, and the world and lifestyle we will bequeath to our children and their children.

• To have a discussion with my colleagues in the technology, finance and policy worlds that will enable us to formulate solutions that cross these three separate, but interlinked arenas.

A couple of initial proclamations:

• I don’t have the answers. Compared to my heroes, gurus, mentors, colleagues and peers, I have but a smidgen of their experience in the energy, finance and policy worlds. I look mainly to them for expertise, guidance, wisdom and inspiration. There are a lot of smart people out there - and it’s my hope that by standing on the shoulders of these (and other) giants, that I can see just a wee bit farther.

• Nobody has (all) the answers (yet). The worlds of traditional energy companies, industrial equipment suppliers, infrastructure builders, project finance, cleantech startups, venture capitalists, building owners and tenants, transportation and logistics companies, peak oil/energy public equity investors, asset managers, government policymakers, environmentalists, climate change activists and consumers - are vast, fundamentally different, and silo-ed. All of these worlds are a part of the entire puzzle, but I don’t believe any single person can humanly understand each of these worlds deeply enough to formulate all the answers.

• I’m here to give it a whack - as stated above, my approach will be to look at the issues from three worlds: technology, finance and policy. But just like a blindfolded birthday child, wildly over-swinging at a pinata stuffed with sweets held just out of reach by his uncles - I’m sure I will miss and fall down more often than I will connect.

Of course, all this talk of answers surely begets the question: what are the questions? That will be the subject of a subsequent post, stay tuned…

A little about me:

• I got inspired to get into the energy and cleantech business by my dear friend Chris Nelder (Twitter: @nelderini, Chris’ blog at www.getreallist.com). In 2005, he told me that the world was headed for an energy crisis. I didn’t believe him, of course - in fact, I ridiculed him with classic economic arguments of how increased demand spurs increased investment and new technologies (like horizontal drilling and hydrofracking) that inevitably yield new supplies. Thankfully, Chris patiently educated me on the unyielding basics of petroleum geology, wellhead pressures, rock porosities, flow rates, new discoveries vs E&P investment, etc. Now I am a firm believer that there is simply a finite supply of liquid fuel that is physically *and* economically accessible to us, given limited capital, limited capital equipment and experienced engineers. And that the world is pushing against the limits of accessible and affordable supplies. Simply put, the era of cheap and plentifully available light, sweet crude oil is over (as well as high-quality coal, metals, and other natural resources). (Of course, the world will not physically run out of oil. But as Sheik Zaki Yamani famously said, ‘’The Stone Age didn’t end for lack of stone, and the oil age will end long before the world runs out of oil.’’) And if you don’t believe Chris or I on this, you might want to believe Jeremy Grantham (see https://www.businessinsider.com/heres-why-the-days-of-abundant-resources-and-falling-prices-are-over-2011-4?op=1)

• However, I am not a ‘peaker’ (in the pejorative sense of the word), nor am I a climate change activist. I am a capitalist and a technologist. I am not building a bunker, storing decades worth of water, chlorine tablets, energy bars and 50-caliber rounds (although in my darker days I sometimes wonder if I should). I do not argue that we should do things because they are moral and right and will save the planet, no matter what the (financial) cost. I believe there are and will be many technology breakthroughs that many in the peak oil world don’t know about, and discount out of hand (just as many in the traditional energy world discount peakers out of hand). The world’s smartest scientists, engineers, entrepreneurs and venture capitalists are working on solutions that I believe will meaningfully change our current trajectory - and will also be a major source of wealth creation for savvy investors. The only problem with basing one’s arguments on potential future technology breakthroughs is that nobody knows they will happen before they happen! (20 years ago, on the cusp of the first Internet decade, nobody could have predicted the multiple technology breakthroughs that fundamentally improved business productivity that yielded a significant increase in economic development rates, globally.)

• I have been in the cleantech/energy business now for over 5 years. My first job in cleantech was through my friend John Balbach (now Managing Director at Cleanpath Ventures (www.cleanpath.com), a leading downstream solar developer in the US), who hired me as Head of Research for the Cleantech Group, a boutique research, consulting and events firm (www.cleantech.com). I don’t know if I was necessarily qualified for that job, but the person they had hired didn’t work out, and I had the ability to blithely toss around terms like ‘crack spread’ and ‘Rankine cycle’ in the same sentence as ‘bond convexity,’ ‘TED spread’ and ‘Socolow wedges’ that convinced (the right) people to let me try. There I learned about the hundreds of investments by venture capital firms in exciting new cleantech startups in renewable energy, energy storage, water, electric vehicles, building materials, software, lighting, etc.

• I currently work at Masdar (Abu Dhabi Future Energy Company), which is the multi-billion dollar cleantech and renewable energy initiative of the emirate of Abu Dhabi. Masdar is most famous for Masdar City, an eco/sustainable city development designed by architect Lord Norman Foster. Masdar is also active in downstream solar and wind projects (CSP, PV and onshore/offshore wind), various CCS projects globally, has two cleantech VC funds, as well as a graduate research university, Masdar Institute. I work on technology strategy and roadmaps, negotiate technology partnership deals and manage technology implementations in smart grid/smart buildings, renewable energy, electric transportation, cooling, lighting, energy management software and systems, and sustainable materials. Our partners tend to be large companies such as Siemens, Mitsubishi, Schneider Electric, etc. as well as the occasional startup like C3. (For more about Masdar, just check Google, Youtube, or Masdar’s website at www.masdar.ae).

OK, that’s it for now.

I look forward to seeing you again soon.

Brian