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W. Marc Bernsau
Wednesday, January 20, 2010
Q&A
Rockport Capital's McDermott: Cleantech driven by fed funds, corporate initiatives
New England prepared to leverage smart grid expertise
Following the Clean Energy Council Fellows
MHT's Jackie Noblett: Fuel cell cutbacks may be good for companies
Boston-based RockPort Capital Partners is a venture capital firm focused on cleantech. One of the firm’s general partners, Charles J. “Chuck” McDermott has been in the cleantech space for more than 20 years and has investments in companies such as Advanced Electron Beams Inc., Project FROG and Renaissance Lighting. He shared his thoughts on the direction of cleantech with Mass High Tech managing editor James M. Connolly.
Q: In terms of cleantech, what did we learn from this economic mess?
A: We learned that the macro drivers for cleantech remain very powerful, not the least of which is that we now have a global population of 6.8 billion people, billions of which are becoming energy consumers for the first time. So in terms of just the global provision under a sustainable framework of energy, water, food, all of those basics, the drivers remain strong from that perspective. A lot of the policy vectors in Europe, China and the United States are helping to create markets for the kind of companies that cleantech investors invest in — mainly renewables.
Corporate behavior, absent regulatory dictates, has been unprecedented in the last four or five years. The oft-cited examples of Wal-Mart, Coca-Cola and some others, their commercial and environmental footprints are sufficiently large that when they make decisions about reduction in packaging and the efficiency of the buildings that they use and things like this, it moves the needle. So corporate America has been very important in creating demand for cleantech.
Q: Is that finance-based — are the bills just too big?
A: Wal-Mart would say it is some of both. They have a responsibility to try to be sustainable stewards of the environment. They also will tell you that if by putting a requirement on their supply chain to, for example, reduce packaging of a product by 30 percent and that knocks $2 off the cost of a product, they can reduce the price of the product by a dollar, and that’s another dollar that the Wal-Mart customer can spend in Wal-Mart on another product. I think they see it as a classic doing well by doing good opportunity for Wal-Mart. And it’s an important branding feature for a lot of companies. Put on “Meet the Press” on Sunday and all the advertisers are the oil companies. They are all trying to out-green each other in their advertising.
One other thing in 2009 that we are going to feel the effects of much more in 2010 and 2011 is the portion of the stimulus that went toward energy. Those dollars are just hitting the street.
Q: It seems like maybe 10 percent of the Department of Energy recovery money has been drawn. Is that right?
A: Ninety percent of it has been committed, so the draw is when you start pouring concrete for the solar plant, and that’s what’s starting to happen now.
Q: Do you think the public understands that?
A: No, I think DOE is getting a terribly bad rap from Republicans in Congress and everyone else. We’re at the point in time where you don’t see the effect of it yet, so it’s easy to say nothing happened.
Q: Is the new consciousness of energy a blip or is it real for the consumer?
A: It’s a little of both. I think there is an increasing awareness among consumers that different products have different environmental footprints and that they do use their buying power at times to vote in favor of the more environmentally designed products. That being said, I think we have had a real-time case study with gasoline prices in the last 18 months. People speculated that when gas hit $2 a gallon it would that really have a consumer impact. We blew right through that, nobody cared. Was $3 the magic number? We blew through $3 and behavior didn’t change. When we hit $4 we learned that that was the number. At $4, it was 85 bucks to fill up your pickup truck. You have sticker shock over that.
When the price fell, we’ve already seen, let’s call it a relapse in this consumption binge when it comes to our vehicles and gasoline. So, clearly price is the most effective determinant in behavior. So how do you build price into this? That’s when you get into some very treacherous political territory. … The politics of a $2 a gallon gas tax is insurmountable. We just don’t have the will to do it.
Q: Instead of the stick, is it the carrot that we need?
A: Carrots help. What have we learned from Europe? We’ve learned in the solar world that feed-in tarrifs can be very effective, whereas we did a lot of capacity-based rebates here in the U.S. If you put 2 kilowatts of solar on your home, we will give you a rebate of X many dollars per kilowatt of installed capacity. That doesn’t take into account how many kilowatt hours of electricity those panels are really generating and offsetting from the grid. The feed-in tariff pays you on the per-kilowatt basis — per electron, if you will. That has been very effective in creating demand for solar. I think there is a greater consciousness now at the state and federal level that a feed-in tariff is preferable to a capacity-based rebate program on solar and wind.
Q: What’s one technology that we are talking about that isn’t going to work?
A: We have not made a single biofuels investment at Rockport, mostly because we cannot find the right combination of a technology that really had a net positive energy balance, that had feedstocks that were abundant and didn’t compete with the food stream, and that had management teams that we could have real confidence in. We never found that combination.
For corn-based ethanol you use more energy to make a unit of ethanol energy than you get out of it. That doesn’t make sense from an energy perspective.
Q: What’s hot, in terms of technology?
A: I think everybody is looking at the world of battery technologies and waiting for the next breakthrough. Energy storage is the chokepoint for the large-scale deployment of renewables. Wind, especially, tends to blow when you don’t need the power. For the management of the smart grid, as we’ve all be talking about, even if you are generating solar power at 11 a.m. but you really need it at 4 p.m., when everyone is turning on their air conditioners on a hot day in July, you need to store it somewhere. On the vehicle side, the battery is the chokepoint today. So I think everyone is keen for a breakthrough on those types of things.
Q: Was the ARRA investment sufficient for batteries?
A: Probably not, but you don’t have unlimited resources. This is just a personal opinion, there is some disappointment in the venture community that so much of the battery money went to the big guys, as opposed to some of the younger, innovative companies. But I think it’s a reality, that the federal government felt that they had to intervene to save the U.S. auto industry from collapse.
Q: Where are other opportunities?
A: It’s not high-tech, but there’s a whole lot that can be done in the built environment. Sixty percent of the energy we use goes to build, heat, cool and light our buildings. There’s a lot of opportunity to go back and reduce the energy load of existing buildings. We’ve been investing in energy efficiency proactively.
Q: What will it take to do the retrofit on existing structures?
A: There is a part of the stimulus bill; there’s $10 billion — $5 billion for low income housing weatherization, $5 billion for federal building energy efficiency retrofit work. Remember that the stimulus bill was a job creation bill. A lot of that was to get guys with hardhats and toolbelts who aren’t building houses out doing something productive that has a payback to it.
Q: You guys are invested in Advanced Electron Beams and industrial energy efficiency. What type of opportunity is there for investors or entrepreneurs?
A: Industrial energy efficiency is one of the sleeping giants on the clean tech landscape. It’s motors and pumps and pneumatic presses, all of that. There’s drying that uses a lot of heat. There’s sterilization. It takes a lot of energy to boil water, and you lose water. So there are tremendous opportunities for cash savings, preservation of ever scarcer resources like water. The challenge is that you are going into an industrial environment that is geared toward a 365 day/year, 24/7 production cycle with a 95 percent uptime, and that 5 percent downtime is scheduled maintenance. That’s how these plants want to run. Oftentimes your customer is the guy whose job it is to keep that line running 95 percent of the time, and he’s not incentivized to do something out of the ordinary. So the sales cycle, and finding the right point of entry in a corporation so that you are delivering the value proposition to the right audience, is somewhat tough.
Q: What are you looking for in 2010?
A: We’re looking for some liquidity to return to the venture capital marketplace; IPO activity and M&A activity. There are some hopeful signs on that. It would be helpful to see the availability of credit and debt financing return to the economy. One of the stories of ‘09 was that there were, for instance, many wind and solar projects permitted, the equipment was ready to go and then the debt financing and tax equity financing dried up overnight, even from the banks that got the TARP money because they wanted to keep it on their books through the next audit so they could look healthy.
That really caused a backup at the utility-scale projects for renewables. Then you feel it all the way through the food chain.
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