SURVEY: BUSINESS AND CLIMATE CHANGE
Fairfield v the valley
May 31st 2007
From The Economist print edition
Two competing models for the clean-energy business
TWO men represent two very different models of the clean-energy business. One is Vinod Khosla, chief executive of Khosla Ventures, a company headquartered in Menlo Park, California, which employs ten people. The other is Jeff Immelt, chief executive of GE, a company headquartered in Fairfield, Connecticut, which employs 300,000 people.
Mr Khosla, formerly of Sun Microsystems and Kleiner Perkins Caufield & Byers, the venture-capital firm that launched many of the big names of the internet boom, is now the most visible venture capitalist in the clean-energy business. There is plenty of competition. Silicon Valley is piling into the business. John Doerr, the valley's best-known venture capitalist and one of Mr Khosla's former partners at Kleiner Perkins, also invests in clean-energy start-ups, sometimes alongside Mr Khosla. Larry Page and Sergey Brin, the founders of Google, have invested in Nanosolar, a company using solar thin-film technology. Microsoft's Bill Gates has invested in Pacific Ethanol, a company building bio-refineries in California.
The VCs who used this model to transform the computer business reckon that they can do the same for the energy business. “The investments we're making are like those we made in the internet,” says Mr Doerr. “They're based on technological and scientific innovation, they're driven by entrepreneurs, and they're distributed, in the way that the internet was distributed.” The VCs also reckon that they can topple incumbents, as they did in the information and communications business. “Look at voice telephony,” says Mr Khosla. “These days, it's basically free. Ten years ago, people told me that would never happen. AT&T believed that—and look what happened to them.”
At the other end of the scale is Mr Immelt. “When I was looking at the growth potential of our businesses three years ago,” he says, “I saw an emphasis on clean energy and energy efficiency, on scarcity and the rise of regulatory pressure. And I thought—we've got something here.” And so he developed the theme, making GE the big company best known for espousing greenness. “Green is green” has become a company mantra. And GE was among the ten companies that launched the United States Climate Action Partnership.
The vehicle that Mr Immelt settled on for promoting green products was Ecomagination. This brings together products from GE's different businesses that are either intrinsically green—like wind turbines—or have been certified as being more competitive and producing fewer emissions than whatever else of that sort is on the market. Not all GE's products get through. The GEnx aero engine, which powers Boeing 747s and 787s, did, but the new-generation CFM engine for narrow-bodied jets did not, because its emission levels are no lower than the competition's. Ecomagination's sales have been rising slightly faster than GE's, by 12% a year rather than 9%. Its energy products have been rattling along.
Immelt thinks big
To a large extent, Ecomagination is a marketing device. GE was selling all those aero and power-generation engines long before Ecomagination was invented, and “fuel efficiency has always been the number one criterion for airline-engine economics,” says Tom Brisken, general manager of the GEnx programme. But Mr Immelt has also made sizeable clean-energy investments. He bought Enron's wind-turbine business out of bankruptcy for $358m. Sales rose from $200m in 2002 to around $4 billion last year. His purchase of Chevron's integrated gasification combined-cycle technology—a potentially cleaner but costlier coal-burning technology for power stations—has still to prove itself, because GE has not yet sold a plant.
GE's enthusiasm for greenery is informing its R&D effort. The company is, for instance, looking at radical ways of making aero engines cleaner. “Suppose we used a totally different fuel. Suppose we used a bio-derived fuel.” says Sanjay Correa, GE's global technology leader for energy and propulsion. Biofuels are widely believed to be out of the question for aero engines because they are less energy-intensive, so more is needed to travel the same distance. But Mr Correa points out that aeroplanes these days have such a long range that they can cross the Atlantic with their tanks only one-third full. “We've done tests. We've studied this pretty hard. It works.”
So who is best placed to win in the clean-energy stakes: the VC who helped transform the computer business or the chief executive of one of the great incumbents? The VCs point out that the energy business is becoming more friendly to small companies. Electricity generation is becoming more distributed as wind farms and solar panels feed into grids. Ethanol can be produced in backyard plants.
True; but that is happening at the margin. The big companies still dominate. According to Michael Liebreich of New Energy Finance, only around $2 billion of the $71 billion that went into the clean-energy investment last year was VC money.
The VC model is an excellent way of generating innovation, and fine for the early stages of clean-energy companies, but ultimately does not suit the energy business as well as it suits computing. Moving molecules around takes far more capital investment than moving bits of information around. Shipping fuel from refineries to petrol stations and running electricity grids are operations best done at scale; and the energy business's hunger for capital ensures a measure of protection for incumbents. Mr Khosla may very well produce some exciting new technologies and thus generate some valuable intellectual property; but it is Mr Immelt who will exploit them.