San Jose, Calif. -- In an oil-addicted society concerned about its environment, entrepreneurs and investors are polishing up clean technologies like solar energy, fuel cells and batteries, looking for new ways to generate electricity and power everything from cars to cell phones. However, contentious government policies and slow- moving technologies dull the shine of this emerging sector.
Front and center in the fight is an initiative on November's ballot in California, where Proposition 87 would levy a fee on petroleum to help fund alternative energy technologies.
"This is probably going to be the most expensive race in the country this year," said Vinod Khosla, one of Silicon Valley's best-known venture capitalists, speaking at the Emerging Ventures conference here last week. He estimated oil companies have already spent $67 million attacking the measure and could spend $80 million to $100 million before the November vote.
A little more than half the Proposition 87 fees would be applied to lowering oil consumption and 30 percent to university R&D. "Clean tech R&D has been declining in this country for 30 years," he said. "We absolutely need to have more R&D in this area."
On a separate front, the government could give a huge push for solar energy if it mandated real-time pricing for electricity, said Barney Rush, chief executive for H2Gen Innovations (Alexandria, Va.), a startup developing hydrogen generation equipment for utilities. Such pricing would show consumers they could save money by using solar instead of utility power at home during afternoon hours when utility demand peaks, Rush said.
Such situations have made legislation a major focus for green tech investors and entrepreneurs, said Bill Joy, former chief scientist of Sun Microsystems turned venture capitalist at Kleiner Perkins Caufield and Byers.
"We hosted a gathering of green-tech innovators to brainstorm, and everyone wanted to go to the policy meeting," said Joy, speaking at the conference. "It's not that the situation is anti-innovation; it's pro-stagnation. It's focusing on the incumbents because it's trying to divide the spoils. We really need to level the field."
Bill Reinert, manager of the advanced technologies group at Toyota's U.S. division and one of the engineers behind the Prius, agreed. He said he butted heads with shifting government mandates earlier in his career while working on Toyota's electric cars, pulled from the market in 1993, and, before that, in the solar industry, which was supported by President Jimmy Carter.
"When [President Ronald] Reagan came in and took out the solar subsidies everything imploded. Within two years, that industry was gone," said Reinert.
"Right now we are using 85 million barrels of oil a day, and by 2020 people expect we will use 125 million. I haven't seen anyone who can show me where this comes from," said Reinert. "We are going to need more than hybrid cars and conservation. We are going to need new fuels and new policies," he said.
Rising interest
"When oil went above $40 a barrel, a host of things became viable," said Khosla, whose Khosla Ventures (Menlo Park, Calif.) has invested in at least seven startups pursuing a variety of alternative fuels.
Khosla is perhaps the most high-profile of many investors increasingly drawn to this small but growing sector. Alternative energy attracted $365 million across 25 deals in the first half of 2006, a record for the sector, said Jessica Canning, a senior research manager with market watcher VentureOne.
"Very big funding deals [in clean tech] are getting done that never make the stats. People are keeping these deals dark because the development cycles are so long," said Erik Straser, general partner at Mohr Davidow Ventures (Menlo Park). Mohr has announced only four of its nine recent deals, he added.
The sheer size of the energy markets is attracting top entrepreneurs, conference panelists said. "I'm not trying to convince people to use electricity or put gas in their cars, we just want to resegment an existing market, and these markets are measured in trillions of dollars," said Straser.
"The most promising thing about clean tech is the entrepreneurs are moving there," Straser said. "Today in the Valley we see a tremendous amount of [career] flexibility." In particular, people in IT say they don't want to be there, he added.
Batteries, cells and solar
Battery technology is one of several investment plays heating up. "The storage of energy is very inefficient, and there are huge opportunities in that area," said Brook Byers, a partner at Kleiner Perkins.
"I have looked at more than 20 battery companies, though we haven't invested in any yet," said Khosla. "If the right battery comes along, the automotive industry will shift dramatically."
Reinert said Toyota is working both with partners and internally on lithium-ion batteries to address tough issues such as large swings in charge voltages and end-of-life disposal.
"All these startups may have better lithium ion than we do, but we are the ones who have to get the lawsuits, provide a 10-year warranty on a car and talk to first responders about how they cut open a car with a lithium-ion battery when it rolls over in a ditch," Reinert said.
In addition, today's fuel cells need longer membrane life, reduced dependency on bulky hydrogen and air compressors, better water management systems and lower-cost materials, he added.
Nevertheless, novel batteries may ride alongside fuel cells in future hybrid vehicles. "We're making good progress on fuel cell stacks in terms of use in cold weather and durability, and we'll get an order of magnitude improvements in cost from new materials and new manufacturing processes," he said.
"I think you will see a combination of batteries and fuel cells in the [cars of the] future but it is quite a ways in the future," Reinert said. "I don't think you will see cars [using fuel cells] by 2010. The real deal is more like 2015-2020," he added.
Franklin Fuel Cells hopes to be one of the providers to tomorrow's hybrid cars. The startup uses copper rather than nickel in its anode and unique catalyst materials that let the cell use as many as 16 different fuels. The company's technology was developed at the University of Pennsylvania. Its fourth-generation prototypes supply energy density of 500 milliwatts/cm2 on average, but won't be ready for integration in cars until about 2015, said chief executive John Law.
"This space doesn't move very rapidly, and it is conservative about new technologies. It's a show-me sector," said Law.
Indeed, "the time period [for maturity in the alternative energy sector overall] is probably the next 20 to 30 years," said Dan Nova, a general partner with Highland Capital Partners.
Another fuel cell company, Enerage Inc. (Arcadia, Calif.), is developing components for low-cost disposable fuel cells that could power cell phones. The startup is in pilot production of a high- temperature membrane and is showing prototypes of a single-chamber cell that can be made in a one-step extrusion process.
Here comes the sun
At the opposite end of the spectrum, investors like Khosla see big opportunities for utility plants powered by thermal solar technology.
"I now believe that thermal solar will be cheaper than coal-fired electricity plants. It is far more risky to build a coal-fired plant than a solar thermal one today," said Khosla.
Green Volts (Berkeley, Calif.) is one of many companies trying to address that market using a novel design for solar panels that could generate up to 20 megawatts. The startup's technology uses high-end solar cells with optics that provide a 625x concentration of sunlight on panels that are relatively lightweight and thus inexpensive to install.
Utilities represent an opportunity for solar energy that could amount to hundreds of billions of dollars, said Khosla, who delivered a keynote at a solar power conference in San Jose that attracted an estimated 7,000 attendees last week. Photovoltaic cells that power solar panels have made significant advances with thin film, multijunction technology, he added.
Although many developers are pursuing the low-cost solar cells, Khosla said, "that's exactly the wrong way to go.
"Solar systems would still cost $2 kilowatt/hour if the cell cost went to zero. What we need are higher-efficiency cells. We should be saying we will accept higher costs to get 30 percent efficient cells," he said.
Straser of Mohr Davidow disagreed. "We are trying to move photovoltaic cells from the economies of the semiconductor industry to the printing business," he said. "We want to make it more like printing the New York Times than building the next Intel fab."
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