Directing Clean-Energy Investment in Massachusetts: An Xconomy Debate

8/13/07Follow @wroush

In a survey publicized last week, the non-profit Massachusetts Technology Collaborative (MTC) confirmed what most local energy entrepreneurs and investors have been saying for months—that there’s a remarkable upswing underway in clean-energy activity in the state, at least judging from the number of new companies sprouting up and the number of people these companies are hiring. Some 14,400 people are employed in the clean-energy sector, making it the state’s 11th-largest industry, and executives expect to increase their staffs by another 20 percent over the next year, the census found.

What could be bad about that? There’s a crying need, after all, for technologies that will meet rising energy needs without releasing a concomitant amount of carbon dioxide and other greenhouse gases into the atmosphere. And Massachusetts, with its universities, its financial industry, and its relatively innovation-friendly regulatory environment, is a natural place for entrepreneurs to explore these technologies.

But in a debate clattering through our own Xconomist forum—sparked by a strongly worded column called “What’s Wrong With Energy Investing”—some observers are wondering whether too much of the regional energy cluster’s growth is devoted to the development of alternative and renewable energy sources, rather than to the more practical and perhaps more pressing effort to make the existing hydrocarbon-based energy economy more efficient and less polluting. The MTC survey revealed that there are more companies, agencies, and research centers focused on renewable energy than on energy efficiency (209 vs. 152) and that hiring is expected to grow at a 30% clip in the renewable-energy sector, in contrast to 25% in the energy-efficiency sector.

Those figures seem to substantiate the concern expressed by the column’s author, Xconomist Bill Aulet, that the state’s brainpower and capital is going disproportionately toward risky, potentially marginal alternative-energy projects. As Aulet, who is preparing to teach a class on energy entrepreneurship at MIT, wrote:

“Renewable or alternative energy is a fantastic thing and it is necessary, but wholly insufficient, to deal with the energy problem. The biggest part of the energy riddle that needs to be solved resides—and will continue to reside for the next 50 years—with the hydrocarbon side. How do we find more to meet the booming demand? And, how do we find ways, through technology, process, and/or business-model innovation, to reduce the environmental impact of hydrocarbon usage? Renewables is a rounding error when compared to the 80 to 90 percent of the demand that hydrocarbons (i.e., oil, gas, coal—ah!, there it is the four-letter word of energy) fill and will continue to fill for the foreseeable future.”

Aulet’s post provoked some energetic commentary. Some respondents acknowledged the point (“This is just math—a small improvement across a huge industry will have a much greater impact than a large increase in a very small industry”). Others called Aulet shortsighted about the danger of global warming (“I don’t know what you intend to teach in your MIT class, but given what I have just read, I am not sure why anyone other than oil execs would take it”).

We reconnected with Aulet and surveyed several other observers to drill further into the debate. Is the renewable-energy sector growing too fast for its own good, creating the possibility of a burst bubble and a backlash of disappointment? Are there really enough good renewable-energy ideas to go around, or should energy investors in New England be looking harder at technologies that improve the efficiency of existing fossil-fuel-based energy generation?

The MTC survey does seem to indicate an imbalance, says Rob Day, a partner at @Ventures, the venture capital wing of technology conglomerate CMGI. “We are actually very interested in energy efficiency—it’s been a critical area of investigation for us as investors, because we know the best and cleanest way to make a kilowatt-hour is not to use one in the first place,” Day says. “But the research, the hiring, and things like that follow the money, and for whatever reason, a lot of the efforts haven’t been targeted on energy efficiency as much as on doing incumbent technologies in incumbent ways or on breakthrough technologies. [Efficiency] hasn’t been looked at as thoroughly as other areas.”

That’s not surprising, given that “the business models and potential upside for renewables is sexier and more straightforward, albeit more risky” than for alternatives such as reducing energy consumption or burning greener materials for electricity, says Jim Matheson, general partner at Flagship Ventures.

Aulet, for his part, says he isn’t trying to argue that developing renewable energy sources is a waste of money. “It’s part of the solution,” Aulet told me. “But there is an overreaction to it. Too much of the money is chasing a small pie. People are going to wake up, and the question is, are these renewable-energy jobs going to be sustainable?”

The smartest investors may be hedging their bets. Flagship, for example, has invested in alternative-energy startups such as Mascoma and LS9, which are both developing biofuel technologies, but it’s also a backer of waste-gasification company Ze-gen, which wants to improve energy efficiency by turning part of society’s waste stream back into energy (see “Ze-gen: Waste is a Terrible Thing to Waste”). Ze-gen “truly connects the end state of consumption, waste, with the beginning of the cycle, production,” says Matheson.

The CEO of Ze-gen, Bill Davis, points out that many big investors are still pouring money into traditional oil, gas, and coal companies, and haven’t really begun investing in either improving efficiency or developing renewable resources. But that situation won’t last long, he predicts. “There’s plenty of money around, and the people that have it are pretty smart,” Davis says. “They will be investing in everything from renewable fuels to efficiency and even hydrocarbon-based technologies. Why? Some will do so because they are opportunists and this is about making money and they are agnostic to everything else. Others will do so because they have social missions and they recognize that there is no silver bullet, and we will need to do 50 things better than we are today.”

There’s little choice but to trust that free-market investment will eventually hit on the right mix of renewable-energy projects and efficiency measures, says Aulet. “It doesn’t truly worry me that there are this many jobs in the renewable energy area,” he says. “Will some companies die? Absolutely. But this is a high-growth industry, and this is a healthy thing that is going on. And we have to leave it up to free enterprise. If we give [the planning] up to the government or to Al Gore, it will be much less effective. Yes, leaving it to venture capitalists with a five- or 10-year time horizon doesn’t necessarily give you the optimal design—but what is the alternative?”

Wade Roush is Chief Correspondent and Editor At Large at Xconomy. You can subscribe to his Google Group or e-mail him at wroush@xconomy.com. Follow @wroush

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  • Bill Aulet

    Just to clarify the above quote on the “small pie” for renewables, renewables is not a small pie at all — it will be very large because it is part of such a large industry. The point is that it is a relatively small part of the overall energy pie and getting a strikingly disproportionate amount of the attention at this time for some good reasons and some bad reason. I think they over time there will be more investment in the other areas required to solve the energy challenge which is the fundamental premise of the article. Renewables is still a good place for a lot of people to be spending a good deal of time and money. For all of our sakes, hopefully it will turn out to be very successful and impactful.

  • http://mitenergyclub.blogspot.com/ Curt Fischer

    As the debate starts to percolate around the site here, I am wondering about the distinction between two concepts: energy investing and energy ventures.

    I’m no expert, but I imagine one could argue that projects to improve hydrocarbon energy usage and extraction, as well as projects toward demand reduction, would fit well inside the already-made-it big name firms. BP, Schlumberger, Toyota, electric utilities…why aren’t these kinds of companies the best to push after hydrocarbons and energy efficiency?

    If you buy into that argument, Massachusetts’ relative proliferation of renewable energy *ventures* could be explained–all the energy *investing* in the bigger slices of the energy pie would be going inside big firms. And big firms don’t seem to be where Bill or Wade are looking. (The MTC survey for example, seemed heavily skewed towards start-up activity.)

    Again, I’m no expert—I’m just looking for clarification: Is Bill arguing that there are unmet *venture* opportunities in hydrocarbons and efficiency, or that Massachusetts in underinvesting in these areas as a whole?

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