Man on a Cleantech Mission: A VC Visits the U.K. (Day Two)

6/10/08Follow @jmatheson

London: Monday, June 9th *

Day 1 started strong and stayed that way. A set of briefings and discussions at the U.K. Trade & Investment offices, a startup company pitch, coffee with Bernie Bulkin from Vantage Point Venture Partners, a trip to the House of Commons to watch their debate on the Climate Change Bill (followed by a visit to the Member’s Pub for a pint), and a reception with a variety of U.K. cleantech leaders. And this was only Monday…

I hope to get the various presentations to post here, but here are the take-aways, which are many. The day’s high-level impressions are that the U.K. faces many of the same challenges as the U.S. Or more precisely, we face their same challenges, but we face it on a much larger scale, are behind on the policy front, and do not have the same utility industry dynamics to rely completely on incentives and market mechanisms to solve our infrastructural challenges. So as much as I am surprised to say it, I am increasingly considering the need for more creative government intervention and funding to help drive some of these necessary changes.

The day started with Adam Brown, the U.K. Trade & Investment team’s Global Cleantech Sector Champion, who briefed us on the challenges and opportunities in the U.K. They need to increase renewables to 20 percent by 2020 (they are currently at 5 percent). They rely heavily on coal and gas for electricity production and are significant net importers of both (from Norway, Russia, and South America). Areas of hopeful gain are on- and off-shore wind, wave, tidal, and increasingly, nuclear energy (although this does not figure into the renewables figure). Of note, the U.K. has already deployed over 2 gigawatts of off-shore wind capacity with another 7 gigawatts in various stages of planning. All this while Cape Wind struggles to find support as the first off-shore wind deployment in the U.S. It is also notable that nuclear seems to face a much smoother path towards new deployments than in the U.S. (currently 20 percent of the capacity of U.K. electricity is from nuclear).

Next up was Nicki Pitts from National Grid, which we know well in New England but which is actually a U.K.-based company with its business and resources split evenly between the U.S. and U.K. She described the market dynamics of electricity and gas industries, and it was apparent that the U.K. has more of a free market dynamic as it relates to the production, distribution, and retailing of utilities (and there are rules prohibiting players from being in more than one segment). This puts the onus on the utilities to manage their quality and profitability, and results in choice for the consumer.

This reinforced the need for rate decoupling in New England so that electricity providers are incented to innovate in pricing and service quality and not just deliver more ‘trons to the grid. Finally, the U.K. has an interconnect with France, and soon the Netherlands. Much of their new capacity is being built out in Scotland while demand growth is in Southern England. The dynamics that this creates provides lessons for New England, where new capacity is potentially available in Maine but demand growth is in Massachusetts, and further amplifies the need to have more fungible power across regions in the U.S. That said, the operational challenges of making this work are enormous but can be solved with technology and business model innovation.

Over lunch we had a group discussion with the representatives from the Carbon Trust and the Energy Technology Institute (both quasi-governmental groups who support innovation in cleantech), investors from The Man Group, BP, Vantage Point, Impax, and Climate Change Capital, and a variety of policy and industry players including National Grid and Group Lotus (auto).

The discussion covered a lot of ground, with key topics being the challenges of funding cleantech infrastructure deployments highlighting the blurred lines between venture capital and private equity. Also, carbon trading schemes and the importance of a consistent policy among global players (opportunity #1 today for us to be embarrassed by the U.S. Senate’s recent unwillingness to engage in any meaningful debate over climate change policy). We also further discussed the private-public policy context that is facilitating a more aggressive ramp-up of alternative energy including incentives, infrastructure build out for alternative transportation modes, and deployment of modern electricity meters for commercial and residential facilities, which will enable a new set of efficiency and consumption reduction mechanisms.

After lunch the group had a series of additional discussions while I met with an interesting cleantech startup that has the potential to have a major impact on the fuel efficiency and emissions profile of fossil fuel based vehicles and power generators. As is always the case, the devil is in the details, but it allows me to evaluate how realistic it really is for U.S. investors to ponder doing early-stage deals overseas. It’s not clear at all how the very real geographical limitations of venture capital investing lines up with the global opportunity of cleantech.

The final commentary for the day is the most important, regarding our trip to Parliament, where we saw the U.K. Climate Change Bill being vigorously and eloquently debated by all parties. The current U.K. framework calls for a 60 percent reduction in greenhouse gases by 2050, but this new bill calls for a minimum reduction to 80 percent with the likely outcome being a move to complete carbon neutrality. Opportunity #2 for embarrassment came when the Labour Party spokesman described how “this bill is not just vital for the future of the U.K., but more importantly will set the stage for how the rest of the world views the U.K. as a nation.” Our entire contingent exchanged frustrated glances with each other, and the rest of the day was spent discussing how the U.S. can overcome its partisan politics and join—never mind lead—the world in embracing climate change.

MP pub

After the debate, we were hosted at the Member of Parliament Pub (oddly called “The Stranger’s Bar”), where we discussed what we had just heard and endured some polite but firm criticism from various of the MPs regarding the U.S.’s laggard status in climate change. Despite this, given the near perfect weather, a cold lager, and an amazing view of the Thames and the London Eye, it was a pleasant way to spend happy hour before we headed over to a reception where we had a chance to mingle with the day’s participants and other U.K. cleantech leaders.

Tomorrow we have a seminar at Imperial College before heading up to Cambridge in the afternoon. Time now to hit the rack and hope the time zone change has subsided.

* Jim Matheson is a general partner with Flagship Ventures in Cambridge, MA. He is part of a small Boston contingent visiting Britain this week on a clean energy fact-finding and information sharing trip organized by UK Trade & Investment. He plans to file regular updates throughout the week.

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