Business Week, Pete Engardio and Adam Aston
Like many eco-conscious homeowners, Darin Budwig and his wife had long wanted to put solar panels on their roof in suburban Glendale, Calif. What stopped them was the high price. "I wanted to do the right thing for the environment," says Budwig, a registered nurse, "but I really had to ask whether it was worth taking on $30,000 in debt."
Enter SolarCity. After the Budwigs put $1,000 down, the three-year-old startup installed panels on their modest ranch home that meet almost all the family's electricity needs. SolarCity also took care of the many complexities that make going solar such a hassle. The company designed and purchased the system and lined up building permits, financing, and government tax breaks. In return, the Budwigs agreed to lease the system for 15 years at $73 a month—$95 a month less than they pay, on average, for conventional power. They expect to recoup their $1,000 investment in less than a year. Since 2006, SolarCity says, it has struck similar deals with 3,500 homeowners, businesses, and schools in California, Arizona, and Oregon. The goal, says CEO Lyndon Rive, is "to create a multibillion-dollar company in clean power."
Say "energy company" to most people, and they'll probably think of an oil giant such as ExxonMobil (XOM)or their local utility. But, in a burst of innovation that could rival the info-tech revolution, global demand for alternative energy is spawning a broad and bewildering array of tiny companies with big ambitions. Many are now hitting the market with products and services—in the thick of the worst U.S. recession in decades.
To help readers get a handle on this fast-changing scene, BusinessWeek teamed up with GreenBiz.com, a green business information service. We don't promise any will blossom into the next Google (GOOG) or Cisco Systems (CSCO). And because they are private, there are no public data on cash flow or profits. But innovators on the list have the brainpower, intellectual property, and ambition to play a role in the coming energy revolution. Since the focus here is strictly under-the-radar, we have excluded famous green startups such as battery maker A123 and electric-car ventures Tesla Motors and Better Place. But like those well-publicized players, all the ones on this list have lined up significant venture backing. "These are companies that, so far, have survived the gauntlet of fund-raising, R&D, and the economic downturn," explains Joel Makower, executive editor of GreenBiz.com, a unit of Greener World Media.
Some of the outfits, such as Southwest Windpower, Solyndra, and Clean Current Power Systems, are chipping away at the technological obstacles that have made alternative energy systems—wind, solar, and hydro power—too costly. Others, such as SolarCity, are reinventing the business model behind alternative power. Still others, including SmartSynch, Verdiem, and Fat Spaniel Technologies, are harnessing the Internet to help utilities remotely manage the energy consumption of their customers' PCs, office air conditioners, and factory lights. In addition, we've identified a handful of companies selling gizmos and services that help slash power usage, from Bridgelux—which makes low-cost solid-state lighting—to GridPoint, whose smart grid software can track and control electrical devices in your home, from appliances to electric cars and solar panels.
For the founders of these startups, the usual path to personal wealth—an initial public offering—is blocked for now. But some will make their fortunes when large companies swallow the small. And although there is enormous risk, there also will be new ways for ordinary investors to profit in this sector when capital markets finally thaw out.
A BOOST FROM THE FEDS
Even in a terrible business climate, several factors are bolstering the fortunes of cleantech companies that were up and running before the financial crisis hit. The $787 billion federal stimulus bill makes billions in funding available for everything from lithium-ion car batteries to green construction. And new federal and state tax incentives make the price of solar and wind power more competitive with fossil fuels. If passed, the carbon emissions trading system approved by the House of Representatives would increase pressure on both businesses and households to use any means they can to conserve energy or switch to cleaner fuels. Then there's the price of oil. For all the volatility, it's bound to rise again when global growth resumes and emerging economies kick back into high gear, says GreenBiz's Makower. (Disclosure: Makower is an adviser to VantagePoint Venture Partners and has a small financial interest in the firm. VantagePoint has investments in five companies on the list: Bridgelux, BrightSource Energy, MiaSolé, Solazyme, and Tendril.)
As the roster of 25 startups shows, advanced green technologies are finally graduating from the lab and taking root commercially. AltaRock Energy of Sausalito, Calif., is building its first U.S. power plant in Northern California, tapping geothermal heat in "basement rock" deep in the ground to boil water in artificial reservoirs. And Coulomb Technologies in Campbell, Calif., is on track to install more than 1,000 curbside recharging stations for electric cars across the U.S. this year, up from just 100 last year.
MAKING IT SIMPLE
Several startups say they are close to price parity with carbon-based fuels. One common benchmark is to produce electricity at around 10 cents per kilowatt hour. That would still be about 40% pricier than power from coal plants, but it's on a par with the gas-fired plants utilities rely on during peak times. "If you can make power that can compete with a gas-fired plant, you can have a huge market," says Joseph Laia, CEO of Santa Clara's (Calif.) MiaSolé, which is marketing solar panels made from low-cost, flexible materials.
As some innovators grapple with technology challenges, others are focusing on making clean energy systems easier for ordinary people to use. "The real innovation now won't be in making a better panel that is 10% cheaper," says SolarCity CEO Lyndon Rive, who co-founded the company with his brother Peter. "Widespread adoption will come if you can take away the complexity and hassle of installing solar."
SolarCity's chief asset is computer automation. Working with satellite images of customer rooftops and utility-rate data, it cuts the process of designing each installation and obtaining building permits and government rebates from months to days. The software also estimates the return on solar investments for each customer and remotely monitors their use of power. The company says it makes a profit on the installations. SolarCity's advantage: It gets a volume discount on the panels, and its software tools help streamline costs.
Another startup, BioFuelBox of San Jose, also is betting on an innovative business model. It collects waste from facilities such as meatpacking plants and sewage processors, converts it to biodiesel, and then sells the fuel. The company wasn't the first to figure out how to cook waste into useful stuff. But BioFuelBox realized the true value lay not in selling disposal systems to customers but in saving them money by taking their refuse for free. So it developed compact refineries that can be loaded onto flatbed trucks and sent to waste sites. Even if the government eliminates subsidies for biodiesel, the company says it can profitably sell its fuel for the same price truckers pay for oil-based diesel. Its first refinery is in Idaho, converting waste from potato processing plants. Given that the world produces 12 billion gallons a year of suitable waste that can be turned into diesel, CEO Steven Perricone hopes to "run a large network of microrefineries worldwide in three or five years."
Executives such as Perricone, a veteran of three previous Silicon Valley startups, know cynics have good reason to doubt bullish claims. In the past decade alone, investors have been burned by the hype over dot-coms and biotech. Many more will surely lose bets on green energy. But Perricone says he is being careful not to oversell the technology before the first commercial projects have been tested in the field. "Many of us remember the wild claims of the Internet," Perricone says. "There are terrific opportunities in this industry for those who execute, but before we go for more funding, we want the data to prove our technology works."
For now, many executives at the 25 startups say their chief worry is the broader economy. With venture funds tapped out, raising capital to develop products or simply keep operating can be tough. Bank financing to build power projects or ramp up production remains frozen, too. The sharp drop in oil prices from $147 per barrel last summer has also cooled enthusiasm for renewables. Numerous companies with promising technology already have gone dark for lack of funds. More will shut if the downturn persists.
The funding drought is especially frustrating for startups that struggled to overcome technical challenges. In 2007, Verdant Power installed prototype turbines to generate electricity from currents in New York's East River. But the river was more turbulent than Verdant expected, and the fiberglass turbine blades fractured. A new design with stronger blades made of an aluminum-magnesium alloy has generated power for the past year. Now Verdant is ready to install 30 more near U.N. headquarters. The recession "slowed us down," says Verdant President Trey Taylor. "We could do a lot more a lot faster if we had more money."
It is always risky to predict the fate of tiny startups in a fast-changing industry. That is true for all 25 companies on the BusinessWeek/GreenBiz list. But together they showcase both the potential breakthroughs and business models needed to make green energy viable.
With John Carey
To learn more about clean energy from GreenBiz.com, visit http://www.greenbiz.com/bw
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