Why Can’t Efficiency Catch a Break?

In top-10 lists of things to do in cleantech, energy efficiency always seems to rank at number 11, says Matthew Wald, an energy reporter at The New York Times.

“I’m not sure it’s a financing problem,” Wald said during a recent panel discussion on efficiency at the ARPA-E conference in Washington, D.C. “And I’m not sure it’s a tech problem. So what do we need to do?”

One possible solution is for venture capitalists to do a better job identifying risks and opportunities in the efficiency space, said panelist Steve Vassallo, general partner of Foundation Capital. Foundation has $2.5 billion under management, about 15 percent of which is invested in efficiency-focused companies, Vassallo said. His team has focused on long-term bets with just “13 or 14” companies, investing early in firms including the energy efficiency company EnerNOC, smart meter manufacturer eMeter, data analytics company AutoGrid and Silver Spring Networks, the smart grid company whose successful IPO last week raised $81 million.

From Vassallo’s perspective, all of these investments had common characteristics. They were capital efficient and quick to market. More importantly, each was propelled by strong financials.

“What you’ll see is we took a different approach,” Vassallo said. “We focused on… the ability to be economical without subsidies, or the subsidies are a bonus rather than a requirement.”

From the beginning, Foundation’s strategy was to focus on companies that could become large and mainstream. For investors in companies whose business models depend on deep commitment to environmental issues, “I think you’re going to be relegated to these small markets,” said Vassallo. “You have to have same or better performance, same or better price, and you happen to be green.”

Another piece of advice from the panelists: The easiest way to succeed in energy efficiency is by investing in things that people can touch and see. One obvious example is the smart thermostat developed by Nest Labs. The company has been shipping its device for 14 months “and we’ve surpassed all of our original first-year estimates” for sales, said panelist Andy Baynes, Nest’s director of business development.

The device’s digital screen displays a green leaf when homeowners reduce their home temperatures below their pre-programmed settings. That has caused a viral game on Facebook and Twitter among users trying to rack up the most leaves, Baynes said.

“People call it ‘Chasing Leaves,’” said Baynes. “It’s become very competitive.”

Another tangible efficiency arena is lighting. Employees in buildings with motion sensors controlling lights sometimes complain to building managers when the lights switch off 15 seconds after they leave their offices instead of 10, says Rich Green, senior vice president of products and technology at Enlightened, a California-based company that manufactures such sensors.

“Most efficiency technologies don’t have a visceral component. You don’t see when they’re working,” Green said during the panel. But with lighting, “they’re paying attention to it.”

Another key to success at Nest and Enlightened: Making products that are repeatable. Enlightened’s sensors work with all major commercial light designs, Green said. Nest’s thermostat is compatible with 95 percent of residential HVAC systems.

“The ceiling is very high,” Baynes said.

The other challenge for efficiency technology companies can be the high cost of customer acquisition. Besides their thermostat needs, most homes are widely divergent in everything from windows to insulation and heating systems, said Claire Broido Johnson, chief of new markets at Next Step Living, a Massachusetts-based residential efficiency company. That makes it difficult to efficiently target potential customers.

To figure out whom to target, Next Step Living recently hired some former Obama campaign staffers.

“It’s like a campaign. It’s getting in at the grassroots and being very efficient,” Broido Johnson said.

Customer acquisition can be difficult for efficiency companies on the commercial side, too. As a small, young company, Enlightened is finding it difficult to move at the glacial pace of large utilities.

“It is heavy lifting to deal with these utility companies,” he said. “It’s brutal. It’s incredibly complex.”

The flipside is the enormous opportunity, Vassallo said. A large percentage of utilities’ capital spend and infrastructure is dedicated to meeting peak demand on the hottest summer days and the coldest winter conditions. They would much rather meet those peaks by installing relatively cheap efficiency controls than by spending $100 million on a new power plant, said Vassallo.

Even more opportunity lies in a small policy tweak, he said. Boosting utilities’ return on investment on efficiency projects by even as little as two basis points “would solve many of these scaling issues that we as an industry continue to suffer,” Vassallo said. “Let’s help utilities make better decisions by creating incentives that align them with deployment of efficiency.”

Panelists hit on two other points of good news. First, once a company successfully enters a major market, the door often swings wide open. Enlightened hopes to complete deals in the second half of 2013 with companies that use as much 6 million square feet of commercial space. Once they complete a sale to one division of such a behemoth, the rest come more easily.

“These are A-category wins that will really help to increase sales,” Green said.

Finally, the fact that adoption of efficiency technologies has remained slow means that plenty of virgin markets still exist for exploration.

“I’ll run into companies that are only focused on dairy, or anther narrow industry, and yet those are very large markets,” said Vassallo. “I’m always stunned to discover some very large niche in energy efficiency.”



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