Alternative Energy: Surveying Seattle’s “Cleantech” Landscape

Seattle Business Monthly, April 2007
By Roddy Scheer

Three miles off-shore from Makah Bay on Washington’s Olympic Peninsula, a revolution is brewing. Although there’s nothing there yet, within a matter of months AquaEnergy, a Mercer Island-based company, expects to get the green light from the federal government to install the first of its kind wave power capture array in those very chilly Pacific waters. The company’s system of tethered floating buoys converts the vertical component of the ocean’s kinetic energy – otherwise knowns as the “up and down motion of the waves” , in the words of AquaEnergy co-founder Alla Weinstein -- into pressurized water flow that is then fed via hose pumps through an underwater turbine driving an electrical generator. The resulting energy is then transmitted to shore by means of secure undersea cables.

While the Makah Bay project is dubbed a demonstration to show the capacity of Aqua Energy’s technology, it will supply the Makah Indian Nation, a partner in the project, with 1,500 megawatts of renewable, non-polluting electricity annually. Further on down the line, Weinstein expects more federal support for ocean energy to emerge within the next two to five years, at which point larger scale installations of AquaEnergy’s buoy systems could provide regional utilities with significant amounts of electricity.

Indeed, with the world’s remaining oil supplies at the mercy of Middle Eastern sheiks and global warming looming, projects like Weinstein’s are looking good not only from an environmental perspective, but also from an economic one. That’s precisely what the principals at Finavera Renewables, a Scottish alternative energy conglomerate, thought when they acquired AquaEnergy to be the centerpiece of their nascent international ocean energy empire last June. Beyond Makah Bay, Finavera is currently installing similar systems based on the AquaEnergy model in Canada, Portugal and South Africa, and hopes to be a major player in the worldwide effort to supply as much as 10 percent of the world’s electricity with the power of waves.

It’s not surprising, though, that a Seattle area company is an alternative energy pioneer. After all, thanks to our extensive regional hydroelectric capacity, the Pacific Northwest has been generating hundreds of times the renewable power as other parts of the country for decades. Also, the region’s respect for nature combined with its history of innovation make it an obvious place to breed new ideas in the ailing energy sector. Perhaps to make sure the innovation keeps flowing, Washington voters passed Initiative 937 this past November, which calls on the state’s largest utilities to derive 15 percent of the electricity they provide from new renewable sources and efficiency gains by 2020.

Given the demand for alternatives—mandated in part by passage of Initiative 937 but also because of the affinity among locals for all things “green”—a new gold rush seems to have started in the Pacific Northwest. This time it’s not gold in them thar hills attracting the prospectors, though, but sun, wind, waves, and even agricultural crops. While the region’s green entrepreneurs continue to dream big, the rest of us are left to wonder just how much that glitters is actually gold.

Biodiesel: The Next ‘New New Thing’?

Perhaps the best known local dreamer in “clean-tech,” as the emerging sector is increasingly called, is Martin Tobias. The longtime entrepreneur jumped ship at Microsoft in the late 1990s to launch and eventually take public digital content encoder Loudeye Technologies. He has since jumped into starting up his current project, biodiesel fuel refiner Imperium Renewables. With money to burn from his successful IPO and a deep concern about the political and ecological stability of a world addicted to oil, Tobias decided to focus his energies on alternative energy, and stands out today as Seattle's leading light of clean tech.

Tobias, who chose to get into software two decades ago because of the enormous potential impact he saw that computers were going to have on society, reports a similar epiphany a few years back about alternative energy. “When I look forward for the next ten years, I don’t think that the world’s problems are going to be solved by computers as much as by getting real alternatives in our energy supply,” he offers.

After taking stock of the prospects for other alternative renewables such as wind, solar and tidal power, Tobias decided to place his biggest bet on biodiesel, which is essentially refined vegetable oil that can be used in place of regular diesel fuel.

Imperium, which has reportedly raised upwards of $100 million and counting from the likes of Paul Allen’s Vulcan Capital, Silicon Valley venture stalwart Technology Partners, the Bay Area’s cleantech-focused Nth Power, and even the city of Seattle’s Employees' Retirement System, is putting the finishing touches on what’s touted as the nation’s largest biomass refinery near the coastal port city of Grays Harbor. Once complete later this year, the plant will have the capacity to turning bushels of soy, canola and palm oil into 100 million gallons of biodiesel each year. With this increased capacity and the resulting economies of scale, Imperium expects not only to bring the cost of biodiesel down below that of regular diesel – it now costs a few nickels and dimes more per gallon but last summer was cheaper for at least one day -- but also to control 40 percent of the estimated billion gallon U.S. biodiesel market by 2009.

Since biodiesel is derived from agricultural crops, American farmers can provide the renewable feedstock for making the fuel. While using biodiesel does aid in the formation of smog (albeit less than regular diesel), environmentalists like it because it does not contribute any new greenhouse gases linked to global warming into the atmosphere. And unlike other forms of renewable energy, biodiesel is easy for people and businesses to work into their daily lives — just by filling up the tanks of their existing diesel-engine cars or trucks with it -- without any upfront installations or ongoing equipment hassles.

Eco-entrepreneurs like Tobias aren’t the only ones bullish on biodiesel’s future. This past year the state legislature passed a bill requiring that biodiesel account for 2 percent of the diesel fuel distributed in the state by 2008. Also, Seattle Mayor Greg Nickels’ objective of meeting the terms set forth by the Kyoto Protocol on global warming -- an international agreement calling on developed nations to curtail emissions of greenhouse gases -- has been good news for purveyors of biodiesel: all city vehicles that run on diesel, including thousands of buses and trucks, have now been switched over to biodiesel, most of which can be locally produced.

And this past January, President Bush announced a federal initiative to cut gasoline usage by 20 percent in part by boosting the domestic production of biofuels (ethanol and biodiesel) by fivefold over the next decade.

A TOUGH SELL

Despite the upsides, however, skeptics point out that biodiesel is far from a cure for our regional and national addiction to mostly-imported petroleum.

For starters, a wholesale societal shift from gasoline to biodiesel would be impractical to say the least, given the number of gas-only cars on the road today and the lack of biodiesel pumps at filling stations, not to mention the fact that growing enough crops to fuel such demand would require converting just about all of the world’s remaining forests and open spaces over to agricultural land.

“Replacing only 5 percent of the nation's diesel consumption with biodiesel would require diverting approximately 60 percent of today's soy crops to biodiesel production,” says Matthew Brown, an energy consultant who formerly served for more than a decade as the energy program director at the National Conference of State Legislatures. “That's bad news for tofu lovers.” He adds that replacing 10 percent of diesel use would require well over 100 percent of today's production and 30 percent of available cropland.” While biodiesel can be made from other crops besides soybeans, Brown’s argument still holds water no matter what the feedstock.

Another issue Brown points out with biodiesel is that its price is largely dependent on the price of its crop-based feedstock, which could become more expensive as soybeans become in greater demand – thanks in no small part to biodiesel’s popularity.

Brown believes that the very existence of government-backed incentives encouraging biodiesel production in Washington State and across the country doesn’t bode well for the fuel’s ability to make it as a free market player. “From an economic standpoint, without high oil prices, tax credits, and new government standards for renewable fuels, biodiesel is a bit of a tough sell,” he says.

But yet an even bigger issue looms over biodiesel’s future: whether or not producing the stuff requires more energy than it generates, especially given the fact that most farms and manufacturing facilities are powered by finite and polluting fossil fuels. After factoring in the energy expended in actually growing soybeans, extracting the oil and refining it into biodiesel, Cornell University researcher David Pimental concludes that the numbers just don’t add up. His 2005 study of the pros and cons of making fuel out of agricultural crops found that producing biodiesel from soybeans requires 27 percent more fossil-fuel-based energy than the end product is capable of generating, making the process a net loss for farmers, consumers and the environment.

Pimental found an even greater “energy balance” disparity for ethanol, the darling biofuel of the Midwestern U.S. which is as of yet unavailable in its pure form in Washington State save for at one retail filling station in farm country near the Idaho border.  “There is just no energy benefit to using plant biomass for liquid fuel,” says Pimentel. “These strategies are not sustainable.”

Imperium officials maintain they can reduce the energy imbalance by employing economies of scale in the production of biodiesel. Its Grays Harbor plant, slated to be online by the end of this summer, will be the largest biodiesel refinery in the country. They say that the sheer volume of product the company will be able to produce should mitigate some of the production costs to the company’s bottom line and to the environment. Still, that’s assuming that Imperium and other biodiesel players can find a market for all the fuel they will be generating.

Angels to the rescue

For his part, Tobias remains optimistic about biodiesel, but isn’t putting all his eggs in one basket either.

In January 2006, he joined forces with Jeff Morris of Washington Technology Center’s non-profit Northwest Energy Technology Collaborative (NWETC) to launch the Northwest Energy Angels. The venture group includes some three dozen angel investors, many of whom hail from local top-tier venture firms, focused on investing personal riches in the area’s clean-tech start-ups. The angels meet every other month to scout out promising alternative energy start-ups hungry for even modest amounts of capital as they turn theories into marketable products and services.

According to Morris, who besides working on the NWETC also helps craft statewide energy policy from his seat as chair of the State Legislature’s Technology Committee, most energy-related start-ups burn out of money before they make it across the so-called “valley of death” between when they emerge from the lab with a product and are then ready to sell it.

“It just takes such a long time to find a utility to work with to do field testing, to find out if the government will let you try out something it’s never seen before, and to get funded to actually do a working demonstration project,” he warns.

Morris and Tobias created the energy angels to help companies through this funding trough. So far, six of the 24 business plans presented to the group during the last year have received some level of funding.

Among the more compelling local clean tech business propositions the group has seen, according to Tobias, have come from the likes of Greenwood Technologies, which makes high-efficiency, non-polluting wood boilers that allow homeowners to reduce their dependence on carbon dioxide spewing fossil fuels while cutting home heating costs by more than two-thirds. Another is LiniGen, a developer of power technologies designed to cool hot electronics (like laptop computers and PDAs) while converting the resulting waste heat into usable energy. This technology could render batteries as we know them obsolete.

Some other Seattle-area clean-tech companies Morris is keeping his eye on include AquaEnergy, which generates and sells energy culled from wave power off the Olympic Peninsula, 3Tier Environmental Forecast Group, which helps utilities and other energy concerns assess the availability of weather-driven renewable resources, and Prometheus Energy, which produces and distributes liquid natural gas (LNG) as a clean burning alternative to diesel fuel and propane.

Saving It Up

While generating new power from renewable sources is all the rage these days, an overlooked source of new energy is energy efficiency itself.

Saving energy might not seem as sexy as producing it, but some area start-ups focused on increasing energy efficiency--while reducing carbon footprints--are attracting investment dollars from venture capital (VC) investors near and far. Two local VC firms, Phoenix Partners and Falcon Partners, have joined California-based investors in seeding Seattle-based Verdiem Corporation with upwards of $6 million in funding. The company makes power management software for computer networks that helps companies and institutions (including several local school districts) save as much as $40 a year in energy costs for every PC in their organization, not to mention reduced facility-cooling costs, all without affecting user productivity.

A company running a network of 5,000 PCs can save upwards of $200,000 a year in electricity, in turn preventing thousands of metric tons of greenhouse gases like carbon dioxide from getting spewed into the atmosphere by power plants. Verdiem’s software also helps its customers qualify for certification under the U.S. Green Building Council’s innovative voluntary sustainability program, Leadership in Energy and Environmental Design (LEED).

Cool on Cleantech?

Even though clean-tech seems to be coming on strong of late in Seattle among individual investors, local venture capital firms have been more hesitant to take the plunge, especially in comparison to their counterparts down in Silicon Valley, where clean tech is all the rage.

“I think the lack of investments by Pacific Northwest venture funds in alternative energy companies is a combination of [the region’s] relatively low number of alternative energy companies with innovative technologies and the relative abundance of new companies in information technologies,” says Tom Alberg, a principal at Seattle-based Madrona Venture Group. He adds that some alternative energy companies, such as biodiesel refiners, do not fit within the traditional VC model because they require too much upfront capital.

Aqua Energy’s Weinstein concurs, reporting that she was surprised to find little interest from local venture firms when she made the rounds in 2004 prior to her company’s acquisition by Finavera.

“VCs are looking for fast returns on business models with low capital investment, and renewable energy is just not that,” she says. “It normally takes longer for the returns and it requires higher capital investment because we’re dealing with hardware, we’re not dealing with software, and in a number of conversations I had with VCs, they just didn’t have the appetite.”

If you ask Morris, local VCs are just being too conservative.

“Most VC firms are such late adopters into many of these companies’ lives that the joke in the industry is that there’s a race between the utilities and the venture capital funds to be the next-to-last investor,” he says. “You don’t want to be in too early because, if you make a bad investment, then you’re embarrassed, but if you’re too late, then you’ve missed the boat.”