The market for alternative power and energy storage started gaining momentum around the turn of the century thanks largely to venture capital (VC) funding for far-reaching and high-risk technologies. That hasn’t changed: Today, technology developers are leaning even more heavily on VC funding to finance demonstration pilots and manufacturing scale-up. What appears to be changing, however, is VC attitudes toward the space.
As this week’s graphic shows, a sharp increase in funding in H1 2009 was followed by a precipitous decline in H2 2009 and a record-breaking high in H1 2010. Along with this roller-coaster-like funding pattern, there’s been an indisputable shift in the size and stage of financing rounds. At the very least, such behavior indicates that VCs are reconsidering their position and strategy in the alternative power and energy storage field. A closer look shows that VC’s are doubling-down on their bets on maturing smart grid and automotive companies.
During the first half of 2009, alternative power and energy storage companies raised $1.14 billion through venture capital, suggesting that 2009 would be the best funding year the sector has seen since we began tracking it in 1999. However, purse strings tightened in the latter half of 2009, bringing the annual total to $1.43 billion, a relatively disappointing sum despite that fact that it represented a 20.5% gain over 2008. In 2010, the money once again came pouring in. The first half of 2010 goes on record as the strongest six-month period for financing, with a total of $1.14 billion in VC funding. However, there’s been flat growth in the number of deals.
Smart grid and automotive companies were the big winners, accounting for more than 77% of all investments. Further, this percentage was dominated by uncharacteristically large financing deals from a select number of high-profile companies. Fisker Automotive, Better Place, and Silver Spring Networks completed a total of four rounds, each more than $100 million, to account for 50% of all financing in the graph’s final 12-month period. As a result of these large bets, the average deal size grew to $29.6 million – the highest average value since our coverage began in 1999, and a 47.2% increase over the average deal size in 2009.
Source: Lux Research report “Alternative Power and Energy Storage Financing: How to Play a Buyer’s Market.“
Nissan recently announced the U.S. pricing for its all-electric vehicle (EV), the Leaf: $32,780 before incentives, or $25,280 after a $7,500 federal tax credit. Notably, Nissan decided not to lease the battery separately, like Nissan Renault is doing with Better Place in Israel (see the August 5, 2009 LRPJ – client registration required). Instead, it will offer the entire vehicle including the battery for $349/month for 36 months after an initial payment of $1,999. In January, Nissan selected AeroVironment to provide chargers that will fully charge the Leaf’s 24 kWh pack in eight hours with a connection to a 220 V power line.
According to the Wall Street Journal, the Leaf will sell for ¥3.76 million ($40,700) in Japan, or ¥2.99 million ($31,600) after incentives. For comparison, the Toyota Prius hybrid electric vehicle (HEV) starts at $22,800 in the U.S. and about ¥2.05 million ($21,700) in Japan. One way to view this information is that the Leaf will be competitive with the Prius when it goes on sale in select markets in the U.S. in December. After the federal tax credit, the Leaf’s invoice price is less than $3,000 above the Prius’s; and in some states, prospective purchasers get additional state tax incentives (California, one of the most progressive states, offers $5,000).
However, apart from price, the Leaf faces additional challenges that the Prius does not. First, a director-level executive from a major California utility emphasized that before a would-be EV buyer takes possession of the vehicle he or she has just purchased, there is a 20-day to 60-day (more likely 60-day) waiting period to allow the utility and the city to ensure the grid can handle the additional load (see the February 3, 2010 LRPJ – client registration required). Second, unlike the Prius, EV owners have to overcome the range anxiety of owning a vehicle with a 100-mile range without the benefit of a widespread municipal charging infrastructure. Finally, while Nissan hasn’t released information on the Leaf’s cargo/passenger space, its hefty 24 kWh battery pack certainly will take up a lot more room than the 1.3 kWh pack of the Prius, even after accounting for the higher energy density of Li-ion compared to NiMH.
Even if the Leaf does sell successfully, some question remains whether or not Nissan will actually make money on its new EV? Our most current estimates have pack costs over $920/kWh today. That means the 24 kWh Leaf pack most likely costs over $22,000 today, which would imply that Nissan (or its battery partner NEC) is losing money on every vehicle Nissan sells for $32,780. While we see pack prices dropping to just over $700/kWh by 2015, even at these prices the Leaf packs will still account for over half of the total price of the vehicles. Unless Nissan and its battery partner NEC have unlocked the magic Li-ion formula that allows them to manufacture batteries at half the cost of their competitors, Nissan/NEC is almost certainly taking a loss on every Leaf it sells in the U.S., in order to encourage EV adoption and unseat Toyota/Panasonic as the greenest auto-making team. While this strategy might make Nissan the market leader in EVs and boost NEC’s battery sales, it may impose a big financial hit in the process if the EV market fails to develop quickly – as we have argued (see the report “Unplugging the Hype around Electric Vehicles“).
Bloom Energy, the previously secretive fuel cell startup, is finally going public with its story, appearing on 60 Minutes last week. In an interview with Lux Research, Bloom’s Stu Aaron told us that the company intends to produce electricity from natural gas at a lower cost to the customer than the grid. Stu claimed the cost of electricity over the fuel cell’s 10-year life is $0.08/kWh to $0.10/kWh (when running as base-load for 24 hours a day), including government incentives and assuming a $7/mmBTU natural gas long-term contract. Stu also confirmed that the 100 kW fuel cell system’s price without incentives is in the range of $700,000 to $800,000.
Although their technologies are different, there are a number of similarities between Bloom Energy and Better Place, which leases electric vehicle (EV) batteries and provides charging infrastructure via a monthly payment plan. Both companies raised hundreds of millions of dollars: Bloom has received over $300 million in investment over its eight-year history, while Better place raised $700 million to date, including $350 million Series B in January 2010.
Both companies are also heavily reliant on subsidies. Bloom’s California customers achieve the quoted electricity costs only because they pay for just half of the system’s capital expense, based on the generous 30% U.S. federal tax credit and the $2,500/kW California rebate (New York and Connecticut also have generous rebate programs for fuel cells, as do many countries around the world). Without incentives, we calculate electricity would cost $0.13/kWh to $0.14/kWh, with about $0.09/kWh from system cost and about $0.05/kWh coming from fuel cost. Note that this is high compared to average retail U.S. electricity costs of roughly $0.11/kWh. In the case of Better Place, without subsidies, a U.S. customer would end up paying some $689/month over eight years, while a conventional gas-powered vehicle would cost only $443/month (see the February 10, 2010 LRPJ – client registration required). But massive government EV incentives could make EVs competitive in specific markets under Better Place’s model – Denmark has offered a tax credit of $40,000 or more per vehicle and Israel has similarly generous subsidies in place – although additionally generous government support is needed to put Better Place’s infrastructure in place.
However, the final similarity between these companies is the most significant one: both sport valuations of over $1 billion (Bloom’s Series F places the company at $1.45 billion, while Better Place’s Series B puts it at $1.25 billion). Niche markets do little to satisfy expectations this high, and both companies have not been shy in claiming that their technologies will eventually find a place in every home. While neither company will live up to its aggressive claims anytime soon, Bloom has a better shot at unsubsidized profitability in the long run. If it can successfully mass produce reliable systems and convince customers to take on the responsibility to produce their own electricity, Bloom should be able to bring down costs through high-volume manufacturing to the point where it will be competitive with electricity from the grid in many areas while providing relief to increasingly overtaxed transmission and distribution systems. While Bloom’s cells running on natural gas are not necessarily greener than combined-cycle gas plants, its economics justify a brighter long-term future than Better Place’s. However, whether it can do so quickly enough to justify its billion-dollar valuation remains to be seen – and will depend heavily on where government subsidies roll out.