Tuesday, April 8, 2008

Notes on Alternative Energy

Most analysts expect alternative energy to continue to attract significant capital going forward -- one example of this forecast is the 2008 Prediction of Venture Capital Trends by the National Venture Capital Association (NVCA). The question comes to mind: how is alternative energy defined? A definition search on Google provides several definitions, most of which define alternative energy by energy source. Below is a simple chart on alternative energy based on source for the benefit of interested readers.

The key to the chart is -- in the author's opinion -- **very promising * somewhat promising "?" not enough information "??" skeptical and ___ (underlined) don't believe will work, as defined as a positive return on energy invested by source and initiative. Rational for the author's opinions are not presented (perhaps will be presented in future posts). There are a few firms listed under each category but these lists are very incomplete.

A few notes on the overall alternative energy industry: first, detailed projections are very important in assessing the economics of each initiative. For example, in the book Wind Power by Paul Gripe -- 700+ pages on wind energy (and extremely interesting reading) -- much of the viability of wind power is expressed location by location, dependent on multi-year assessments of wind patterns and cost drivers. This sort of analysis does not translate easily into a short article in a newspaper or magazine.

Second, in all areas of the chart above, -- somewhat related to the first point concerning projections -- the initiatives have relatively high capital costs. Many power initiatives are described in investor prospectuses as "cost per MW:"" -- with $1000 per MW as a very economical standard for a large scale power plant. This cost translates to a billion dollars for a 1000MW power plant in coal, solar, nuclear, etc.

Lastly, the timing of the ideas appears to be generally of a longer time frame than is customary in information technology and other venture capital business areas - for example, in Nuclear technology, according to the publication Nuclear Engineering International: "2020 is right around the corner" (written in early 2008).

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