Africa, Energy, and Me

I finally landed in Nairobi last night after about 20 hours of travel. I am mostly here for a family vacation but am hoping to be able to do some general observation and research about how people use energy here, especially off the grid. I’ve already had the opportunity to talk to one Kenyan today about how people in the slums, where about 70% of Nairobi’s population live, get access to electricity.

This man told me that the most common thing was for people to install solar panels on the top of their houses. He comes from the north of the country and was planning on doing the same thing for his family home there. It was going to cost him about 20,000 Kenyan shilling (about $250 U.S.) for the panels and an additional 15,000 shilling ($190 U.S.) for wiring in his home, a battery to store the energy, and the labor to install it all. People get loans for this from their employers, who automatically deduct it from wages or occasionally from banks if you can prove you have the steady income to pay it back. From this setup you can power a TV, radio, some lights, and charge your cell phone but you can’t run a fridge or stove. For those items you need a stronger more steady current. A few people in these areas are able to run diesel generators but those are considered pretty expensive and beyond the means of most individuals.

Tomorrow I head off on a safari so I may not be able to get reliable enough internet to post on a regular basis for the next few weeks.  I’m coming back through Nairobi on January 14 before heading home.   Does anybody have suggestions for organizations in the city addressing energy poverty that I should check out?

Financing Problems and the New Energy Revolution

No matter how good your cleantech idea is, without money you are not going to be able to turn your dream of using expired milk to power your car into a reality.  The financing system is broken for most businesses right now but innovative ideas in the energy space face their own special set of hurdles.  A lot of electronic ink has been spilled this year trying to explain and come up with possible solutions to the cleantech financing problem and I thought this would be a good time for a review of some of the better ideas from 2010 in this area.

The Valley of Death: The Wall Street Journal, Bloomberg New Energy Finance, and numerous blogs have all been writing about the financing “valley of death” facing cleantech startups.   The basic idea is that VCs are reasonably good at funding high risk technology ventures between a few million and a few tens of millions of dollars but when it comes time to scale up for a large scale demonstration or manufacturing facility VCs usually aren’t able to invest the $100s of millions needed to take the company to the next level.   Banks won’t lend to businesses that are as risky as many of these companies and the whole IPO system is currently broken.  Many Silicon Valley VCs that thought investing in cleantech would be akin to investing in online tech companies are now realizing that both the expertise needed and the exit scenarios for these companies are significantly different from what they had experience with in the past and are now pulling back from the sector.  So how can cleantech startups make it to the other side of the financing valley?

Government vs. Market Solutions: There is a debate about the degree to which government should get involved vs. letting the market place resolve this financing gap.  The Fiscal Times has a good story about the ways that the U.S. government is trying to help cleantech companies get access to capital.  Included in the stimulus package is funding for loan guarantees that, although they do not provide money directly to energy focused startups, makes it possible for them to get money from other sources.  Tesla probably would not have been able to undertake its IPO without a $465 million loan guarantee from the Department of Energy.   The government can also make investments in alternative energy more valuable through policy decisions that incentivize or mandate the use of clean energy sources.

The main market solution available in the absence of a functioning IPO system or bank lending is acquisition of startups by larger energy companies.  However, there aren’t many established market leaders in the cleantech space that can serve an Apple or Facebook like function of scooping up promising young upstarts.  The obvious candidates with deep pockets and an appetite for acquisitions are the big oil companies like ExxonMobil and Chevron but some people argue that they are mainly interested in alternative energy for public relation reasons and have little interest in going all the way with new technologies that will interrupt their existing business models.  Utilities make sense as buyers for certain kinds of new technologies although entrepreneurs and investors are often disappointed when they pay a small multiple of what is referred to as EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), which is how normal businesses are valued, rather than the much higher valuations given to tech startups based on what a revolutionary idea might be worth.

Revolutionary Technologies: Serial entrepreneur and influential cleantech investor Vinod Kholsa has an article in the December issue of Foreign Policy arguing for increased investment in revolutionary technologies.  He thinks that investing too much in today’s technologies that are an incremental improvement in terms of efficiency will leave us with an overhang of large scale infrastructure that will not be a significant enough improvement to stave off serious climate change.  Therefore, we should hold off on large scale changes of infrastructure and have governments invest more in swing for the fences ideas through entities like the Advanced Research Projects Agency – Energy.  Coming from anyone else I would think this idea an excuse for inaction in the near term but Kholsa has a record that can’t be ignored of effectively pushing the envelope on innovation.

Financing and Solutions to Energy Poverty: Looking at the financing challenge from a completely different angle The New York Times has a great Christmas Day article about energy poverty in Africa.  Although a significant market is developing for renewable energy solutions that can help people that are off the main power grid, one of the big constraints is that African companies cannot get the finance to develop new products in this area or import existing products in large quantities from other countries.  The Times notes that “a $300 million solar project is much easier to finance and monitor than 10 million home-scale solar systems in mud huts spread across a continent.”   The business model for off the grid power renewable energy in developing countries is still being developed and this is an issue Ideas on Energy will be following closely.

So as we go into the new year, what are your predictions for what is going to happen in cleantech finance?  Will we see more IPOs?  Will bank lending unfreeze for the sector?  Will the big energy companies swallow all the smaller players? Or will we become more reliant on government assistance and policy?  Whatever happens, 2011 in going to be a big year for new ideas in the energy sector and entrepreneurs are going to be looking for new ways to get money to turn those dreams into our new energy future.