Michael Bevan, EnerTech Capital

The fundamentals of the electric market require a unique approach to venture capital (VC) investing, which, in many ways, differs from traditional VC investing. Unlike an unregulated market, the electric industry consists almost entirely of large, incumbent players who possess dominant positions. The buying decisions of these incumbents are heavily influenced by regulations and regulatory agencies. As a result, utilities make careful, and sometimes tentative, purchasing decisions, which translate into long development, testing and sales cycles for new power technology companies.

A second major difference between power technology investing and traditional VC investing lies in the seasoning of the entrepreneurial management teams. Traditional VC markets, like software and telecommunications, have had long gestation and maturation periods. As a result, there are a greater number of companies that have evolved from inception to IPO-and a correspondingly large pool of entrepreneurs who have been associated with these companies. The power technology sector as a whole is younger in its evolution. As a result, there are fewer entrepreneurs who have had the opportunity to recycle through the system.

The net result of these fundamental characteristics is that investing in the power technology arena requires a greater level of investor patience, more strategic interaction between incumbents and entrepreneurs, and a higher level of interaction between the venture capitalists and the entrepreneurial companies.

For those who understand the unique dynamics of the industry, however, the continuing decentralization of the electric market presents a number of opportunities within the industry for entrepreneurs, utilities and investors alike. A fundamental motivator for all entrepreneurs is fulfilling the need to solve a problem. For utility executives, a key driver is return on investment and shareholder value. For power technology venture capitalists, the challenge is to align these interests by financing companies that solve problems and improve the return on investment of the incumbent providers.

Promising technologies for the utility industry

Power technology VCs have been following several exciting technologies that promise to create new value for utilities. Among those that venture capitalists find most promising are:

• Powerline communications. The dream of someday delivering broadband access through electrical power outlets appears to be around the corner with the recent announcements by several companies that they have solved the "last mile" problem and are successfully delivering broadband access in beta markets. One that appears particularly promising is Current Communications of Germantown, Md., whose solution for broadband delivery bypasses the transformer. Another unique aspect of their solution is a marketing model that is based on a partnership with utility companies.
• Companies that monitor and manage T&D infrastructure. As the T&D infrastructure ages and siting new power lines becomes more problematic, the need to improve the efficiencies of the existing network will become increasingly important. There are a number of promising companies that are actively focused on this problem, such as CES International and Severon Corp. For many years, CES has focused primarily on outage and trouble call management. CES is evolving its technology to help utilities with real-time, current state, network management. The new offering will provide utilities proactive and predictive decision-making capability and move network management from a reactive state into more proactive management.

• Energy management. According to the Department of Energy, commercial and industrial customers were the largest consumers of gas and electricity, representing over $200 billion in expenditures. In addition, customers spend billions annually for new capital equipment and to maintain existing systems. As a result, commercial and industrial customers are becoming increasingly aware of the need to better manage and meter distributed assets within a facility. One company helping to address these needs is Enerwise Global Technologies. Enerwise offers customers the ability to reduce electricity costs, increase the reliability of machinery, and improve overall facility management. Its Web-enabled, fully integrated management system allows an eerprise-wide view of energy usage, costs and savings opportunities and real-time access to system performance.
• Fuel cell advancements. Fuel cells operate on hydrogen and the process of converting, or reforming, fossil fuels into hydrogen is expensive and technically challenging. While a number of companies are trying to tackle these complex reformation issues directly, some are avoiding the issue altogether with an expectation that a ubiquitous hydrogen infrastructure will be forthcoming. Franklin Fuel Cells may have a solution to this reformation problem. Franklin's technology is a novel SOFC (solid oxide fuel cell) anode which directly oxididizes fossil fuels, including the more complex hydrocarbons such as gasoline, natural gas, and diesel without the need for reformation. The anode, made of a copper composite, is designed to be sulfur tolerant and resistant to coking. The design is also unique in that it uses inexpensive materials with no required precious materials.

Bevan is a principal at EnerTech Capital (www.enertechcapital.com), the nation's largest venture capital firm that focuses exclusively on the power technology industry.