The New Silicon Valley: Why Entrepreneurs Are Flocking to Energy

Ten years ago, Silicon Valley was the place to be. The brightest entrepreneurs, engineers, and venture capitalists flocked to a burgeoning number of high-tech companies to get in on the Internet boom. As a result of their collective work a new industry was born, and it revolutionized our economy.

But in a sign of the times, entrepreneurs today are turning to energy, where challenges are giving way to new opportunities. With increasing worldwide demand for energy, tightening supply constraints and mounting environmental concerns putting pressure on traditional energy sources, the nation’s brightest business minds are needed to help commercialize the massive technological progress we have already made, says Jigar Shah, CEO of the Carbon War Room.

Shah, founder of SunEdison, would understand why entrepreneurs are needed at a time when the industry is searching for creative solutions. In 2003, just out of business school, Shah pioneered a model that allowed building owners to install solar panels on their property without paying anything upfront by agreeing to buy cheap energy later. SunEdison turned out to be a venture capitalist’s dream: In 2009 it was acquired for $200 million by MEMC. That success, Shah argues, only scratches the surface of the opportunities in the energy sector.

In anticipation of Shah’s upcoming role as keynote speaker at Wharton’s Annual Energy Conference on October 29, we caught up with him to find out what advice he could give to entrepreneurs and the next generation of business leaders interested in energy.

Where in the sector should entrepreneurs focus their efforts?

I think the energy business is the largest wealth creation sector on the planet. If you are an entrepreneur and you are smart, this is where you should be. But one of the biggest gaps is financial products. We do not yet have a set of financial products that would allow people to move forward with projects in all technology areas. For example, there is no residential financial product that I can sell your mother in the energy efficiency space. That is a big gap. More broadly, technology is great, and hundreds of technologies exist, but they are not being implemented because the right financing products are not available.

So is most of the opportunity now in business process improvements and financial products, or are there still technology startups that make sense?

I think the question isn’t one more than the other; they both need to exist. Lots of new technology companies exist already, but to date there are not enough people to do the business process improvements.

What are some of the most important innovations to look out for on the technology side?

Some of the biggest innovations are in fuel cells, storage, biofuels, solar thermal energy production, the small wind turbine sector, the smart grid. Lots of cool things are happening in electric vehicles. There are also important areas that are not as well known, for example, more efficient airplanes and internal combustion engines. In water, areas like smart metering and building are interesting. Providing clean water in India is another new market.

What other opportunities are available in emerging markets?

There has been a decade of growth in communications technology in Africa. Today, 70% of people in Africa have phones. That’s 485 million people with phones but without access to energy to recharge them. They are paying $2.00 – $2.50 per kilowatt-hour, and so we are seeing a huge interest now in large scale renewable energy. Other opportunities include initiatives like Desertec, where the goal is to produce energy in North Africa and to transmit it to Europe. This is a big change. There, they are using thermal technologies, not just traditional PV cells. There are a lot of emerging markets where entrepreneurs are playing a big role. A colleague of mine is providing telecom towers with solar power for 20% less than equivalent diesel power.

Can you give any examples of companies that are doing interesting work today?

One company is offering the equivalent of a PPA for produce. They have copied SunEdison’s plan and are growing vegetables on the rooftops of grocery stores, selling the vegetables into the stores. Skyline Innovations and Equilibrium Resource Management are both innovative companies that are treating buildings as power plants. More broadly, entrepreneurs today can set up a solar company, for example, as neatly as they can set up a bakery. Thousands of entrepreneurs will jump into solar this month. I just talked to three people today who are starting their own solar company in Tennessee.

What should entrepreneurs be thinking about at a macro level as they approach this market?

First, many people don’t know that over 50% of new energy capacity added is zero emissions technology – new solar, new hydro – and that includes energy efficiency. That is headed to 100% in the 2012-2013 timeframe. That means no new coal and gasoline infrastructure. That is what the data shows us and it is accelerating. Second, there is more money chasing renewable energy than there are projects. In biofuels and electric cars there is a shortage of money, but in renewable there is plenty of money available. Third, my big concern is that people in this space are overly enthusiastic about getting everything right the first time. Some projects need a 9% expected return to make the deal work, but the first interest rate in any asset class is more like 18%. The key is to wait until the funders get used to the asset class, and we have good data, and expected returns might come down to 6% or 7%. That was SunEdison’s trajectory; our returns started at 16% and they came down to 6.5% over time.

How should entrepreneurs think about the government’s role?

Government’s role is to offer incentives to push people in the right direction when it comes to infrastructure. Eventually, we need to get to true cost accounting, but in the mean time we need the GAO and other government bodies to offer hard subsidies of $25 to 30 billion a year. This would make renewable energy competitive with oil and gas, which are heavily subsidized; oil, gas and coal have never left their subsidies behind. This is really about putting newer technologies on a level playing field.

The key for entrepreneurs, though, is to work within an existing technology and regulatory framework to solve a problem. Otherwise, they would be taking too much risk, and it would be impossible for venture capital to fund them.

Article by Seth Kisch, an MBA candidate at the Wharton School of Business, where he is marketing director for the school’s energy conference “Bridging the Gap” on October 29. Prior to moving to Philadelphia to pursue an MBA, Seth sourced investments for Battery Ventures, a venture capital and private equity firm based outside of Boston, MA.