Blackout jolts new energy sector
by Claire Poole

August 22, 2003

After the lights went out in New York City and other places around the Northeast, Midwest and Canada, creating the biggest blackout in U.S. history, interest in alternative energy stocks surged.

Plug Power Inc., a developer of commercial fuel cells, jumped 23% to $5.16, American Power Conversion Corp., which makes uninterruptible power supply devices for computers, went up 11% to $17.98 and FuelCell Energy Inc., which develops large, stationary fuel-cell power plants for localized generation and grid support, zoomed 21% to $9.40.

Given these stocks' electrifying jump, some private rivals are boosting their valuations for follow-on investments, in one case by 30% just a few months after closing its previous one, according to one source. Companies out trying to raise capital for the first time — such as commercial and industrial solar installer PowerLight Corp. of Berkeley, Calif. — could benefit from the renewed interest.

“It could result in an uptick in funding,” said Eric Prouty, who follows energy technology companies at Adams Harkness & Hill Inc. in Boston. “There are plenty of companies focused on power quality and power reliability that has always been an area of interest for VCs.”

But analysts and industry followers say buyers — including acquirers, private equity investors and venture capitalists — beware. Many alternative energy companies don't have products yet on the market, are losing money hand over fist and may use this time of power grid uncertainty to hype their companies.

“Alternative energy firms are a great short,” said Tim O'Brien, manager of the Evergreen Utilities and Telecommunications Fund in Boston, who doesn't own any in his portfolio. “It's years and years away, if ever. Half of these stocks aren't going to make it.”

News releases from some of these companies have flown over the last week or so, hawking everything from backup power systems to grid management software to off-grid alternative energy sources such as solar and wind. Alternative energy CEOs have appeared on news programs damning the incident and hyping their products. Articles on alternative energy gadgetry have also pervaded the country's newspapers.

“This is going to be huge,” John Mitola, CEO of power control systems firm Electric City Corp., told Chicago's Daily Herald on Aug. 16, saying he's anticipating a flood of demand for his firm's “Virtual Negawatt Power Plants” that taper big-user supplies during peak hours.

One can't really blame these companies, who could use a little brightening after a downturn over the last few years. Valuations have plummeted, several smaller players have gone out of business and many that remained joined forces to improve their chances for survival.

The list includes Canadian fuel cell testing equipment maker Hydrogenics buying rival Green Light Power Technologies Inc. in January for $19 million (Greenlight couldn't raise new private equity investments), Canadian hydrogen generation water technology developer Stuart Energy Systems Corp. buying competitor Vandenborre Technologies NV in February for C$9.5 million ($6.8 million) in cash and 7.3 million shares (Vandenborre was also having capital-raising problems) and Plug Power buying rival H Power Corp. in November 2002 for $50.7 million in stock (Lehman Brothers Inc. advised H Power, which had been looking at strategic options for months, while Stephens Inc. assisted Plug Power).

The dealmaking is even getting a little cutthroat. Earlier this month, FuelCell Energy of Danbury, Conn., bested a previous offer by Irvine, Calif., competitor Fuel System Technologies Worldwide Inc. to acquire Global Thermoelectric Inc. of Calgary, Alberta, for $80 million in stock.

“I call it the self-help program,” said Jarett Carson, who follows the industry at RBC Capital Markets in Austin, Texas. “In the downturn, companies had to merge together to cut costs and have better product traction and balance sheets. The M&A activity improved the financial health of the leaders.”

Going forward, Carson thinks chances are best for FuelCell, the leading developer of large-scale stationary fuel cell power plants designed for localized base-load generation and distribution grid support; Ballard Power Systems Inc., which he believes could launch a commercial back-up power product this year as well as the consumer version of its AirGen 1kW product; and Itron Inc., as increased transmission and distribution investment could be positive for its T&D design and distributed asset optimization software products.

Troubled players include Plug Power, which Carson said is just now launching a backup power product but seriously needs to raise additional financing in the next 12 to 18 months. “It'll be difficult to gain revenue traction before they hit the red zone,” he said.

Another is AstroPower Inc., a leading provider of distributed solar power. It's had financial trouble, been delisted from Nasdaq and its CEO and CFO were forced to resign last spring when the firm announced it would restate financials for 2002 and 2001. “They have someone doing a turnaround, but I've been disappointed about the outcome of an interesting company,” Carson said.

Prouty noted three companies he thought could benefit incrementally and monetarily from the outage: American Power, C&D Technologies and Itron.

“The blackout will heighten the awareness of this sector, and there is a myriad of companies that could potentially benefit if — and that's a big if — there's more spending to fix these problems,” he said. “But for many of these companies, a commercial product and profitability are a long way off.”

Meanwhile, venture capital firms are sifting through business plans to decide which startups to invest in.

The most active in the alternative energy area have been Nth Power, EnerTech Capital, Kinetic Ventures, Draper Fisher Jurvetson, Chrysalix, Conduit Ventures, Hydro-Québec CapiTech Inc., Advent International and GFI Energy Ventures LLC. And venture arms of large energy and financial firms have also been involved, including E.ON Venture Partners GmbH, Shell Internet Ventures, an affiliate of the Royal Dutch/Shell Group, and RBC Capital Partners.

There are also new ones sprouting up. Braemar Energy Ventures of New York just did its first closing of $35 million in December 2002 from a mix of financial and strategic investors. So far, it has invested in two firms: EnerNOC, which provides communications software and managed services for backup power generation ($2.5 million last June, with Draper), and Solicore, which makes thin-film batteries for the next generation of smart cards ($13 million in early August, also with Draper and Firelake Capital Management). It is looking at doing several more this fall (it calls on Jeff Levin at Kirkland & Ellis for counsel).

“The blackout highlighted the need for improvement to the grid and focus toward technology closer to the end user,” said Braemar managing director Neil S. Suslak, 44, who did oil and gas deals at Swiss Bank and UBS Warburg before starting the fund last fall. His partners include George Reichenbach, 73, who led the funding of such firms as Ballard, Active Power and Astro Power at Advent, and William Lese, 45, an industry veteran who's worked at Sithe Energy and NPF Industries as well as New York venture capital firm Mantis Holdings.

Suslak said he's looking at energy storage, power conversion, clean fuel processes, hydrogen, demand side management and energy communications. “The biggest issue is these companies have taken longer to develop their products than originally thought,” he said. “So we're looking at a clear path to market, with significant potential sales.”

So far, entrepreneurs aren't valuing their companies too high in their proposals. “Valuations are still relatively attractive in most of the companies we're looking at,” he said.

And where was Suslak went the lights went out? In his New York City office building, which had a backup generator running the service elevator and some of the lighting — managed by one of his portfolio companies, EnerNOC.