RENEWABLE ENERGY

Clean tech, Big Oil hottest new couple in energy world

First of three stories on the traditional energy industry's embrace of clean technology.

"Sometimes you need to kiss many frogs before you find the princes."

That sums up the past few years of investing in clean technology, says Wal van Lierop, co-founder and CEO of Chrysalix Energy Venture Capital. But now the industry has transformed to the point that even a small but growing number of traditional energy companies are embracing the use of renewables.

"What we are seeing is a maturing of clean technology, and it is arising in the mainstream of existing large industries," van Lierop said. Chrysalix, which focuses solely on clean technology, has attracted a majority of its $250 million in funding from conventional energy companies like Royal Dutch Shell PLC, Total SA and √Člectricit√© de France (EDF).

The key, van Lierop said, is to "try to develop technology that can have a major impact on the world, but you try to develop it on the nickel of the people that have the capital."

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In theory, using renewables makes sense to power the everyday operations of traditional energy companies, which often work in remote and harsh conditions where infrastructure like roads or pipelines is minimal. The current relationship between the traditional and clean technology energy industries, however, is far from a fairy tale.

But the two may need each other more than they would like to admit. The International Energy Agency and U.S. Energy Information Administration have issued report after report acknowledging a foreseeable need for fossil fuels and mining but saying they must be part of a "low-carbon solution" -- a notion echoed by Energy Secretary Ernest Moniz and the Obama administration.

The traditional energy sector has another oft-overlooked reason to embrace renewables: It is in itself a considerable consumer of energy, especially in the form of heat supplied by diesel and other carbon-based fuels.

In the United States, the mining sector -- including oil and gas extraction -- accounted for about 33 percent of the industrial consumption of distillates and fuel oil in 2012, with almost two-thirds of that by oil and gas, according to a Greenwire analysis using EIA data. The U.S. industrial sector is only second to transportation in consumption of petroleum products, according to EIA's monthly energy review from March.

Relying on petroleum products is a costly proposition for any industry with rising prices that may soon be compounded by carbon emission regulations in California, Australia and other places. That is even more of a pressing issue in countries outside the United States that do not have the same access to low-cost natural gas.

The budding relationship has benefits for renewables, too. For the burgeoning clean technology sector, the energy industry offers two crucial components of success: capital and expertise. These two inputs make the difference for a technology becoming commercially successful rather than just another report in a science journal.

A union is not that simple, of course. The traditional industry's general view of renewable energy is that it is too expensive, unreliable, risky and not large-scale enough to provide solutions -- and is a competitor in the long run.

Clean technology startups often view partnering with traditional energy as selling out, or in direct conflict with many founders' mission -- fighting climate change. Plus the small, new companies designed themselves to be providers of technology without the infrastructure, desire or experience to offer the power solutions that these larger industries seek.

Nathanael Greene, director of the renewable energy policy program at the Natural Resources Defense Council, said his "knee jerk" reaction to the idea of renewable energy helping to clean up the traditional power industry was a bit of the proverbial "putting lipstick on a pig."

But he acknowledged, "Any renewable energy advocate that is serious about renewable getting to scale recognizes that the answers are going to be really big companies playing in that space."

"I think this sort of purist approach of renewable energy development only lasts for a little while," Greene added. "Technical expertise is technical expertise, and we need that to flow to the best technologies, and money is critical to scaling renewable to the level we need them to achieve to stop global warming."

Van Lierop estimates the traditional energy industry market to be worth $3 trillion to $4 trillion that could be an important source of investment for startups to tap now.

That's especially important as governments continue to cut back on funding meant to take technology from the laboratory to the market. Plus, a traditional source of private money, venture capitalism, has been pulling back on funding for energy projects because of the longer five- to 10-year return on investment timelines, favoring instead the "clean Web" startups based on websites and software.

There is much to be gained for both sides if the two industries work together, according to Matt Scullin, founder and president of Alphabet Energy Inc., a company that converts waste heat into energy and is targeting the mining and drilling industry as its first market.

"These 'dirty' companies stand to be cleaned up the most," he said. "We want to have impact. We think we can have impact. The impact can be had in these global dirty industries."

Highest-value customers

Like many of his California clean tech compatriots, Scullin is an idealistic and driven scientist-turned-entrepreneur. He previously worked at IBM Corp., General Motors Co. and X/Seed Capital, backed by his doctorate and master of science in materials science from University of California, Berkeley, where he was advised by Arun Majumdar, the former head of the Advanced Research Projects Agency-Energy.

Alphabet Energy wants to be the "Intel of waste heat recovery," Scullin said, becoming a critical component of efficiency and a power source for industry no matter what fuel or equipment is used. One of the company's thermoelectric modules is only the size of a shoebox and could be adapted to many different applications, he said. While the technology existed in the lab for a long time, Scullin was able to find low-cost materials and manufacturing that made it possible to commercialize.

Alphabet first looked at waste heat energy technology to improve fuel consumption of cars, using the heat from the cars' exhaust to provide additional power. But the company found that market moved too slowly to provide the kind of funding and customers it needed in the near term to grow, said Scullin, who co-founded the company five years ago.

Although his products are clean technology that cuts emissions, that is not the leading marketing point for his company. The most important point, Scullin said, is the cost savings for companies.

"The quickest to market is very, very high-value waste heat," Scullin explained. Oil, gas and mining companies "are going to pay the quickest and the most, and allow us time to come down on the cost curve on volume." Lowering the technology price through volume could lead to more partnerships with industries that deal with furnaces, such as steel, with others that use a great deal of heat and then finally to the tailpipes of cars.

"We have to take the right steps. We have to be pragmatic and seek the highest-value customers first," Scullin said.

He added, "Rome wasn't built in a day. You can think about changing the world, but the fact of the matter is, these energy industry and very heavy industries are very slow-moving. One should not expect for adoption to be rapid in a single industry and for disruption to occur overnight."

Encana Corp., a leading North American energy producer, is a key investor in Alphabet Energy and has offered the startup important engineering and market insights into real-world applications via a pilot project -- another significant benefit to partnering with established energy companies, according to Scullin. Alphabet is preparing to announce one of its first products for application in the mining and oil industries within weeks.

'Simply too brown'

Other startup companies are following a similar strategy to Alphabet Energy's. But partnering with the traditional energy sector is not always the easiest path forward for clean technology.

Steve Taub, senior vice president of Investment Strategy at GE Ventures, advised the battery company Solid Power during a recent Energy Department investment pitching session that targeting oil drilling and other sectors could be difficult because they have a "tough, long cycle" in terms of buying new equipment and are "heavily regulated."

Solid Power is considering down-hole drilling operations as the first market it will target, Douglas Campbell, founder and president, told the panel, because the "nasty environment" of drilling requires reliable and "extremely high-tech" solutions like the solid-state battery his company offers. Solid Power says its battery could be lighter and safer and could run longer than lithium-ion batteries at a lower cost.

Chicago-based PyroPhase Inc. is also concentrating on oil companies but that has come at a cost to fundraising, particularly with the federal government, according to PyroPhase President Jeff Presley. The company is now mainly concentrating on the Canadian market.

Oil sands operations currently use mostly natural gas to produce the heat and steam necessary to extract the oil. PyroPhase's technology uses lower-frequency radio waves to heat up oil sands to release petroleum. Renewable energy could power the radio waves, so the technology could be an important consumer of renewable power when there is more supply than demand on the system -- such as spring runoff or windy nights.

"Our technology could take that electricity and convert it to heat underground and, in a way, treat it like a battery," storing the energy in the form of oil being heated and separated into a usable form, he said. "The real fundamental thing is for utilities to have a customer who likes intermittent energy. Industrial-scale customers -- the kind that consumes megawatts, not kilowatts."

The technology could also be used in environmental remediation or oil spills, Presley added.

But Presley said because the technology is helping oil sands development and doesn't necessarily have to be powered by renewable energy, it is "not as green as people would like."

Despite a good reception from experts -- including winning a "Sustainable Technology of the Year Award" in 2011 from the McGraw-Hill Platts Global Energy Awards -- Presley said the government's response for the technology during the Obama administration has been "frustrating."

A DOE staffer at an oil shale symposium several years ago "flat told me, 'We loved this technology, but it was simply too brown,'" he said.

NRDC's Greene said some caution in pairing the renewable and traditional energy sectors is wise. There should be awareness that traditional energy investment in clean technology may not be "altruistic," he said.

"Marginal improvements are good, but if you are already on the unsustainable side of the ledger, you are just getting closer to less bad," he said.

"There is this sort of green-washing potential that needs to be guarded against," he added. "We are going to be needing low-carbon energy and energy that doesn't destroy habitat and pollute water, and it is not like at some point we'll just, the market will just decide on its own to start producing that and we won't think about it anymore. It's not like those challenges are going away."

But Chrysalix's van Lierop said the current push toward clean energy strategies for companies is comparable to a decade ago, when businesses all wanted an Internet strategy; Internet strategies are no longer a separate business plan.

"Frankly, I always say that if in a decade -- at most two decades from now -- if we still talk about clean technology, then something horrible has gone wrong," van Lierop said. "It really needs to become a normal part of doing business."

Tomorrow: How a solar power technology for oil production may turn a California regulation to promote low-carbon fuels on its head.

Twitter: @lingkate6

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