Ken Silverstein EnergyBiz Insider Editor-in-Chief

Fossil fuels such as oil, natural gas and coal not only have volatile prices but they are also responsible for a host of pollutants as well as carbon dioxide emissions tied to global warming. New discoveries would diversify national fuel portfolios and help sustain the environment. And, today, major companies such as General Electric are coming to the table because investments in green energy are profitable.

"With the combination of rising energy costs, overall natural resource scarcity, growing demand for environmentally superior products and greatly improved clean tech alternatives, it is possible clean tech will capture up to 10 percent of overall venture capital flows by 2009...," says Nicholas Parker, chairman of the Cleantech Venture Network in Ann Arbor, Mich. The firm just released a report that says capital dedicated to clean tech companies could reach $10 billion by 2009.

The emergence of dotcoms along with the overabundance of capital gave birth to a new era for venture capital investors in the 1990s. That's all changed. But, 2005 is the start of something fresh: Venture capitalists pumped about $20 billion into upstart operations and about $520 million of that went into such sustainable technologies as wind, solar and fuel cells, says San Francisco-based Clean Edge. Individual clean technology deals won an average of $7.5 million each.

Another survey by the National Venture Capital Association says that 21 percent of venture capital firms globally are planning to invest in the energy and environmental sectors over the next five years. That's up from 12 percent now. Altogether, at least 90 venture capital funds are raising money to invest in sustainable energy, adds Cleantech Venture Network. And even the established businesses are getting more involved, it says, noting that 27 of them said they would invest at least $1 billion in green energy.

GE is active in wind and solar. The company bought Enron's wind unit about five years ago and says the division is profitable. GE also paid $15 million, along with assumed debt, for the solar power venture AstroPower about 18 months ago. Florida Power & Light, meantime, says about a quarter of the energy it produces comes from wind. It invests $5-$10 billion annually in the global wind market. Other utilities such as Hydro Quebec's CapiTech and Ontario Power's OPG Ventures are also active in clean energy investing.

"Wind provides a decent return on equity and it is a good deal for shareholders," says Mike O'Sullivan, senior vice president of development for FPL Energy.

Going Green

The economic downturn in early 2000 meant that fledgling companies with innovative ideas were starved for cash. In the case of fuel cell companies, the flow of capital nearly stopped and their stock prices nosedived. Now, investors have come up for air. Venture capitalists are not just eying renewable technologies. They are also getting more involved in power grid optimization and energy management.

But some analysts are advising would-be investors to scrutinize the start-ups asking for capital. Clean tech "is now frankly over-hyped, and I am seeing poorly conceived business plans getting funded," says Peter Fusaro, in a column he authored for UtiliPoint's IssueAlert. "So-called 'science experiments' don't cut it on Wall Street ... Many of these technologies are so debt ridden that they will never be commercially viable."

Fusaro doesn't give the whole sector the thumbs-down. He is positive about hybrid vehicles and coal gasification that cleanses coal of its impurities before it is burned and goes out the smokestack. American Electric Power and Cinergy Corp. are two utilities getting involved in this pursuit and are doing so with the expectation that they will be able to pass through the cost of such ventures on to customers.

For a short period last decade, a lot of utilities were getting involved in venture capital funds by creating such units within their overall operations -- without any guarantees of getting positive returns. But the culmination of power trading scandals and hard times meant the majority had to retreat and focus instead on their bread and butter operations. PNM Resources of Albuquerque, for example, lost nearly $2 million in 2003 in the boiler inspection business.

Others, though, have kept a foot in venture capital investing and view it as a means by which they can learn what is happening on the ground floor of American enterprise. Cinergy, for instance, owns energy conservation firm Vestar.

Venture capital investing is a method by which utilities can learn about new opportunities without having to risk unlimited capital. Such investments are uncertain but seen as a way to invest in emerging technologies that could affect core operations. In addition to the 35 percent returns that most companies hope to achieve over a five-year time frame, the outlays must expand the parent companies' markets for its products and services.

According to Tucker Twitmeyer, managing partner at EnerTech Capital in Wayne, Pa., there is no ideal entity when it comes to investing in clean tech. Each unit has its own methodologies and each has merit when it comes to getting value out of the energy market. Utilities generally may be getting out. But, other large industrials are getting in.

At the same time, some venture capital firms have remained active in the sector. EnerTech, for example, picks early stage deals and ones where there is significant revenue opportunity in a 6-18 month time frame. To be successful, firms need a path to profitability in three-to-five years, adds Twitmeyer. EnerTech typically builds a syndicate of investors and demands board seats on every company in which it invests.

"It's a good time to be a buyer," says Twitmeyer. Among the businesses he likes: WellDog, a Wyoming-based enterprise that has developed uncommon tools to discover natural gas and particularly coal-bed methane. Others are high on Energy Innovations out of Pasadena, Calif., which develops solar panels. It has raised almost $17 million in recent months.

Indeed, times are different. During the height of folk music, corporations were seen by some as the evil spirit. Today - with the leadership of companies such as GE -- they are viewed as a springboard into the New Economy. Going green is not just fashionable. It's also profitable.

For far more extensive news on the energy/power visit:  http://www.energycentral.com .

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