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Power Source

How a fresh crop of CFOs is propelling the alternative-fuels industry.
John Goff, CFO Magazine
July 1, 2006

The first time Don Points visited Kramer Junction, California, he didn't know what to expect. It was 2001, and the retired finance executive had booked a tour of Solel Corp.'s solar thermal power plant in the Mojave Desert. Although Points had heard about solar electric-generating plants from his friend John Myles, CEO of Solargenix Energy, he hadn't given the concept much thought. But as the former McDevitt Street Bovis finance chief stood in the barren desert, out among the endless rows of sky-blue reflectors, he felt as though he had stepped into an alien world. Points still recalls the eerie silence, punctuated only by the soft electronic whir of actuators moving giant mirrors 1/16th of an inch. "I was awestruck," he says. "I knew right then that this technology would work."

Points came out of retirement to join Solargenix as finance chief in 2004. His timing could not have been better. With fuel costs rocketing to the top of the worry list for CFOs (see By the Numbers), finance executives in the clean-fuel sector — once seen as a noble but foolhardy pursuit — now find themselves at the center of the action.

Indeed, the clean-energy industry (solar, wind, geothermal, biomass, hydrogen, fusion) has moved far beyond its early tree-hugger image. Legislators in several states, worried as much about potential power shortages as they are about the environment, have set aggressive targets for clean-fuel production of electricity. Business leaders, too, are exploring ways to insulate their companies from price spikes. One company, natural- and organic-food retailer Whole Foods Market, now meets all of its electricity needs through wind power, a technology whose fuel source is free.

The build-out of the clean-fuels industry has commenced in earnest. Nationwide, there are 101 ethanol mills, and another 40 are being constructed or expanded. General Motors Corp. is ramping up production of vehicles that can run on the high-octane home brew as well as gasoline. Commercial wind farms have cropped up in 34 states, with turbines dotting the rolling farmland near Walla Walla, Washington, and the marshes outside Atlantic City, New Jersey. Close to Las Vegas, Solargenix recently broke ground on a 64-megawatt solar thermal plant — the largest to be built in nearly 15 years. All in, research and publishing firm CleanEdge predicts that by 2015, sales of clean fuels will hit $167 billion. (That's more than the revenue currently generated by the U.S. airline industry.) "Renewables are poised to grow," insists Dan Goldman, CFO at clean-energy specialist New Energy Capital Corp., headquartered in Hanover, New Hampshire. "We're at a tipping point."

The switch from novelty to commodity is no sure thing, however. Securing capital remains difficult for new-fuel businesses, particularly those short on earnings. To obtain funding, CFOs at these outfits must convince lenders of the viability of often-exotic technologies — no easy sell. And regardless of fears about global warming, clean fuels will not catch on unless they cost as little as fossil fuels. That puts CFOs at alternative-energy companies squarely on the hot seat. "We're past the crunchy-granola stage," says Richard Baxter, senior technology analyst at Ardour Capital Investments LLC. "This is about money. If clean fuels aren't competitively priced, they won't last."

Corn Stalkers
The track record bears this out. In 1973, the Arab oil embargo jump-started scores of alternative-fuel projects, many of which faded away when petroleum prices dropped. The wind-power industry has practically shut down every time the federal production tax credit has been left to expire.

Clean-fuel executives know they can't avoid every risk. OPEC could flood the market with cheap oil. Big-oil companies could jump into the renewable-fuels business, pushing smaller players aside in the process. (The former British Petroleum is now BP Plc, and brands itself as "Beyond Petroleum.") Or, they could take their massive cash reserves and buy alternative-power technologies — and then let them wither.

So-called clean fuels (that is, fuels that do not release carbon dioxide into the air or those that come from renewable resources) are not entirely problem-free, either. In May, the Federal Aviation Administration, concerned about the effects of wind turbines on radar, placed a moratorium on the construction of new wind farms in the Midwest. Critics of solar photovoltaic cells predict the technology will only exacerbate the current worldwide shortage of silicon. Ethanol bashers contend that the grain alcohol requires more energy to make than it creates.

The Department of Agriculture disagrees. But such criticisms haunt ethanol investors like New Energy Capital. New Energy, which is funded partly by the California State Teachers' Retirement System, is close to completing a dry mill ethanol factory in Rensselaer, Indiana. Financing for the $70 million project came from several backers, including Farm Credit Services of Mid-America and 300 local farmers and businesses.

When analyzing long-term biofuel investments, Goldman gauges things like commodity risk (the price of ethanol and feedstock like corn) and legislative risks (the biodiesel tax credit expires in 2008). Nonetheless, the New Energy Capital CFO can't control negative press about ethanol's impact on food prices, nor shifting political whims in Washington, D.C. Says Goldman: "There is some wariness that this boom may end."


Here Comes the Sun
Solargenix's experience reflects this uncertainty. The company is building a large solar thermal electric power plant in Boulder City, Nevada. Roughly akin to a big magnifying glass, such a facility uses thousands of mirrors (called troughs) to focus the sun on a synthetic liquid. Eventually, the super-hot fluid (750°F) creates steam, which spins a turbine. Technology under development will allow additional heat to be stored in liquid salt, enabling the plant to produce electricity after sunset.

Although the Department of Energy estimates that such facilities could compete with traditional power plants in as little as five years, the Solargenix project, dubbed Nevada Solar One, has been repeatedly delayed by financial constraints. "When I joined Solargenix," says CFO Points, "I knew our biggest problem would be convincing lenders that the technology is commercially viable."

The shaky credit status of Nevada Solar One's only customer, Sierra Pacific Resources (the parent of Nevada's two electric utilities), didn't help. Eventually, the state stepped in. Points worked with a task force set up by Nevada governor Kenny C. Guinn and hammered out amended power-purchase statutes. Under the setup, Sierra Pacific revenues that are attributable to renewable energy sources will be funneled into a trust guaranteeing Solargenix's payment. Local officials also okayed about $15 million in incentives for Nevada Solar One, including a $9 million property-tax abatement.

The concessions acknowledge Nevada's ambitious goals for clean-energy production (20 percent by 2015), with at least one-quarter coming from solar power. The reliance on solar energy makes sense for a state that generally records as many as 320 sunny days a year in prime locales such as Las Vegas. The electricity produced by Nevada Solar One will bring Sierra Power Resources into compliance through 2009. Past that, the Nevada utility will have to scare up additional supplies of solar power.

Twenty-two other states have similar aims. Called renewable portfolio standards (RPSs), the programs have gained considerable support. In 2002, following the California energy crisis and Enron-manipulated blackouts, Gov. Arnold Schwarzenegger raised California's already high targets. "I'm not sure he even knew what he was doing," says Ardour Capital Investments's Baxter. "But other states then said, 'We can do that.'"

The Check's on the Wall
In theory, the RPSs will prevent future outages and cut back on pollution-related illnesses and deaths. In practice, the targets mean utility operators have little choice but to purchase power from distributed generators (small-scale power generators located close to where the electricity is used). This has not escaped the notice of institutional investors.

Last year, for example, the three largest U.S. initial public offerings for venture-backed businesses were for companies in the solar-energy industry, including the nearly $400 million offering for China-based Suntech Power. Even more telling: investment bank Goldman Sachs purchased a Texas wind-farm development company in 2005 and has earmarked $1 billion for similar acquisitions.

Conventional power producers have also gone on a buying spree. In April, Portland General Electric announced plans to acquire the development rights to Biglow Canyon Wind Farm in Oregon. In May, Iberdrola, a Spanish energy concern and the largest owner and operator of renewable-energy facilities in the world, acquired Community Energy Inc., a Pennsylvania-based company that markets and develops wind energy in the United States. Even Solargenix was bought last November by Acciona Group, a Madrid-based energy and construction company with 2005 revenues of $5.8 billion.

At the same time, a few utilities have developed creative ways to meet clean-energy mandates. In May, Princeton, New Jersey–based NRG Energy Inc. formed a joint initiative with GreenFuel Technologies. The purpose: to test GreenFuel's algae-bioreactor technology on NRG's coal-fueled power plant in Dunkirk, New York. For NRG, the agreement means the utility can try out the technology without actually buying it. In exchange, GreenFuel gets to perform a utility-scale test on its bioreactor system without footing the bill.

That's crucial for a company that still tapes copies of customer checks on the walls of offices that are otherwise free of adornment or amenity. When GreenFuel moved into its new office in Cambridge, Massachusetts, in January, management didn't have time to paint or install carpet. "We couldn't afford the distraction," explains Cary Bullock, CEO and de facto finance chief. "We went right to work."

What GreenFuel is working on is pond scum. No kidding. The company, which sells to power producers and manufacturers, constructs bioreactors that contain a special strain of algae. The algae are deployed in modules at a power plant or factory. Those modules are connected to a smokestack through a pipe or hose. When emissions from fossil-fuel generators pass through the flue, the algae convert carbon dioxide into starch and nitrous oxide into lipids. Once the algae are harvested (that is, the water is removed), the starch can be turned into ethanol or biodiesel. Early tests suggest the process yields about 10,000 gallons annually of bioethanol and a comparable amount of biodiesel per acre. By comparison, an acre of soybeans produces just 60 gallons of biodiesel. In essence, the algae turn smoke into fuel.


It remains to be seen if GreenFuel can turn algae into dough, especially since research-and-development costs eat up the company's $2 million revenue stream. Even with the completion of an $18 million B-round of funding in April, Bullock keeps close tabs on available capital from gross margins. He also monitors expenses. "I don't want to take my engineers' last nickel," he notes, "but for a company this size, cash is oxygen."

Utility Players
It's a refrain regularly repeated by clean-fuel CFOs. Finance chiefs at solar- and wind-power companies, for example, know they must take costs out of production, since there's very little chance they can lower the cost of their source of power. Solargenix's Points, for example, says a $500,000 reduction in the operation and maintenance expenses of a solar generator would significantly reduce the rates the company charges. "We've got to get costs down," he concedes. "Right now, we're a high-priced commodity."

Reining in costs will require, among other things, financial discipline, a trait that's often lacking in the fledgling sector. "There's little tax and structuring skill within the renewable industry right now," claims New Energy Capital's Goldman. Case in point: FuelCell Energy, founded in 1969, operated without a corporate finance chief for almost 30 years. In 1998, the manufacturer of stationary, hydrogen-powered fuel cell generators hired Joseph Mahler, an Ernst & Young partner, to head up finance.

Mahler's quest to reduce zeros has led to a new-product portfolio. Now, the Danbury, Connecticut-based FuelCell focuses on 250-watt and 1-megawatt modular generators instead of small, all-in-one units. The larger machines enable big manufacturers to reduce both reliance on the grid and carbon output. And the modular design lowers manufacturing, transportation, and maintenance costs for FuelCell. "I'm not necessarily an environmentalist," insists Mahler. "My job is to manage this company into a position where it can reach its potential."

Reaching that potential remains an elusive goal. In 2005, the publicly traded FuelCell recorded $30 million in sales, a 38 percent increase over the previous year, but still managed to lose $74 million. To reduce the red ink, Mahler will have to find additional savings, no easy task considering product costs were cut in half in the past two years. But the longtime accountant sees gains coming from supply-chain management and efficiencies of scale. In fact, he forecasts that FuelCell's next product, a 2-megawatt unit, will be competitive with local utilities — even without the current government subsidies.

At the moment, no alternative source of electricity can compete on price with conventionally generated power (see "Price Parity?" at the end of this article) — at least not yet. Currently, wind power is the closest. After factoring in a 1.9 cent-per-kilowatt-hour federal production tax credit (which will likely be renewed in 2007), wind-generated electricity costs between 6 and 8 cents per kilowatt hour — compared with 3 to 6 cents for coal-fired electricity. Says Erin Kelley, a former Georgia state energy manager who now heads up sustainability efforts at carpet and commercial fabric maker Interface Corp.: "The cost of wind power has fallen drastically."

When you can get it, that is. An unexpected surge in global demand for wind power has triggered a shortage of wind generators. It can take up to 16 months for delivery of a turbine. "Now, you have to agree to a down payment," says Jaswant Bangaru, director of finance and project management at Toronto-based wind-farm development company AIM PowerGen Corp. "Otherwise, it's difficult getting a turbine on time."

Carbon Copy
It may become even more difficult if a bill introduced in Congress in May becomes law. The proposal would require utilities to reduce their smokestack emissions of carbon dioxide and would almost certainly boost demand for clean energy from producers like AIM, Solargenix, and FuelCell Energy. Other legislators want to regulate CO2 emissions from all commercial smokestacks — great news for GreenFuel. The groundswell of bipartisan congressional support was no doubt inspired by the sizable drop in air pollution brought about by the 1990 revision of the Clean Air Act. That, or politicians saw a recent poll showing that 83 percent of Americans would like to see more attention paid to global warming during the upcoming elections. "It looks like carbon may finally get regulated," says Interface's Kelley. "In that case, you won't have to pay for compliance if you use clean fuels."

Critics of clean fuels say biomass-fuel producers should make it on their own, without government prodding. It's a compelling argument — one that would be even more compelling if it weren't for the raft of federal tax breaks enjoyed by oil companies. One long-standing depletion allowance enables energy companies to deduct the "loss" of fields that have been mined or drilled to the last dollar. The Congressional Joint Committee on Taxation estimates that oil and gas companies will receive about $10 billion in industry-specific tax breaks over the next five years.


For his part, New Energy's Goldman thinks some biofuel technologies can compete without incentives — even if the price of petroleum drops to $45 per barrel. In fact, the CFO says he's more concerned about keeping up with demand. "There just aren't enough builders of these ethanol projects," he complains. "They're stretched thin."

Consider it a sign of things to come, particularly if consumers tire of runaway electric bills and $3.50-per-gallon gasoline. Envisioning this strange new landscape, management at retailing giant Wal-Mart Stores Inc. recently began exploring the possibility of offering ethanol at its 383 service stations.

Meanwhile, back at the GreenFuel offices, they finally painted the walls. Apparently, the company is planning on staying a while. "This is a noble business," says Bullock. "The good thing is, you can also make a hell of a lot of money from it."

John Goff is technology editor of CFO.



The Alternative Factors
Every clean fuel comes with its own set of promises and problems. Here's a breakdown.
Pro Con
Solar Thermal (Parabolic Trough)
Free source, peak output during peak usage hours, no pollutants, some night production Expensive, ill-suited for rainy climes, some night production
Ethanol
Decrease in farm subsidies, reduced pollutants, made in U.S.A., almost cost competitive, flex cars exist, better methods coming Unstable when transported, adds to groundwater pollution, small net-energy gain, boosts food prices, try finding a station
Wind Farming
Free fuel source, no green-house gases, almost cost competitive, domestic source, cash crop for farmers Intermittent, risk to wildlife, often far from grid (power drop), ruins the view
Algae Harvesting (Bio-Conversion)
Double duty (smokestack cleaner, fuel source), produces ethanol and biodiesel, mitigates risk from CO2 cap, works at existing facilities Some carbon release, untested on large scale, algae farming tricky (tiny tractors)
Hydrogen Fuel Cell (Stationary)
Off the grid, ideal power backup, costs dropping, reduced pollutants, quiet Rate volatility (natural gas), reliability, pricey without incentives

It's Good to Be Green

In February, Whole Foods Market made a bold announcement: henceforth, it would use wind power to supply 100 percent of its electricity. Toward that end, the Austin, Texas-based organic- and natural-food retailer plans to purchase renewable-energy certificates from Renewable Choice Energy, a wind farmer in Boulder, Colorado.

In doing so, Whole Foods joined a growing list of businesses turning to clean fuel. FedEx Kinko's gets 14 percent of the electricity for its U.S. stores from renewable-energy sources. Likewise, Johnson & Johnson has on-site solar plants in New Jersey, California, and Pennsylvania. Sierra Nevada Brewing Co. now supplies most of the base load electricity for its Chico, California, microbrewery from a hydrogen fuel cell generator. CFO Bill Bales says the move doesn't come cheap. "There are a lot of credits and rebates, which make the out-of-pocket costs more reasonable," he says. "If you had to pay full retail value, it wouldn't make economic sense."

There are other benefits to consider. Erin Kelley, head of sustainability efforts at Atlanta-based fabric and carpet maker Interface Corp., says that by using clean fuels, "you get a double ding. Renewables move you off the grid and help build the brand."


Certainly, few large businesses can match Interface's commitment to moving off the grid. In 2004, the company completed a renewable-power facility in LaGrange, Georgia, that converts landfill waste to liquefied gas. And while Interface currently satisfies 13 percent of its global electricity needs with renewables, the goal is to hit 100 percent by 2020. CFO Patrick Lynch concedes such greening makes his job more difficult. The approach does have its pluses, however. "It's a hedge against price volatility," he says. "These days, the oil markets get all skittish around some offhand comment about what's going on in Nigeria." — J.G.


Not Exactly a Breeze

Politics, turbine shortages, and rising steel prices notwithstanding, wind farming is a complicated business. AIM PowerGen Corp.'s recently completed Erie Shore Wind Farm underscores this point. The 99-megawatt power plant, which took more than four years and $186 million to complete, is set on rolling farmland near Lake Erie.

That's not where AIM's management thought the plant would be, however. Initially, the company planned to put the turbines in Lake Erie. "But erecting the turbines two kilometers out in the lake was a problem," says Jaswant Bangaru, director of finance and project management at the Toronto-based wind-farm company. "We had to design the turbine foundation to withstand icing conditions." In the end, the offshore idea turned out to be cost prohibitive.

Locating a wind facility on land is no less complicated. Today's generators are more efficient mostly because they're bigger, typically 25 stories high. They require space. Erie Shore's 66 turbines, for example, span 16,000 acres, which meant AIM had to negotiate long-term leases with local farmers. What's more, the massive blades can prove lethal for birds and bats, and can blight a once-scenic view. Indeed, several European wind projects have been canceled or delayed due to — wait for it — environmental risks. Says Jeff Deyette of the Union of Concerned Scientists: "Some wildlife and resource conservation groups are just now discovering this problem."

Electric-utility operators long ago discovered problems with wind power. Industry experts say such managers don't know what to make of the power profiles created by wind farms and other distributed generators. "Utility guys monitor things that affect the grid for just 1/60th of a cycle," notes one energy analyst. "A full second drop-off? That will drive them batty." — J.G.




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