Monday, May 18, 2015

The Cleantech Bubble, Tesla Motors, Nuclear Industry Startups: Guest Post by Evan Twarog

Evan Twarog
The Energy Market

In 2013, more than $1.6 trillion was invested into global energy markets, a figure that has more than doubled since 2000, and one that will continue to grow well into the future. The global energy market is worth tens of trillions of dollars, and this marketplace has driven the growth of entire regions, including Northern Africa, the Middle East, and Russia.  In other words, the energy market is massive beyond comprehension.  For the aspiring entrepreneur, this amount of available money means one thing; a huge opportunity to build a company that dwarfs even Exxon Mobil.  If a company can capture just 1% of this market, the company will be worth over $100 billion.  This opportunity is what drew the attention of a herd of entrepreneurs in the mid-2000s.

At the start of the 21st century, seemingly everyone thought that clean energy would be the next big thing.  How could it not? Smog in Beijing was so bad that people couldn’t see from building to building.  The year of the hurricane, 2005, brought a record 28 hurricanes, 8 more than the next busiest season.  Humanity’s consumption habits had to change, and they had to change immediately.  It was going to be a generation of clean energy entrepreneurs that lead this wave of economic transformation.  No longer would we be reliant on evil oil companies, greedy lobbyists, or big finance.

This revolution never came though.  Wind power today, a full decade after the Green Tech Boom offered to change the world, meets less than 5% of total power consumption in the US.  Solar power meets less than 1% of our power needs.  Renewable energy advocates point to stunning growth rates, often nearing 100% for solar power, however fail to mention the percentage of total power generated by renewables.  What happened to this wave of change?

The Cleantech Bubble Bursts

In 2007, the Cleantech Bubble burst.  The Renewable Energy Industrial Fund, which peaked at over 2000 points, dropped to less than half of that in a year, and today rests at 528.93 points (as of April 30, 2015).  While conservatives will often argue that as soon as the government touched renewables with its subsidies, its failure was inevitable, there is a different explanation as to why cleantech blew up.  Many cleantech companies tried to be revolutionary companies that would take over the entire energy market, and turn into a multi-billion dollar company.  While the massive scale of the energy marketplace seemed to present a huge opportunity on the surface for entrepreneurs, the reality was that this created fierce competition.   While many companies tried to differentiate themselves from one another with “unique” approaches to producing solar panels or wind turbines, there were no exponential improvements in solar panel efficiency.  A solar panel from one company was virtually the a solar panel from a different company, only both were marketed as being revolutionary.  In reality, there was rarely a distinction from a CIGS Solar Panel and a Silicon Solar Panel from a market standpoint.  While this bust may seem like a creation of the oil industry, the failure comes back to a lack of distinction, and companies trying to go big and compete against much larger competitors.

This bubble is by no means the first time an industry has burst open.  The housing bubble of 2008 and the tech bubble of the early 2000s are the two examples that come to mind.  Even the South Sea Company experienced a massive financial bubble in 1720.  What makes the Cleantech Bubble unique is its connection to a social issue.  In building a cleantech company, entrepreneurs were taking on a problem facing humanity.  Environmentalists were thrilled by the industry’s growth, and the potential revolution even attracted the attention of the GOP, a party that has traditionally been skeptical of environmentalism.  The pressing nature of climate change undoubtedly pushed forward the inflation of the bubble.  The failure of the Cleantech Bubble was the biggest flop of “social entrepreneurship” in mankind’s history.

Tesla Motors Survives the Bubble

Out of this bubble, one of the survivors and winners that emerged was Tesla Motors.  Founded by a group of Silicon Valley entrepreneurs in 2003, Tesla aimed to create world class cars that were powered by electricity.  With each generation becoming increasingly affordable, the goal was to bring beautiful, powerful electric cars to the masses and prove that they could match and exceed its gasoline competitors.  Today, Tesla has a market capitalization of nearly $30 billion, and has sold tens of thousands of cars.

Tesla Motors ultimately emerged from the Cleantech Bubble for a number of reasons.  Perhaps the single greatest reason why Tesla succeeded is that Tesla took over a small market, and then expanded to include larger markets.  Initially targeting the high-end, luxury electric car market with its Roadster, it was able to capture a monopoly over the industry before expanding into larger markets.  The Roadster provided the needed capital and reputation necessary to fund the R&D to design and built the less expensive Model S.  Now it’s in a prime position to expand into even broader markets.

One of the key features of any Tesla product is its outstanding performance and beauty.  Its Model S has the highest safety rating a car can achieve, and it can accelerate from 0 to 60 mph in 5 seconds.  Tesla’s technology is so good that other companies use it in their own products.  Mercedes-Benz uses its powertrain, Daimler uses its battery packs, and Toyota uses its motor.  Simply put, Tesla has the best electric vehicle on the market.  Not only this, but its products are beautiful.  It can be considered the “Apple of the Auto Industry”, and has something of a cult following.  This innovative culture is the product of Tesla’s CEO, Elon Musk  Musk is both a brilliant salesman and engineer.  This combination is exceedingly rare to find, and he could easily be compared to Apple’s Steve Jobs.  In many ways, Musk has become the face of the electric car industry.  His demanding nature has attracted both the fascination of the public and the drive of some of the best engineers.  He describes his staff by saying “If you’re at Tesla, you’re choosing to be at the equivalent of Special Forces.  There’s the regular army, and that’s fine, but if you are working at Tesla, you’re choosing to step up your game”. This charisma and intensity is a critical component of the success the company has experienced.

Beyond this, Tesla was able to time the markets in order to take advantage of government funding available during the Cleantech Bubble to gain access to tremendous amounts of capital.  In January 2010, Tesla secured a $465 million loan from the Department of Energy.  Today, this loan is unthinkable with the political climate in Washington.

Entrepreneurial Success Requires Micro-Vision 

All of these factors coupled together show a few things.  Companies must have a micro-vision in order to take advantage of macroeconomic trends.  Entrepreneurs can’t rely on the opportunities that huge markets present without thinking about how their company in particular will capture this market.  Tesla had a vision from the start, whereas Nanosolar and Solyndra didn’t create a solar panel that would stand out from other competitors and in turn, meet a market need.  Beyond this, timing, leadership, people and image all play a significant role in how the success of a company pans out.

Tesla’s success is largely due to a combination of factors.  It created a revolutionary car.  It timed the market perfectly.  It captured a small market before expanding into larger ones.  It attracted incredibly engineers.  It offers direct car sales to its customers through its company dealerships.  Its name has become a coveted brand, and Tesla took advantage of the “sex-appeal” of appearing to be green in order to drive its initial sales of the Roadster.  Perhaps the nuclear industry, an industry not known for its startup-friendly culture can learn from Tesla’s example.

Innovation in the Nuclear Industry

One industry that isn’t necessarily known for its rapid innovation and startup friendly culture is the nuclear industry.  This might be slowly starting to change though.  Y-Combinator, one of the world’s most renown startup incubators, has invested in several nuclear power startups over the past several years.  UPower, a nuclear battery company, hopes to produce a container-sized nuclear battery capable of producing 2 megawatts of electricity.  Instead of producing a reactor that produces enough electricity to power a small state, the reactor would power a small, remote city.  Another startup that YC has recently funded is Helion Energy, a nuclear fusion company that takes an alternative approach to building a nuclear fusion reactor.  Instead of building multi-billion dollar reactors like the ITER, the international effort to build a nuclear fusion reactor, Helion aims to build smaller, distributed reactors for several tens of millions of dollars.  The company claims that it could produce power for $.04/KWh.  Even outside of YC, NuScale Power, the front runner of small modular reactor designers resembles more of a technology startup compared to a traditional nuclear company.  Starting out of the vision of Dr. Jose Reyes in the early 2000s, NuScale has collaborated with Oregon State University and is arguably the company within the industry that has the most momentum.

These companies are examples of an interesting shift in the way innovation is permeating into the nuclear industry.  For decades, innovation within the industry was dominated by larger companies such as GE, Westinghouse and Areva.  Seemingly, some of this momentum is now coming from smaller startups.  While this trend might not seem significant, it could change the way in which newer technologies come to the marketplace.

If startups are going to be successful within the nuclear industry, they are going to have to learn from the startups of Silicon Valley and the Cleantech Bubble.  Compared to other industries, the nuclear industry is heavily capital intensive and regulated, so establishing a strong foundation is critical to a startup’s success.  In particular, a couple issues that the nuclear industry will face mirror those that Tesla overcame.

Breakthrough Nuclear Technologies, and Learning from Tesla

Any nuclear startup will need to address what their target market will be.  Just as Tesla established a small niche and then expanded out into larger markets, nuclear startups must do the same because of the immense size of the energy marketplace.  These startups are going to run into serious challenges because of competition from fossil fuels. Larger nuclear reactors will have the benefit of massive scale, but will face the challenge of proving their economics because of the uncertainty associated with their construction costs.  Not only this, but natural gas and coal will provide fierce competition.  Why should utilities build a $10 billion reactor, when they could build a natural gas plant for half of that in half the time?  Smaller reactors will face similar competition from fossil fuel generators.  What these startups will have to rely on are nuclear power’s inherent advantages over its competition.  Nuclear reactors rarely have to be refueled, making them appealing in marketplaces with unstable and high energy prices.  Additionally, because they don’t have to be refueled, they’re appealing to markets where refueling can be difficult (UPower is attempting to capture this market).

Creating a breakthrough technology in the nuclear industry is going to be difficult, expensive and lengthy due to its strong regulatory framework.  As Peter Thiel writes in Zero to One, a breakthrough technology is something that is orders of magnitude better than the current competition.  Being 25% more efficient than other competitors isn’t going to be considered a breakthrough technology in his mind.  Creating a product that is 2 times better, 5 times better or even 10 times better is what will change the world.  The difficulty that the industry is going to experience is that innovation is a) expensive and b) lengthy.  The NRC is planning on charging $279 for every hour of time that its staff spends reviewing a reactor license, meaning it will cost tens of millions of dollars to win a reactor license.  Additionally, the review period takes several years, making it difficult for any startup to maintain the momentum it built up during its initial period of life.  Nuscale is proving that these regulatory challenges can be overcome by partnering up with a larger firm (in this case it was Fluor, a large construction firm) to gain access to the necessary capital to navigate the process.

There are several technologies that have the potential to be considered breakthrough technologies.  Molten Salt Reactors offer passive safety systems and a smaller footprint that could lead to lower construction and operating costs.  Nuclear fusion, which has been “20 years away for the past 50 years”, could be equally as transformative if it  can be commercialized at competitive costs.  The other technology that could be powerful is the Traveling Wave Reactor which is currently under design by the company Terrapower.  All of these technologies have the potential to improve safety, decrease the waste generated by the fuel cycle, decrease production and construction costs, and in turn, be considered breakthrough technologies.

Building the Nuclear Startups

The laws of building a startup apply to any company that is seeking to enter into the nuclear industry.  While the engineering and monopoly questions are both critical to answer and present unique challenges for the industry in particular, all of the questions will need to be answered.  Building a startup is a massive investment of personal energy and it will consume years of the entrepreneur’s life.  Just because there are some unique challenges facing the nuclear industry doesn’t mean that entrepreneurs should be timid about building a company in the industry.  If anything, this difficulty will separate out those who are serious about building a company and technology from those who are looking to simply get rich.  Building a startup in the nuclear industry offers potentially tremendous rewards if it can overcome the challenges facing the industry.  Where difficulty lies, if success is found, the rewards are tremendous.

Works Consulted:

“About Tesla.” Tesla Motors. N.p. n.d. Web. 1 May 2015.
Russell, Kyle. "Y Combinator And Mithril Invest In Helion, A Nuclear Fusion Startup." TechCrunch. TechCrunch, 14 Aug. 2014. Web. 02 May 2015.
Russell, Kyle. "YC-Backed UPower Is Building Nuclear Batteries."TechCrunch. TechCrunch, 18 Aug. 2014. Web. 02 May 2015.
“Technology” UPower. N.p. n.d. Web. 1 May 2015.
Thiel, Peter. Zero to One. New York, NY; Crown Publishing. 2014. Print.
"Top 10 Most Active Hurricane Seasons." Weather Underground. N.p., n.d. Web. 1 May 2015.
"WORLD ENERGY INVESTMENT OUTLOOK 2014 FACTSHEET." (n.d.): n. pag.International Energy Agency. International Energy Agency. Web. 1 May 2015.
"§ 170.20 Average Cost per Professional Staff-hour." Nuclear Regulatory Commission. Nuclear Regulatory Commission, 29 Aug. 2014. Web. 1 May 2015.

Evan Twarog will graduate high school this year and start at the Coast Guard Academy this summer.  He has been a guest blogger at this blog and an intern at the Energy Education Project of the Ethan Allen Institute.  Most recently, he has been blogging at his own blog, Semper Deinceps (rough translation: "Always Forward").  This post first appeared at that blog. Twarog also contributes to several other sites. Twarog's latest two posts are The Three Gorges Dam: Why China is Run by Engineers at Atomic Insights, and Touring Vermont Yankee, at ANS Nuclear Cafe.  We are pleased to host this essay at this blog.

Tesla Roadster

1 comment:

Engineer-Poet said...

Evan, you need an editor!

"This revolution never came though."

There should be a comma before "though", unless you meant "came through".

"It was going to be a generation of clean energy entrepreneurs that lead this wave of economic transformation."

This requires the past tense, so "led" instead of "lead".

"A solar panel from one company was virtually the a solar panel from a different company"

When writing, always proof-read to see if you any words out.

"It attracted incredibly engineers."

Not only is that an adverb when you meant to use the adjective, "incredible" means "having lack of credibility".  Given the industry-leading status of Teslas products that you list, a more appropriate term would be "amazing" or "top-notch".