How and Where GE Is Placing Its Cleantech Bets

How and Where GE Is Placing Its Cleantech Bets

Marc Gunther: This is Marc Gunther. I'm at the GE Global Research Center in Niskayuna, New York -- that's near Albany -- and I'm joined by Kevin Skillern. Kevin is Managing Director of Venture Capital for GE Energy Financial Services -- that's a unit of GE Capital. He overseas GE's Venture Capital Portfolio in Cleantech companies.

Kevin, tell me just as we get started, why is GE in the Venture Capital business and talk a little bit about your portfolio in general terms before we talk about a couple of the specific companies.

Kevin Skillern: We started in the venture capital activity about four years ago in the middle to late 2005. And really, the motivation at first was greed. We had seen several other investors make relatively small investments in some of the solar companies that had gone public and literally had made about $200 million on as little as a $10 million investment. And so the leadership of our business looked at that, said, "Well, why can't we do that?" And so it really was a greed factor to start with in saying, "How can we make more money for GE?"

We spent a bunch of time looking at opportunities. We were a little bit concerned about the market fundamentals and that was a period when ethanol companies were very hyped up. And we were concerned that there was a lot of hype and not a lot of substance there, and so we started conservatively.

We studied the market. We started looking at specific companies to invest in. We had the very good fortune of the first investment that we'd made, which really was the first new venture capital investment by GE, and four years at that point was in a company called A123 Systems that recently went public.

MG: Now, we'll get to that in a minute. Did you get into any ethanol companies, Kevin?

KS: We did not -- in our side of the business. I think, in some part of GE, probably there was, but not in our side of the business. So if we started with the financial motivation, we really realized and we put a set of policies in place that allowed us to succeed as an investor but also as a partner with the companies that we invested in. And I think we quickly realized that the shifts going on in energy and the business that we're in within GE is amongst the largest financial investors in energy in the world.

GE is a major company in the energy industry supplying important components of the power generation industry, the power transmission as well as the oil and gas industry. Given the presence of GE in the energy industry globally, the impact that potentially could play out with the emergence of these breakthrough technologies is significant.

And beyond the financial returns, we quickly realized that there was a real technology window benefit that, by seeing the types of companies and what they were doing and acting as a good partner, we could have an earlier read on what was actually happening, where the big opportunities existed for those companies as well as for GE and partnership with those companies.

MG: And roughly, what's the size of the portfolio and about how many companies have you invested in so far?

KS: Since January 2006, we have invested in 20 different companies, all in, from a GE Capital perspective; we have invested about $160 million of capital into those 20 companies. We invest at the rate of about seven or eight companies a year, is kind of the notional target. We are not a fund. We are investing GE's money -- GE Capital's money into these companies with a clear financial expectation in terms of having returns that are profitable for the company.

MG: Okay, now during today's press presentation, we've heard from some of the companies. I'd like you to talk a little bit about a few of those. One of them was Soliant Energy Company that's just getting started. What's their business, and what made them an attractive investment for GE?

KS: Soliant Energy is a company that's now started to shift product. The technology that they have developed is really a system for the production of solar power on commercial rooftops. If you look around the world, there are lots and lots and lots of commercial rooftops that are under-utilized space. They're just there to provide protection from the rain, protection from the environment, and other than that, there's an opportunity to make money out of what's sitting there with that idle rooftop.

And what their technology in essence does is uses optics instead of more material and concentrates the light coming through from the sun 500 times more concentrated than typical sunlight onto a much smaller footprint of solar material and high cost component, and then uses tracking technology that will follow the sun that allows the optimization of the energy production.

What makes Soliant Energy special is that there's a real likelihood that they will have the best economics. So if you were a building owner, and you had said, "Well, I want the most economic asset sitting on top of that roof to produce my power," that Soliant, because of the cost elements as well as the high -- relatively high energy production compared to other options on what you could put on your roof for solar power, would be the most economic choice for owners.

What's interesting about that as well -- where the opportunity is best, so where the sunlight is best, and solar power also depends on humidity, so in Florida, for example, the dispersion of the rays, because of the moisture that's in the air, makes solar power less effective than you might have in Arizona or California where the air is drier?

So in places where the insulation, the amount of sunlight reaching the rooftop, is greatest in places like Spain and Arizona and California, when you're producing that power also happens to be at the peak rates that the utilities are charging you. And this is something that even the next several years could be a highly economic purchase for customers in that very target but still substantial market.

MG: Another company we heard from was Southwest Windpower. Those are small-scale wind turbines. GE's a big player -- I think number one in the U.S. in large-scale wind turbines. Why would you invest in a small-scale wind turbine company?

KS: GE is the number one wind turbine manufacturer in the U.S., about 45 -- 50 percent market share, depending on the time frame. Southwest Windpower is interesting. They too are the world leader in small wind turbines. They are about 30 percent share globally of the entire global small wind industry, which is still relatively small today. It's only about $150 million a year for the entire industry.

One of the things that makes Southwest Windpower interesting is that they have the lowest cost distributed and renewable power technology. And when you look at the future of continued enhancements to the product and continued to eke out additional energy production, reduce the costs through supply chain and design enhancements, we believe that there's a transition that will occur over the next couple of years.
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The frame being, what has primarily been more of a green oriented consumer that's more of say, a niche lifestyle oriented a consumer into a segment that's much more of a mass market. So more typical residential customers that are more focused on the economics of their purchase, as well as commercial customer small businesses, retail parking lots, things like that, where really the economics are critical to the decision process.

And so with Southwest Windpower is the leader in that evolution, and we believe that you will see substantial growth could be 20 times growth over the next 5 to 7 years in the size of the market, and they are well-positioned to make sure of that.

MG: And let's wrap up with a little conversation about A123. As you know, they went public last month in September. Very successful IPO. Talk a little bit about GE's role there and has that been a good investment for you, if you could quantify it, please?

KS: Sure, I'll share first on the financial aspects that - these things are in the public domain with the SEC filings, following their IPO.

We have invested about $69 million in A123 over six different rounds of financing that have occurred since January 2006. We are the largest shareholder in A123 and have, with the recent trading prices, obviously with that investment, we own 8.2 million shares at an average cost basis of about $8 a share.

So with the recent IPO, we are obviously extremely pleased with the outcome and their ability to raise a substantial amount of capital, which will help fund the capacity expansions that they need. We look at the future of transportation and in this country, the economics of electrifying vehicles -- it doesn't have to be a full electric vehicle -- it'd be a plug-in vehicle, it'd be hybridization of a vehicle -- but those economics are attractive potentially at $40 oil. It depends on capacity expansions and cost reductions with capacity expansions, and with the tax regime that we have today.

When you look internationally, like in Europe, where the taxes are so much higher, we believe that you could see electrification of the vehicles work at $10 oil. And so when you look at the relative economics of electrifying our transportation industry, they're extremely compelling.

There are lots of vehicles under development -- passenger vehicles, heavy-duty vehicles -- and A123 is really the leader -- they have the best-in-class technology of what's available out there to supply that market at this point. There's obviously significant innovation occurring in the batteries but the development cycle --

MG: I was just gonna say, it's a very competitive business, isn't it? I think the Volt went with another supplier, if I'm not mistaken.

KS: Yes. And so the innovation is definitely occurring rapidly.

The qualification cycles are longer, meaning that when auto manufacturers are looking at the cars they'll be rolling out, they need to lock down their supplies several years in advance of knowing what's going to be going into the vehicle, which is also one of the advantages that A123 has from their position where they have been working actively with auto manufacturers as well as off-duty or heavy-duty vehicle manufacturers through the design process, through the qualification process.

And we certainly see, this is a beginning of a substantial change in how consumers drive, and the types of vehicles that they drive. And if you look 10, 20, 30 years from now, I think you will see significant numbers of vehicles on the road.

Well, you could -- people have different forecasts, but in 10 years, 5 percent of the vehicles, and in 20 years, 30 to 50 percent of vehicles being electrified in some form or another.

MG: And I will ask one last question. All three of these companies depend on favorable -- either tax policy or stimulus money. A123 got some federal grants. Both solar and wind get favorable tax incentives for the federal government. What's your concern about -- if any -- about the dependence on your portfolio on a favorable tax and regulatory environment?

KS: I would say that as a company, GE has generally been very reluctant to make substantial investments in things that are dependent on tax -- on subsidies, in a sense, that can be changed by rule of law. And so when we look at these investments, obviously there's an economic environment where people are trying to stimulate jobs, and they see this as a point in time where the U.S. has an opportunity to establish a technology leadership relative to the rest of the world. And you look at the potential growth in the future in China and India and other places, and there is a compelling policy reason to try to stimulate jobs. Clearly, that has benefited the companies that we're investing in.

I think when we've looked at that, when we're making our investment in A123, we never had the expectation that we required a government grant to make it successful. It obviously is very helpful in accelerating the expansion of the company in providing the capital that's needed to build new manufacturing plants.

In the case of our windpower company, Southwest Windpower, there was a subsidy passed -- a tax credit that had not been, before last November -- it was unique in that small wind was excluded from the other subsidies or credits that existed for solar power, their distributed renewable power. But that said, even without those subsidies, we would look and say that the opportunity is still there -- it's just not there at the same pace and size as what would be without those types of programs.

MG: Thank you very much, Kevin, for taking a few minutes.

Wind turbine photo CC-licensed by Flickr user phault.