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High Energy Prices, Tech Attract Venture Capital, but Power Regs Still Uncertain

Today's historically high natural gas and oil prices globally are a major attraction, but uncertainty in the electricity regulation sector has a dampening effect as venture capital funds increasingly eye the energy space -- particularly so-called clean energy -- as good places to invest. The fact that energy touches such a wide variety of industries worldwide is a major attraction, according to one venture capitalist who is helping a new California green energy investment fund get started as an offshoot of Pacific Gas and Electric Co.'s bankruptcy settlement implemented a year ago.

The venture capitalists like the combination of the continued high energy commodity prices at a time when growing markets and technology advances are cutting the costs of various renewables, such as wind and solar. In this regard, the more volatility in the fossil fuel prices, the more attraction that renewables and energy efficiency have for their "stabilizing" effect, another venture capitalist said Tuesday with the release of a report of rising investment in the clean energy sector.

"The efficiency movement grows as fossil fuels [prices] get higher," said Tim Woodward, a principal with the clean energy venture capital firm, Nth Power. "These current [energy commodity] price hikes are not just a short-term, one-time occurrence. I think we have seen step-changes in our costs of commodities. That will drive decisions people make about how assets get deployed, and it will have a big benefit for renewables, there is no doubt about that. Load management and energy efficiency will be big beneficiaries of high natural gas prices."

Woodward said he views most of the trends as positive and that the barriers are being lowered, except in the power regulation area, and particularly regarding transmission, given the quagmire that the national concept of regional transmission organizations (RTO) has fallen into.

"There will always be a little bit of a regulatory overhang," he said. "And we still haven't addressed -- at least in North America -- what we are going to do in terms of restructuring the power industry. Until that really gets clarified, there is a little bit of an impasse in terms of bringing in more intelligence [sensors, smart metering and controls] and upgrading the quality of our grid. It is still unclear what the business rules will be for participants in that (transmission) market. Until those are defined, you simply won't see a lot of investment going into that sector. That's probably the biggest overhang. Otherwise you have to look segment by segment."

The biofuel arena has been impacted by the historically high oil/gas prices. Ethanol burned in one of today's hybrid passenger cars would get 300-350 miles/gallon, the venture capitalists said. "So I think there is a huge area on the biofuels front to advance those technologies and reduce our dependence on more expensive fuel sources," said Ron Pernick, a co-founder of San Francisco-based CleanEdge, a communications/research firm that publishes an annual survey of markets and trends in the clean energy arena.

"We think that oil and gas will remain relatively high," he said earlier in the week in releasing the results of the 2005 clean energy survey. "At the same time, we're seeing a reduction in prices for just about all of the technologies we've talked about. So while fossil fuels increase in prices, the alternative technologies over time are seeing reductions in prices. So the clean sources are becoming less expensive and providing a stabilizing source."

Pernick's co-founder at CleanEdge, Joel Makower, however, cautioned that the positive impact of the high energy prices and lowering of alternative energy costs is slower to manifest itself in the wind, solar and fuel cell sectors. There it takes time.

"Most of the clean energy technologies don't respond in quick succession to changes in energy prices because there are still such large barriers to entry in the case of solar and the interconnect laws with distributed generation, etc.," Makower said. "And then there is the shortage of modules in this country because of the generous subsidies in Europe and elsewhere. They all have infrastructure challenges, so it isn't the case of energy prices being high this year, and meaning there will be immediate growth in the renewable energy technologies. With the exception of efficiency, it is a long-term thing for the renewables."

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