The Switchgrass Is Always Greener

Alternative-energy investors have weathered many booms and busts. Solar power was eclipsed by wind, which in turn was blown aside by fuel cells. Ethanol derived from corn has hung around for years, thanks in large part to generous government funding, without coming close to supplanting gasoline. Now there's switchgrass.

Despite past failure and unfulfilled promises, it's undeniable that soaring crude prices have renewed interest in the sector once gain. Nth Power estimates that of the money that flowed into venture funds last year, slightly more than $800 million was earmarked for "clean technology" start-ups. That's up from around $700 million in 2004. The amount has grown every year for the last four years.

Spikes at the gas pump and soaring home-heating bills have garnered the attention of consumers too, but Americans have been down this road before. During the oil shock of the 1970s, high prices prompted many to bet big on alternative-energy technologies. When oil and gas prices eventually retreated, most of those investments floundered as alternative energy faded into the background. But this time around, says Woodward, it's different.

"There's a real push toward energy independence and a cleaner source of energy as people start to take global warming seriously and realize the true costs we have in this country of supplying our oil habit," says Woodward, whose firm invests in a range alternative-energy start-ups. "People are willing to pay a premium as a way to do their part, as a way to help solve that problem."

A sticking point has always been cost. Renewables are notoriously expensive, so their inability to compete with traditional energy sources has held them back. But as technologies are refined, Woodward predicts companies like the ones that Nth Power invests in will become more cost-effective.

"A lot of these technologies that are viewed as questionable because of economic considerations are more viable today and will be more so five years from now," he says.

SmartMoney.com spoke with Woodward about the specific start-ups that Nth Power is pouring money into, and why alternative energy must be the wave of the future.

SmartMoney.com: What areas of energy are you focusing on?

Tim Woodward: We're an energy venture-capital firm. We broadly define the energy market space. That market has evolved from a focus on the power industry, which is really the electricity industry, and has become much broader to include all of energy. From oil exploration, processing, natural-gas exploration, refining, to all of the technology that touches on consuming energy, including batteries in laptops, and anything related to uninterruptible power supplies, where 24/7 electricity is critical, like data centers and hospitals. And then it carries over to the customer side — how the homeowner can manage their energy consumption in more intelligent manners. Whether that's buildings, heating and cooling systems, to homeowners who want to put solar on their roofs, or want to use a different type of fuel in their cars.

SM: What kinds of companies does Nth Power invest in?

TW: We invest in private companies. We're at the early round, at a point in time when the company is about to launch a product. So we're pretty far upstream in [the venture process] and we continue to invest in the businesses prior to their public offering.

One of the companies we invest in, and I'm on the board of, is AllConnect. We provide a service for [residential customers in the process of moving]. We allow you to sign up for all your home services through a single transaction. It could be DSL, phone, cell service, electricity, gas, water. We do that through your electric utility. For example, you could call ConEd (ED) and you'd be transferred to our facility, where in about half an hour you could have all your other services signed up. It enhances [ConEd's] brand in relationship with the customer. We get in front of a moving customer when they make critical decisions so companies like Verizon (VZ) and Comcast (CMSCA) want access to that customer.

It's related to the evolving energy market. Electric utilities are in a more competitive marketplace. Electric utilities view themselves as having a pipeline into a home that can bring services into the home, similar to the TV company, cable company or phone company. So the utility company is beginning to broaden the services it's bringing to the customer.

I'm on the board of a company in New Jersey that provides "peak load management." At times in Manhattan, or in southern New Jersey, when everyone turns on their air conditioners, the power grid is pushed to capacity.... We offer a cost-effective way for the utility to wirelessly communicate with a home and cycle the air conditioner to reduce the amount of power used. It can save a significant amount of energy....We build the equivalent of a power plant around load-management devices. It's the ultimate in renewable energy.