Power to the geeks!

Eric Fry - Wed 19 Apr, 2006

...The markets for the [alternative energy] products are huge. If you can get it right it's really a market that's infinite...

Power to the geeks!

- Question: How many geeks does it take to power a light bulb?

- Answer: At least two. One to provide millions of dollars in research funding and one to devise an economically viable process for converting agricultural waste into "cellulosic" ethanol.

- Vinod Khosla, the founder of Sun Microsystems, along with Bill Gates and many other billionaire propeller-heads, are investing their riches and their passions in the pursuit of alternative energy solutions. Their early efforts have kicked off a mini gold rush among small-cap alternative energy stocks here on Wall Street.

- Just on Monday, the shares of Pacific Ethanol (Nasdaq:PEIX) jumped more than 15%, bringing its gains for 2006 to more than 200%! Other recent high-flyers include Green Plains Renewable Energy Inc., a Las Vegas-based company building a 50 million-gallon per year plant in Iowa...Xethanol Corp, a New York-based ethanol company...and MGP Ingredients Inc, a Kansas-based maker of wheat proteins and starches.

- Undoubtedly, some of these early winners will prove to be long-term losers. But some will produce enormous, tech-stock-esque gains...

- "I have a religious belief in the power of ideas propelled by entrepreneurial energy," declares Sun Microsystems' Khosla. Apparently, many other tech-company founders hold a similar "religious belief".

- Larry Page, the co-founder of Google, is also investing in ethanol research. Robert Metcalfe, the co-founder of 3Com Corp, is testing a system to convert smokestack emissions into power-plant fuels. T.J.Rodgers, the founder of Cypress Semiconductor, has spearheaded his company's sizeable investment in SunPower North America, a solar energy company...

- And Bill Gates, the world's wealthiest human, is investing $84 million in Pacific Ethanol (NASD:PEIX), the company now constructing a large-scale ethanol production facility in Madera, California.

- What do all these folks have in common? They have all pioneered, or helped to develop ground-breaking information technologies...and have made billions of dollars in the process.

- 3Com's Metcalf, for example, led the Xerox research team that invented the Ethernet networking technology in 1973. And Bill Gates created a little company called Microsoft that revolutionised personal computing entirely. Khosla, for his part, helped to found Sun Microsystems, the company that pioneered network servers and the Java programming language. Khosla also made a fortune as a partner at Kleiner Perkins, the Silicon Valley venture-capital firm famous for making early-stage investments in AOL, Amazon, Compaq and Google.

- The glittering curriculum vita of Messrs. Metcalf, Gates and Khosla do not guarantee success in the field of alternative energy, but neither do they portend failure. Successful entrepreneurs have a way of succeeding more than once.

- "Energy has got to be one of the top five problems the world faces, and it's been frustrating to watch activists and politicians fail to solve the problem," Metcalfe recently griped. "Now it's time for the entrepreneurs and scientists to give it a try...The markets for the [alternative energy] products are huge. If you can get it right it's really a market that's infinite. We're hopeful."

- And so is your New York correspondent. He is hopeful both that creative individuals will develop ground-breaking alternative energy technologies, and also that vigilant investors will profit as these technologies gain acceptance.

- "We're finally at a point where some of the alternate energy sources that are more environmentally friendly are worth taking a look at," hedge fund manager David Shaw, recently remarked to Bloomberg News. "We're interested in cleaning up the environment at the same time as we make money for investors."

- And it seems that the prospects for cleaning up by cleaning up have never been better. Alternative energy technologies have yet to capture any meaningful energy-source market share. Renewable energy accounts for less than six percent of all primary fuel used by the International Energy Agency's 26-member nations, with hydropower accounting for 2%, combustibles such as ethanol 2.9%, and wind 0.6%.

- But $70 crude oil is rapidly changing the economics of renewable energy. The IEA estimates that demand for fuels made from corn, sugar and soybeans will quadruple in the next three decades, a period when oil use will increase by less than 60%. This growth potential is not lost on folks like T.J.Rodgers. A few years back, when the Cypress Semiconductor founder recognised the investment potential of solar energy, his company purchased SunPower North America – and investment that Rodgers still considers one of his "best ever".

- "One of the reasons the oil guys say, 'This solar stuff is interesting science, but we've got to get on exploring for more oil,' is because the numbers are pretty small," Rodgers explains. "The flipside is, if you are a solar guy, you are looking at an infinite market – absolutely infinite. The total available market for the solar industry in megawatts in 2005 was 1,300. The compound annual growth rate [for solar cells] is 31 percent…Since roughly 1995, semiconductors have grown at 10 or 12 percent and we consider that a fast-growing industry."

- Elsewhere in Silicon Valley, Sun Microsystems' Khosla is particularly enthused by 'cellulosic' ethanol, a fuel derived from agricultural waste. "President Bush touted this new technology in his recent state-of-the-union speech, suggesting that it may come to market in six years," the Economist relates. "In typically impatient form, Mr Khosla wants to halve that gestation period...Given his record as a venture capitalist, it would be foolish to dismiss his latest bet on the future."

- Over the near-term, the exuberance about alternative energy stocks may have gotten ahead of itself. Now that upstart "ethanol plays" are soaring 15% in a single trading day, for example, cautious investors deserve to feel their pangs of anxiety. At the same time, the long-term promise of alternative energy stocks remains extremely compelling.
In the past 30 years, only $27.4 billion has been spent on renewable research and development budgets, according to the International Energy Agency in Paris. Last year alone, oil and gas companies spent eight times more money on oil exploration and production.

- One way or another, therefore, investment in alternative energies will increase sharply. And as this investment increases, so will the capacity to devise new technologies, and so will the opportunities for individual investors to capitalize on these technologies.
Vinod Khosla might not find the next great energy technology; and Bill Gates might not either. But some other geek will.

- The next energy age belongs to the geeks. Invest accordingly.

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