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Changing the landscape

Published at: Dec 11, 2011
source: Financial Post
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To international decision makers in energy and the environment, Stephan Ouaknine has become a full-blown curiosity.

While the government of Canada rejects the Kyoto climate treaty and refuses to make a second commitment to its emission targets, the Quebec high-tech entrepreneur is spearheading an ambitious business that aims to fundamentally change the landscape for renewable energy.

Canada is being cast as the villain in climate negotiations, a U.S. puppet with its head in the sand bent on protecting its oil exports at any cost. Mr. Ouaknine, meanwhile, has his head in the clouds. He’s a big-picture thinker who believes the world is moving too slowly on clean energy adoption. And he’s got a scheme to quicken the pace.

Earlier this month at the World Climate Summit in Durban, South Africa — the international business conference that takes place alongside the UN-sponsored COP17 climate change negotiations — Mr. Ouaknine shared the stage in a panel discussion with Mary Robinson, former president of Ireland, and Philippe Joubert, deputy chief executive of French energy giant Alstom SA.

The Montrealer talked about the need for new business models to speed up the adoption of clean energy and about the need for renewable energy technology to become cheaper to cut the dependence on government subsidies — themes familiar to anyone who has spoken with him longer than five minutes.

Then, the kicker. “I’d like to paraphrase Steve Jobs, who said the people who are crazy enough to think they can change the world are the only ones that do,” he said, with his typical non-apologetic flair for self-promotion.

“I have a vision of the future where renewable energy is available everywhere, and at a price cheaper than coal.”

These are interesting times to be a Canadian, Mr. Ouaknine confessed via email this week. Perhaps no one is feeling that more than him.

Mr. Ouaknine, 37, is best known as a telecom wunderkind. From 1994 to 2010, he started three separate high-tech ventures — Emblaze, Airslide Systems and Blueslice Networks — and made three successful exits, each one richer than the one before. He sold Blueslice, a subscriber data management company, to Morrisville, N.C.-based Tekelec Inc. last year, pocketing a small fortune.

Now he’s putting that money to work with a new energy venture that consists of two companies: a $1-billion fund called Inerjys Ventures, which is raising money to invest in early to mid-stage companies involved in wind, sun, marine and biofuel power generation, as well as energy storage, transmission and distribution, and smart-grid systems; and a global utility company called Inerjys Renewables Corp. that sells clean power in various countries with local equity partners under the brand Inerjys.

The novelty of the idea lies in the interplay between the two.

The recent bankruptcies of U.S. clean power companies Solyndra LLC and Beacon Power illustrate that green technology startups are still scrambling to find the financing and support needed to cross the so-called “valley of death” — a predicament where a company’s technology is too capital intensive for a venture capital firm to continue investing but still too risky for a bank. In renewable energy, the gap is especially wide because some technologies are unproven and significant funds are needed up front to make them work.

Both startups received loan guarantees from the U.S. Department of Energy under its 1705 program valued at US$16-billion. It was supposed to be a lifeline that would allow them to scale-up their products. It turned into an embarrassing mess that has tainted the notion of using public money to propel green technology.

“Even if, by some miracle, the government could make good business decisions void of political interference, such programs are still doomed to failure because the public and the media won’t allow for even one loan or one investment to fail,” David Gold, a clean-tech venture capitalist argued in a recent column.

Mr. Ouaknine recognizes that problem. Further, he sees a near-term future where governments won’t be able to afford this kind of corporate welfare because of they’ve borrowed too much themselves. But in his world, there’s no need for it.

The Inerjys fund attacks the valley of death difficulty by securing revenue for its portfolio companies. The orders will come from Inerjys Renewables, the sister company, which will buy the latest innovations and deploy them in its global network of utilities.

It will own those utilities with local governments, billionaires and other partners, under a variety of business models. But the international banner for the clean energy will be the Inerjys clean energy company, much like U.K. wireless service provider Vodafone built out its brand in nearly 200 countries.

In theory, the system will allow a network of clean tech companies to grow, breaking the oligopolies now enjoyed by incumbents such as Siemens AG. and lowering prices.

Mr. Ouaknine sees the same deregulation that happened in the telecom sector taking hold in energy, across the planet. Eventually, he says, people will be able to buy their power directly from an alternative energy supplier in the same way they can get television service from Videotron or Bell.

“What we have today is a highly fragmented set of wind farms and solar farms and guys like [General Electric] showing up and saying ‘You’ll pay what I tell you to pay for that turbine, that solar cell, that biofuel power station,’ ” Mr. Ouaknine says. “We’re going to build an entity that is eventually going to have enough critical mass that it’s going to have leverage over its suppliers. So we’re going to change the balance of power. That’s part of how you negotiate prices down.”

This is all pretty ambitious stuff, loaded with regulatory risks and other obstacles. It’s a lot of moving parts for one guy to manage from a slick, second-floor office in Old Montreal. And it is highly dependent on forging relationships internationally.

The odds are stacked against him.

Right now, the effort is very much in its infancy. Mr. Ouaknine says the fund has $700-million in committed capital, roughly 20% of it from family offices and wealthy individuals who are in the mindset of “impact investing” — the concept that philanthropy and for-profit corporate greed aren’t mutually exclusive.

He is also eyeing strategic investors, namely established energy players he can partner with on contracts and who might end up buying the smaller technology companies the fund holds for a multiple later on.

As for the utility company, it has projects underway in seven countries: Canada, Germany, Ghana, South Africa, the United States, Vietnam and Indonesia.

In Indonesia, a country where people often wear gas masks in the streets because the air quality is so poor, Inerjys is partnering with the government and a local billionaire to power the network of base stations for the nation’s largest telecom operator.

The telecom network manager was using thousands of diesel generators to power the system. It was a dirty and expensive solution, Mr. Ouaknine says. And local residents would steal the machines regularly to power their cars and trucks. Inerjys’s solution? A hybrid unit that combines a small wind turbine with a solar panel and a storage device.

The company will recover its $100-million capital cost in two years, after which it will earn profits for the duration of the contract, Mr. Ouaknine says. And the telecom operator will get a solution which costs half what the diesel generators cost.

And the wind, solar and storage equipment providers? They’re among the 40 or so firms in the Inerjys pipeline, companies that the fund is investing in. With Indonesia, they get revenue certainty and cash flow they so desperately need as their sister company provides a captive marketplace for their products.

The Inerjys two-company model is a “phenomenally interesting proposition” if it can be made to work in the long term, says Jatin Nathwani, a professor at the University of Waterloo and the director of its institute for sustainable energy. The key is the global utility company winning contracts, he says.

“[Usually] companies end up either relying on governments for early handouts or investors who are on their backs every quarter,” says Mr. Nathwani, who has been retained as an advisor to Inerjys. “To have that degree of certainty to actually get on your feet is what this model promises.”

Mr. Ouaknine is under no illusion that his $1-billion fund and sister company will rid the world of oil and coal. But he says efforts like his are certain to push up clean energy’s current 3% to 4% global power market share.

The same doubts about the Internet as an immature, unreliable technology that gripped the early days of the telecom industry transformation are at work now in the energy sector, he says.

“I see the same kinds of protectionist tendencies over monopolies and status quo. I see the same fear mongering. … I see the same opportunity to make money and to improve things by making these solutions more efficient.”

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