Energy makes the world go round, and industrial growth coupled with waning nonrenewable resources have fueled concern that we’ll outgrow supplies. But developing next-generation energy resources is time-intensive, costly, and often requires the use of public land, a transition that may take decades to come full circle. John Moore, president and CEO of Acorn Energy Inc. (NASDAQ: ACFN), has taken a contrarian’s approach to the great energy debate, opting not to chase new energy sources but rather to help make current infrastructure cleaner and more effective. By funding six portfolio companies that focus on overlooked niches, Acorn is working to develop an intelligent energy infrastructure.
EQUITIES: You have a diverse corporate background. What brought you to Acorn?
Moore: I’m a magnificent amateur. I consider this the age of the energy entrepreneur. The energy industry hasn’t historically been a place for entrepreneurs, but now the material of construction is silicon and software, which is where entrepreneurs can make a big impact.
EQUITIES: In your view, what is the crux of the United States’ energy problem?
Moore: Most people are thinking of this energy crisis strictly as a fuel crisis. We think the more profound problem is our energy infrastructure crisis. A fuel crisis is a discussion about the price of energy, but an infrastructure crisis is when you can’t get it to where it needs to go. The problem in the United States—and this is really a global problem—is that over the last 30 years, the demand for electricity has tripled, while investment in electric grids has fallen to a third of its normal investment. We’re really under-investing in our grids.
The average age of a power plant is 40 years, and the average age of a transformer—which is the No. 1 asset a utility company has—is 28 years, and that’s the typical failure point for transformers. Because the U.S. was the only major growing economy in the past several decades, it was always able to order components for the grid and have them supplied easily and quickly. Now that China and India are growing massively—and are also concerned about their energy infrastructure—the lead time for critical components is two to three years out, and our infrastructure desperately needs to be upgraded. So Acorn believes that the solution is to extend the life of our current energy assets.
EQUITIES: And that’s the transformation that Acorn seeks?
Moore: Exactly. We’re working to transform the architecture of energy. In the past, energy architecture was about an economy of scale and putting steel in the ground. That’s now a problem because of rising demand and supply constraints, as well as the outdated infrastructure and business models of the coal industry. We’re looking to unleash economies of connection. Google turned 10 last month, and its market capitalization is larger than the five largest utilities in the U.S. combined. Economies of connection have been transforming nearly every aspect of our society except the energy industry. People are looking to solar and ethanol and other methods of supplying energy—they’re looking to new supply to deal with our energy crisis.
EQUITIES: Do you believe that the surge in development of alternative energy is somewhat counterproductive in that way?
Moore: We’re going to need every electron we can get—our consumption of electricity is projected to climb 40% in the next 25 years—but I believe that there is low-hanging fruit and high-hanging fruit. Many alternative energy technologies are very important because we’re investing to improve economies of scale with those assets. But I don’t think we should neglect the low-hanging fruit, which means improving existing infrastructure. A lot of these alternative energy assets are intermittent. Solar power only works during the day, and wind typically works at night when the wind is blowing. We believe that wind and solar need a dance partner. Our technology is like an on-ramp for the alternative energy assets that are being developed.
EQUITIES: How will your technology change energy infrastructure?
Moore: Instead of just putting steel electric grids in the ground, we want to add a layer of intelligence to make the existing infrastructure more environmentally sound and cost-effective. The conventional view of energy is what we call fires and wires—energy is created at the power plant and sent out into the world with the hope that there’s enough to meet demand. But there are massive congestion problems, which means that even if suppliers have the electricity, they can’t get it to where it needs to go, and that results in blackouts and brownouts.
EQUITIES: How does your flagship company counteract the congestion?
Moore: We created a company called Comverge, which went public in April 2007 and was named one of America’s 10 most eco-friendly companies by Newsweek. And through it, we’ve changed the paradigm. Instead of sending out supply and hoping that it matches the demand, we aggregate the demand and shape it to fit the supply.
Comverge puts a load switch on your air conditioner or hot-water heater. So when a utility has a congestion problem and is in danger of a blackout or has to buy expensive peak power, it can push a button and dial back the demand of electricity on all those air conditioners, which can shave the peak, prevent a blackout, or eliminate the purchase of costly wholesale power.
We have more than 2,000 megawatts of power under contract around the United States, including 250,000 homes in Salt Lake City that have our load switch on their air conditioners. And the company is growing. Five years ago, Comverge had a pre-IPO evaluation of $5 million, and today that number is around $250 million.
EQUITIES: What can your companies do for electric grids?
Moore: Another of our companies, called Grid Sense, makes a very inexpensive monitor for a grid transformer. There’s this absurd chasm today that our $100 cell phones have more intelligence than the trillion-dollar electric grid that you plug it into. If you look at a substation, which is involved in distribution of electricity, the electric company has no way of knowing what’s happening with that transformer. They have to send someone out in a truck to read the analog meters to find out what’s going on. That’s a big problem when you have a very old asset, like the typical transformer in the United States, which was probably installed in the ’60s or ’70s.
We have a noninvasive device that can be attached to a transformer. It monitors every failure point possible and reports back on a minute-by-minute basis to the central station. When put into context with congestion, utilities currently can’t get more electricity to the transformer than its nameplate value. So the price of electricity around that transformer goes from $47 per megawatt hour to $1,000 per megawatt hour. And because the utility doesn’t know what the condition of that transformer is, they just have to take it at face value according to the last condition report. But if you can monitor that transformer on a minute-by-minute basis and you can monitor all the failure points, you can actually run that transformer for periods of five or 10 minutes at 5% or 10% over its nameplate capacity and pay for that transformer in three to four days.
So the idea is that when you connect everything on the grid to everything else—whether it connects residences to each other, industry to distribution, or transformers to central dispatch stations—you get massive economies of connection, and therefore, you get massive productivity gains from the grid.
EQUITIES: What are the long-term benefits for utility companies?
Moore: It means that utilities can be more strategic about the grids components that they update. They can upgrade only the assets that are closest to failure, and that’s very important. They can get much higher returns off their assets because of the ability to monitor the assets, which results in less interruption of the economy because you’ve got more intelligence out there.
EQUITIES: On the other side, Acorn also promotes energy independence.
Moore: Right. We have a company called Local Power that’s developing tools for cities to be able to secede from major utilities. And that’s a very profound change. If you’re my boss at a utility company and, in the current market environment, I come to you and say that I just figured out a way to sell less electricity, you’re going to say, “You’re fired because we make money by selling more electricity.”
But we believe that the U.S. energy industry has incentive systems that are as screwed up as our health-care system. Demand response and energy efficiency are really at the periphery of the portfolio of most utility companies’ efforts when they should be at the center.
When you look at it from the city’s perspective, they’re interested in keeping a lid on their electricity costs. They want to keep local jobs. So when they aggregate their demand for electricity under the laws that we’ve created called Community Choice Aggregation, the city then manages the portfolio, which moves demand response and energy efficiency to the center of the portfolio and focuses on renewable power and then on the purchase of wholesale power. And that’s how they’re going to achieve a reduction in carbon emissions. That’s how they’re going to achieve their renewable portfolio standards.
Local Power has created the laws and the tools for the cities to secede and take control of their own energy destiny. So where Comverge is dealing with a $5 billion market opportunity and demand response, Local Power is dealing with about $325 billion opportunity in the supply and demand response of energy. But it’s all about aggregating demand. If you work from the demand side of the equation, it’s like the people at Costco have realized—it’s much more powerful if you can aggregate the demand than if you’re working on gadgets to reduce the cost of the supply.
EQUITIES: Do you believe that Acorn’s focus on proven technology makes it more attractive to shareholders?
Moore: Actually, I’m shocked by how people are willing to take more risk by chasing gadgets instead of proven technologies. But I think that in the short term, the market’s a voting machine, and in the long term, it’s a weighing machine.
For example, another of our companies, Coal-Logix, regenerates the catalyst that’s used for scrubbing nitrogen and sulfur oxide out of coal emissions. It’s a proven technology. So for us, that’s a very simple risk to take because it’s something that’s mandated—it’s part of the clean air laws, and we feel that we’re reducing the environmental impact of the infrastructure.
There are only two publicly traded clean coal companies, Fuel Tech and ourselves, and they’ve got a $600 million market cap compared to our $50 million market cap. So we describe the clean coal business as $650 million worth of market capitalization chasing tens of billions of dollars of market opportunity, versus the solar industry, which is $2 billion worth of demand being chased by about $70 billion worth of market capitalization. And we’re not saying anything bad about solar; we think that solar is incredibly important. But we like to fish where the fish are and not where the boats are.
EQUITIES: Where do you see Acorn in five years?
Moore: I’d like to have two more acquisitions similar in size to Comverge. I want to be making a contribution toward solving this energy problem. I want to buy companies that have customers and proven technology, give them the acceleration capital they need, and get them to a point of significance. Over the past two years, I’ve learned everything I can about the energy industry, and I now have a perspective on investing in specialty assets and getting specialty returns. That’s one of the special things about Comverge—we have a 75% gross margin on the residential portion of our business, compared to the 12% return that utility companies usually see. It’s very fulfilling to develop these new solutions. When a stockbroker friend called a few years ago to tell me about Comverge, he told me how the company helps turn off air conditioners when it’s hot outside. And I said, “Wow, that sounds really strange.” But I’m a believer that the future is strange.
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