Waveplam

Nicolai S. Løvdal is CEO in the company LovdalVenture and specialized in international business development within offshore renewable energy. Further, he is working on a PhD at the Norwegian University of Science and Technology on the same issues. He is one of the founders of International Network on Offshore Renewable Energy (www.inore.org). At the moment he coordinates a €10m Ocean Energy Research Program initiated by the Norwegian power producer Statkraft and three leading Scandinavian universities (www.statkraft.com/ocean).

1 - In your opinion, what are the main barriers to overcome in order to be able to raise money in this business;

The main barrier to raise money in every business is to build a business case the investors believe in. To simplify this a bit a good business case consists of a winning team and good business idea. The construction of a good team is often more important than the business idea.

Regarding the team there are no different challenges within wave energy than in any other industry. However, I would still guess that many start-ups within wave energy cannot raise money because they do not have a team that convinces the investors to think “Yes, these are the guys we will trust and put our money on”. This is a common problem for start-ups in every industry. If you are in the situation of searching for funding you should first of all start asking your self “Do I have a convincing team?”. If not, you should get it. Remember that you could add lot of experience and network though your board of directors. You do not have to employ everybody to get a good team. I would like to emphasize this point as much as possible. Investor put money on people they believe in, not in technology alone.

Regarding the business idea – e.g. to develop and sell a machine that can produce energy from the waves – there are some characteristics that could be different from other industries. First of all the development of this kind of technology is both time consuming and capital intensive. This means that this kind of business is not interesting for all kinds of investors. Next, the end product from wave energy is electricity – which is a standardized product. Hence, it is difficult for the end user to see the difference on electricity made from wave and electricity made from e.g. coal. Therefore we see little or no willingness from the end customer to pay more for this electricity than other electricity. In other words, the market alone is not able to promote the introduction of new renewable energy technology like wave energy and governmental support systems if needed. This is the point were political risk is added to the business case. Political risk is difficult to handle for investors because they can only to a limited degree control it or reduce it.

In other words; there are not all types of investors that are capable of going into these types of business case. And further, the biggest challenge is to get control of the risk involved in the business case. A winning team would have convinced me as an investor to believe they can develop the technology. However, I would still be dependent on political decisions to find a market for the technology.

In my opinion the best examples we can point at where politicians have made an effort to reduce this risk is in the UK and in Portugal were they have introducing special tariffs and programs for demo projects and more commercial projects. Unfortunately, we see that the bureaucracy to get projects out in the water still slow down the process and thereby keeps the risk high for investors.

2 - How do you see that wave energy, as a young player in the energy market, could raise sufficient funds in its current pre-commercial stage?

First of all I hope to see that the companies that already have raised funding will get out some full scale projects within reasonable time to exploit the support mechanisms which are already established. In particular I’m thinking of the £50m demonstration fund in UK and the feed-in tariff for the Portuguese Pilot Zone.

Secondly, I’m expecting the industry momentum to pick up the coming years. More and more utility companies are taking a stake and some oil & gas companies are starting to look closer at this opportunity. I expect these companies to move heavy into the wave energy industry the next five years. Many small technology developers will probably see this as a threat, but I consider it more as a prerequisite for the industry to develop. We need to see the big player on the playing field! This will also trigger more interest from the professional investors, as they regard the big players as potential buyers of their shares.

I guess I should be quick to add that I expect to see more structural change in the industry in the next years through merger and acquisition. This does not add more funding to the industry per se, but it will still be important to move the industry forward. We need players that dear to see synergies across different concepts. In a way we could say that the wave energy industry is about to leave the cozy research arena and enter the arena where the tougher industrial players are.

Finally, the wave energy industry should make sure they are present when EU are crafting out the policy for reaching their target for 2020. Through organizations like e.g. European Ocean Energy Association it is possible to lobby for the needed political framework to develop wave energy. If you have a look at the official forecasts from IEA and EU they do not expect much energy to come from the waves. Here is a job that just needs to be done!

3 - Raising venture capital is becoming common for wave energy companies that are attracting large industrials and utilities. In your opinion, will this step make the undertakings viable? Do you think this is a suitable first step for raising money in this sector?

My most important point on this issue is that the start-ups should look for investors that can contribute to the development with more than just money. The right investors should add competence and network to speed up the development of the firm. Money alone is seldom enough.

The start-up team should ask them self “What kind of investors are we searching for?”. If you feel that you are in the position where you can manage a fast expansion you might go for professional investors, like venture capitalists, who are looking for a short payback time. These investors will typically try to grow your company and sell their shares within three to five years. I guess many of the companies within wave energy, at least the ones who develop technology for producing energy, need industrial knowledge just as much as they need cash alone. In this case utilities and energy companies could be more appropriate. Perhaps even big engineering or construction companies could be the perfect match.

As more technology gets mature I expect to see more creative deals to secure funding to early projects. It is all about placing risk. In the USA we can see a good example on this where PG&G have signed a power purchase agreement with Finavera. In this way Finavere secures future income as long as they manage to produce electricity and PG&E reduce their risk by only committing funding if the project succeeds.

I would like to add one more thing; when we have experienced a project that really demonstrates wave energy as a viable energy source we can expect some second generation technology to pop up. These technologies might be better suited for venture capital since the 1^st generation technologies have removed much of the initial uncertainty connected to new technology and they need to grow fast to catch up with their competitors.

4 – Do you think wave energy will attract enough funding to reach the state of grid parity?

The clear answer to this is yes. On the macro level the energy potential in wave energy is simply too big to overlook and the fundamental drivers to develop new renewable technology are favorable.

On a more micro perspective wave energy, together with offshore wind, is a golden opportunity for companies working in the domain of offshore oil and gas to diversify into renewable energy, and get a competitive advantage based on their offshore experiences. As more of these players enter the field of wave energy the industry will pick up momentum and the development will accelerate.

It takes time to develop new energy technologies. Still, considering the circumstances we see today I think the next five years will determine the destiny of wave energy.