As famed venture capitalist John Doerr is fond of saying: The combined greentech sectors are some of the largest markets in the world — power, fuels, chemicals, transportation — and energy is a trillion-dollar opportunity. And on this news-laden Monday, there’s some particularly interesting evidence of the market advantages of being a massive company today selling into the energy, fuel and chemical markets.
Duke Energy said this weekend that it will buy Progress Energy in an all-stock transaction (for a value of $13.7 billion) making the combined companies the largest utility in the U.S. by market cap. At the same time, Monday morning U.S. chemical giant DuPont said it will buy Danish enzyme company Danisco for $6.3 billion.
Clearly these are very different moves — and markets — but both acquisitions are indicative of how in very capital-intensive businesses like energy generation and fuels/chemicals, the ability to scale means everything. The larger the scale, often times the lower the cost of the product per MW or per gallon (clean power, biofuel).
The Wall Street Journal quotes UBS analyst Jim von Riesemann as saying the new massive utility will have the largest regulated nuclear portfolio in the U.S. and will help Progress Energy with “needed scale and scope to lower its cost structure.” A large nuclear power plant can cost $10 billion to build.
Likewise, DuPont gains Danisco’s sizable divisions for food ingredients, enzymes and bio-products, complementing the companies’ previously launched joint venture DuPont Danisco Cellulosic Ethanol, which is making cellulosic ethanol from waste and non-edible plant parts in the U.S. Commercial cellulosic ethanol plants can cost hundreds of millions of dollars to build, and need to produce biofuel competitive with the cost of corn ethanol and fossil fuels.
The EPA found that DuPont Danisco Cellulosic Ethanol — along with four other firms including Range Fuels, Fiberight, KL Energy, and KiOR — will be the only companies that will be able to produce a combined 6 million cellulosic ethanol-equivalent gallons in the U.S. in 2011. Expect the new DuPont Danisco to move ahead in this slow-moving cellulosic ethanol race, now that it’s just got a bigger combined backer.
What does this mean for the startups selling to the utility? For smart grid and smart energy startups, large utilities want to buy from large companies. The common wisdom is small startups need to either partner with some big vendors (Siemens, ABB, GE, etc.) to sell into the utility world, or get ready to lose deals to bigger competitors.
Once consolidation starts in a sector, it leads to . . . more consolidation. Competitors naturally bulk up to compete with the combined firms. Will 2011 bring the year of Godzilla greentech firms?
For more research on cleantech financing check out GigaOM Pro (subscription required):
- Cleantech Financing Trends 2010 & Beyond
- Smart Algorithms: The Future of the Energy Industry
- Renewable Energy Charging Up Electrical Transmission Tech
Image courtesy of Ianmyles.