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The six million dollar men

Silicon Valley plans to clean up by investing in green energy.

To illustrate the role of innovation cycles, Khosla cites two contrasting ways of generating electricity: nuclear energy and solar thermal technology. "It takes 15 years to build a nuclear power plant," he points out. So while there may be exciting ideas in the field that could have a big impact, the rate of innovation is too slow to make it an attractive investment.

Solar thermal technology, which uses the sun's heat to generate steam that drives a turbine, is at the opposite end of the spectrum. It takes just two years to build a solar thermal plant and in that time the technology will have improved further. "With solar thermal, I can fit several cycles of innovation into the time it takes to build a nuclear plant," Khosla says.

Last year, Khosla Ventures and KPCB invested a total of $40 million in Ausra, a Palo Alto solar thermal company which claims to be already generating electricity at competitive rates. Advocates of solar thermal energy, Khosla among them, say the U.S. could eliminate half its greenhouse emissions by installing solar thermal technology in an area less than 150 kilometres square (58 miles square). Solar thermal power isn't suitable for every climate, but in places where the sun shines regularly and predictably it's gaining in popularity as successive innovation cycles improve efficiency and drive down costs.

Just as important as the innovation cycle is how well a technology "scales": Does the product get cheaper as it's made in larger quantities, like the silicon chip?

Consider the biofuel ethanol. It's most commonly made from crops such as corn (maize) and costs some 65 cents a litre in the U.S. (less than $2.50 a gallon), significantly less than the four bucks a gallon Americans are paying for gas. But far from offering economy-of-scale benefits, corn ethanol gets more expensive as you make more of it, not the least because corn is also a food crop. Converting it into ethanol pushes up demand and triggers a spiralling increase in prices. And the more corn ethanol you make, the higher the cost of your feedstock.

There is, however, an alternative biofuel that scales well. Cellulosic ethanol can be made from almost any plant matter and so can incorporate material such as corn stalks that would otherwise go to waste. Khosla says companies like Range Fuels and Macoma (both of which he funds) produce cellulosic ethanol for less than 55 cents a litre (some $2 a gallon). A practically limitless supply of feedstock means the more cellulosic ethanol you make, the cheaper it becomes. Other approaches that pass Khosla's tests include using synthetic biology (a holistic way of building new systems) to produce biofuels and thin-film solar photovoltaics (see the sidebar on the next page, "Ripe for exploitation").

Where Doerr and Khosla have led, others are following. One such pioneer is Lightspeed Venture Partners of Menlo Park, California. Principal investor Andrew Chung says decisions about funding clean technology are made more difficult by the complex economic environment in which energy companies operate. Solar power, for example, still relies on subsidies, which are dangerously dependent on public opinion and politics. On top of that, solar power companies have to sell their product in a market sensitive to regulatory changes.

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