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Saturday, February 04, 2012
Feature: June 2007
Thinking Inside the Box
Guy Archbold may have found a global model for low-cost clean energy. But is the world ready?
Story by Rich Ehisen
Conventional business wisdom says it is generally not a good idea to invest millions of dollars into developing a product that could take years to market, particularly when you have no intention of selling that product once you do get it up and running. But don’t tell that to Guy Archbold, CEO of El Dorado Hills-based BluePoint Energy Inc.
Archbold, an investment banker turned energy swashbuckler, is using that unconventional thinking to position BluePoint at the forefront of the rapidly growing global cogeneration energy market.
A relative newcomer to the distributed — or on-site — energy game, BluePoint has 30 employees that specialize in the production of combined heat and power, or CHP, modules.
A CHP unit is essentially a large natural gas- or diesel-powered generator that produces electricity for hotels, hospitals and other similarly sized entities. But unlike regular generators or conventional power plants, CHP also captures excess heat to run buildings’ heating and cooling systems.
That process has historically given CHP users both greater self-sufficiency and lower energy costs. In this regard, BluePoint is in line with most of its competitors. But BluePoint has added a third element that separates it from the pack: its Envirogen CHP units are not only economically super-efficient, they are also environmentally friendly, burning far cleaner than both conventional power plants and the rest of the distributed-energy competition.
BluePoint introduced the Envirogen CHP unit last year and has been on a roll ever since, racking up close to $10 million worth of power-supply contracts with the likes of retail icon Macy’s and the international Starwood hotel chain. In addition to gaining huge cash flow, BluePoint has simultaneously eradicated nearly $10 million in long-term debt.
Guy Archbold
BORN Oct. 12, 1951
JOB Chairman and CEO, BluePoint Energy Inc., a provider of on-site energy plants. The company is based in El Dorado Hills.
FAMILY Divorced with a son, William, a cadet at the U.S. Military Academy.
EDUCATION Bachelor of Science in business administration from California State University-Long Beach. Also completed executive and advanced management
programs, respectively, through Northwestern University’s Kellogg School of
Management and the Wharton School at the University of Pennsylvania.
BUSINESS PHILOSOPHY “Always do the right thing for your customer.”
LIFE PHILOSOPHY “Experience is something you get right after you need it.”
But while BluePoint’s star is rising — the company stock has climbed from about 20 cents a share at the beginning of 2006 to as high as $4.92 in early 2007 — Archbold says BluePoint has barely scratched the surface of its long-term potential. Based on a number of new contracts he says are in the works, Archbold estimates that 2007 revenue could top $100 million.
“The sky is truly the limit,” he says. “We’ve come from the back of the pack to the front in just a few years. We’re so far ahead that it’s hard for me to see anyone catching us for the next three to five years.”
It is hard to begrudge Archbold his self-assurance. During two decades managing boardrooms for investment giant Paine Webber (now UBS) in New York and San Francisco, he has learned a thing or two about what makes a business or an industry work and, more important, which hazards could send it belly up.
After watching some of the early entries into the modern energy market ride shaky business models or outdated technology straight into the poorhouse, he feels he has ample reason to believe BluePoint has figured out how to build a better mousetrap. But to fully understand Archbold’s enthusiasm means first understanding the pros and cons of conventional energy production.
All energy production — whether created in a coal-fire, nuclear or natural gas power setting — creates a significant amount of heat. In conventional power plants, a huge percentage of that excess heat is lost when it gets pumped through the plant’s cooling towers. Another large chunk is lost through a phenomenon known as “transmission sag,” the bleed-off of electricity being transferred over long distances via power lines.
This wasn’t much of an issue in the early days, when power plants were situated fairly close to homes and businesses. But most plants are now located far from urban life, making bleed-off more of a factor. So while a conventional power plant can produce enough electricity to light up a city, the end-user is ultimately able to access only about 35 percent of the total energy produced at the original source.
To make matters worse, conventional power plants produce pollutants that also get released into the atmosphere. Coal-fire plants, for instance, produce significant greenhouse gasses, like carbon dioxide, which many scientists believe are the main contributors to global warming. Nuclear power has even worse issues, from environmental concerns over the radioactive waste it produces to ongoing public fear of a Chernobyl-like meltdown.
Cogeneration, on the other hand, is a far safer and more efficient way to produce energy. Not only does the cogeneration process use a single fuel to generate multiple outputs — electricity, heat and cooling — but because the energy created by the unit is generally not traveling off-site, there is also minimal bleed-off to contend with. Between its multiple uses for heat and minimal travel, cogeneration efficiency is usually double that of conventional energy creation and distribution.
For all the new interest in cogeneration, the concept is not new. Steam cogeneration can be traced as far back as the early 17th century. Modern versions using turbine engines have been used in some form or another for more than a century, primarily in Europe and Japan but also at numerous U.S. factories, hospitals and universities. But cogeneration is not perfect.
Startup costs have historically been prohibitive, usually to the tune of several hundred thousand dollars to purchase a CHP unit large enough to provide energy for a major hotel or hospital (or upward of $20,000 for a unit that would power a single-family home).
Notoriously fickle fuel costs, poor reliability and high maintenance costs have also been problematic for CHP users. And, as with all fossil fuel-driven machinery, emissions remain an issue. The particular bugaboo of emissions regulations is, in fact, at the heart of BluePoint’s master plan.
Archbold began thinking about getting into the energy business during the rolling brownouts of the 2001 California energy crisis, which he says cost Silicon Valley manufacturers millions of dollars every time an assembly line shut down for even a few moments.
“When you are making computer wafers, losing power for even a second can cost you the entire run,” he says. He began following some of the market’s hot energy stocks, most notably companies like Capstone Turbine, one of cogeneration’s first major U.S. players.
With everyone looking for energy alternatives, Capstone’s stock went through the roof and ballooned the overall company value to more than $5 billion. But though Capstone had a leg up on the market, its technology was not very efficient and its delivery record was spotty at best. It eventually began a backslide that has seen its current stock price drop to less than a dollar per share and its company valuation fall to around $120 million.
That rise and fall was not lost on Archbold. By 2004 he had retired from the banking business and moved to El Dorado Hills, but his interest in the energy industry was as strong as ever.
He put off retirement to get involved with BluePoint, a struggling energy company with no direction and a lot of debt. He did it, he says, because he felt strongly that although companies like Capstone were treading water, cogeneration could be viable and even wildly profitable if someone could produce a CHP unit that was super-reliable, highly efficient and, most important, really clean-running.
That last one was the big ticket because California’s emissions standards, already among the toughest anywhere, were set to get even tighter. Clean units were an absolute must-have if the company was going to be successful for the long haul.
“We made the concerted decision not to go to market until we had a product that would meet those emissions standards,” he says. “It was hard at the time. I went without a salary for two years. But while we were busy doing R&D, our competition was putting out products that were trying to reach those standards with faulty technology.”
BluePoint engineers eventually came up with the right design, Archbold notes, right about the time the wheels were really coming off at Capstone. Though BluePoint CHP units were reliable, Archbold knew the cost of buying a unit outright would still scare off many potential customers. Thus he added another wrinkle to his unique business model: BluePoint doesn’t sell its CHP units, but installs them on site for nothing, and takes care of the maintenance.
It takes about a day to get the unit up and running, after which BluePoint engineers monitor its operation around the clock to ensure everything is running at peak efficiency, literally controlling every facet of the CHP unit’s operation remotely from its design plant in Carson City, Nev.
“It’s incredibly simple,” Archbold says. “The customer only pays for the fuel, we sell them the electricity the unit generates, and they get all the heat and cooling byproduct for free.”
And while rising fuel costs can cut into the user’s bottom line, BluePoint also sells the power at a rate deeply discounted from that of the grid, virtually ensuring that users will save money regardless of fuel spikes.
“I went without a salary for two years.”
— Guy Archbold, CEO, BluePoint Energy Inc.
For example, Archbold notes that the BluePoint Envirogen CHP units being used in Starwood’s two Sheraton Kauai resorts “will cut their energy bill by about $750,000 annually.” He says Macy’s expects to save more than $1 million in energy costs over the life of its contract.
But to get to the numbers Archbold envisioned, he knew BluePoint needed a way to mass-produce its ace-in-the-hole engine and then to ensure the service and maintenance of those engines anywhere in the world. For that, he developed an alliance with Cummins Power Generation Inc., a global engine maker with the resources to build and service BluePoint-designed engines in more than 160 countries.
Not only does Cummins build BluePoint’s engines, it now has the exclusive right to market and sell BluePoint CHP products globally. That arrangement, Archbold says, made BluePoint a global company overnight.
Understandably, visions abound of hospitals, offices, big-box stores and prisons around the world powered by BluePoint CHP units. Archbold is particularly interested in entering third-world markets with rapidly growing populations but traditionally unstable energy-supply chains. “Those possibilities alone are mind-boggling,” he says.
Many energy industry insiders agree with him. “There is huge potential for growth in distributed energy,” says Jon Norling, an attorney and energy project consultant for the Portland office of the Seattle-based Lane Powell law firm.
Norling has worked with clients on renewable and conventional energy projects all over the country. “There are many people in the industry who believe that distributed power could meet 25 percent of the country’s energy needs within 20 years,” he says.
Attorney Jonathan Gottlieb, who represents energy clients in both the U.S. and around the word for the Washington D.C.-based Leonard, Street and Deinard law firm, also believes cogeneration could have a very bright future.
“The potential is vast and the market is very real because it is much easier to put in a CHP unit than it is to build a power plant,” Gottlieb says. He also notes that the utility industry is this nation’s second largest consumer of available capital, right after real estate, making energy innovators in all areas of great interest to investors.
“There is a lot of capital chasing new energy development these days,” Gottlieb says. “The key is that it must be reliable and the company must have a viable business model. In that regard, it sounds to me like BluePoint knows their history and has learned from the industry’s mistakes of the past. If they have it figured out, they will make a ton of money.”
Not having to take on the cost of buying and maintaining a CHP unit could help sway many of the companies in BluePoint’s target market. Sheri Blackwood, general manager of the Atrium Hotel in Irvine, Calif., the second hotel in North America to go to cogeneration, says the three Capstone micro-turbine units she uses to heat the hotel’s water system cost $337,000 in 2003.
Through lower heating bills, the hotel has recouped much of that cost during the past four years, she says. The hotel also received $100,000 in utility company rebates when it made the purchase. But even with the savings, Blackwood says that kind of initial outlay has made it pretty hard to convince owners to buy into cogeneration.
“It’s all about return on investment,” Blackwood says. “A new LED television in the rooms gives guests a greater perception that money is being put into the hotel. Many owners look at it like, ‘Hey, the lights and heat are supposed to work anyway. Why should I put all this money into something the customer will never see?’”
But Blackwood says there are other factors that heavily impact the decision-making process. “There is a growing public perception that all businesses should be more responsible in an energy crisis,” she says. “We’re seeing so much more interest now in cogeneration because it is better for us to do something than to do nothing.”
That growing interest has led some people to call energy the new dot-com, something Gottlieb says is not really accurate.
“There is still a lot of speculative investment going on in alternative energy sources like biofuels, wind and solar,” he says. “But CHP is really a bricks-and-mortar, conventional energy source. The beauty is that while it may not be a renewable energy source, it is still extremely efficient both from an environmental and cost perspective.”
Norling of Lane Powell also finds comfort in customers paying for their own fuel. “The problem with the usual cogeneration model is that the CHP supplier pays for the fuel,” he says. “That means you really need a hedge against rising fuel costs because gas spikes can get you upside down pretty quick.”
BluePoint clearly has that issue worked out, but Archbold says they have other cards to play as well. Any day now, the company is set to launch another program with vast market potential: linking an entire network of existing non-BluePoint CHP units to work together to supply backup power to the electrical grid during peak usage days. BluePoint will control that network via a proprietary software system that gives it the same minute management capability as it currently has over its own CHP units.
The system is simple: BluePoint will access surplus energy from units not located in peak demand areas, then sell the excess energy at a discounted price to areas where it is needed most. The profit would be split between the unit owners and BluePoint.
As Archbold sees it, it is a win-win-win proposition. The CHP owners make a nice profit on energy they weren’t using anyway, the grid gets the energy it needs at a much cheaper price than if it was purchased from another source and consumers don’t lose power when they need it most. It is a concept Gottlieb calls “the Holy Grail of the distributed-energy concept.”
“If you are controlling 50 or 100 of these units from a central station, you can run them just like a power plant,” he says.
Which is exactly the idea, Archbold says. “This is really a new paradigm. The best comparison I can see is the desktop computer. When computers first came out, you basically had all the intelligence locked up in a mainframe somewhere that fed information to all these dumb terminals on people’s desks. You really couldn’t do much more than input with those because they were so dependant on the mainframe.
“But now, anybody can do virtually anything they need to do right from their desktop because we’ve taken that intelligence away from the mainframe and moved it to the individual points where we can utilize it the best,” he continues. “That is what we’re doing with energy.”
