Is Houston missing the next energy wave?
City failing to draw new tech ventures for a world shifting from fossil fuels
August 12, 2017
In the basement of an engineering building at the University of Houston, Daniel Araya flips a giant switch and air whooshes through a tunnel, spinning a basket-like gadget that turns on a vertical axis.
This unconventional wind turbine with curving blades is designed for urban rooftops, able to generate electricity from shifting winds and turbulence caused by tall buildings. Think of it as wind power’s answer to rooftop solar.
Araya, 31, began working on turbines as a graduate student at the California Institute of Technology. When he completed his Ph.D. in 2015, he said, he decided to bring his research to UH for one main reason: “Houston is known as being the energy capital of the world,” he says.
But Houston is in danger of losing that distinction, as the world shifts from fossil fuels to clean energy technologies. For all its dominance in oil and gas, and all the brain power devoted to getting more from out of the ground and under the sea, Houston has very few young companies incubating new technologies and very few large ones that conduct clean energy research here.
Houston not only lags technology centers such as Boston and Silicon Valley but also cities like New York, Chicago and Los Angeles – not to mention Austin and Lubbock, where most of Texas’ clean tech startups are based and most of its wind research takes place. Houston comes in fifth for the number of wind patents nationally, but 37th in the number of solar patents, 36th for energy efficiency patents and 16th for energy storage, according to the Brookings Institution.
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In venture capital deals in renewable energy, Houston is a distant eighth, according to the data firm CB Insights.
The shift to clean energy, meanwhile, may be starting to accelerate, with breakthroughs like Tesla’s $35,000 Model 3 electric car, and Volvo’s decision to abandon conventional gas-powered engines by 2019. Rapid growth in wind and solar power, even in the absence of federal policy nudging in the United States, are contributing to what Shell CEO Ben van Beurden predicted will be “lower forever” oil prices – bad news for Houston.
If trends toward clean technologies pick up more speed, as many analysts, researchers and even oil executives expect, Houston risks the kind of economic disruptions that rocked Detroit – where, in the 1970s, automakers left the market for fuel efficient vehicles to foreign competitors.
“We have so many skills and so much know how around energy, and it’s important for us strategically and globally to be part of these transitions,” says Brett Perlman, a former Public Utility Commission member who now leads the business-backed Center for Houston’s Future. “To continue to be relevant as the industry evolves, we have to be at the forefront of developing these new technology solutions.”
The reason for Houston’s poor showing in renewable energy isn’t a mystery: It has been a fossil fuel powerhouse for so long that the next generation of low-carbon energy hasn’t been a priority.
“The attention to greenhouse gases and pollution is far more attuned up north than it is up here,” says Ken Jones, who directs Energy Research Park at the University of Houston. “Down here, this is an energy city, and you’re not looking to displace those that are in traditional energy elsewhere.”
Houston’s energy economy initially grew because of its proximity to the Spindletop oil gusher and the salt domes throughout East Texas, but the city consolidated its sway over the industry by becoming the financial center for exploration and the technological center for extracting oil more easily and cheaply. That would make it logical for Houston companies to lead the charge into the energy sources of the future, but for a variety of reasons, companies here have focused clean tech investments in other cities.
Chevron’s investment arm has backed renewable energy companies in Boston and Silicon Valley, but not in Houston, according to the venture capital data website Crunchbase. Chevron said most of its clean energy research is done in California, where the company is headquartered, but it is “very open to investing and working with startups that are based in Houston.”
BP Ventures has dozens of portfolio companies in California and the United Kingdom, but only one in Houston, and it makes acoustic technology for drilling oil wells.
Shell’s year-old, $1.7 billion new energies unit, which includes biofuels, hydrogen, wind and solar, is mostly centered in San Francisco, London and Amsterdam. Kirk Coburn, who co-founded an incubator in Houston for energy startups, only to see it fold in early 2016, now works for Shell Technology Ventures. He scours the country for promising young firms, and usually finds them on the coasts – where startups generally are thriving.
“Why would entrepreneurs come to Houston, when they could move to San Francisco, where it’s easier to raise money?” Coburn asks.
One reason might be to work closer to customers, and there are plenty of them in Houston: EDP Renewables is one of the largest wind developers in the country, Quanta Services one of the largest transmission builders, and Sunnova one of the largest builders of rooftop solar. Dynegy, Calpine, and NRG are three gigantic power providers. But many of those companies are happy to purchase technology from far afield.
Wind farm developers, for example, buy equipment from manufacturers like General Electric, whose research centers in Schenectady, N.Y., and Greenville, S.C., produce more wind patents than any other metropolitan area in the country, according to Brookings.
Beyond oil and gas
Michael Skelly is the CEO of Houston-based Cleanline Energy Partners, which builds transmission lines for wind power. Innovation is essential to the advances renewable energy has made, he says, but it has largely bypassed Houston.
“Do we here in Houston have the company that designs a better blade for a wind turbine or a better control algorithm for a wind generator?” Skelly says. “No, we don’t do that here.”
That means that eventually, the companies shaping the future of energy may be based somewhere else.
So, how is Houston losing its edge on the competition?
Start with local universities. Boston’s Massachusetts Institute of Technology and Harvard spent a combined $1.9 billion on all research in 2015, according to the latest figures available from the National Science Foundation. UCLA and Stanford, the powerhouse of Silicon Valley, spent more than $1 billion dollars. Texas spends its research dollars in Austin and College Station, with the University of Texas and Texas A&M budgeting a combined $1.4 billion.
Houston’s primary universities, Rice and the University of Houston, spent a combined $160 million. Most of the federal research dollars that Houston wins go to scientists at the Texas Medical Center, not wind turbine inventors like Daniel Araya.
Houston also lags in attracting venture investment. Blair Garrou, managing partner of Mercury Fund, Houston’s only major venture capital firm, said it’s simply because Houston doesn’t have a reputation for renewable energy startups, and that’s what attracts investors.
“We haven’t really shown startup success in innovative green technologies,” Garrou says. “Getting VCs to come to Houston to invest in a type of company where there haven’t been successes before is very, very difficult.”
Clean energy sectors also are powered by more than investor cash. In cities leading in renewables, local and state governments consider the industry an integral part of their economic futures.
Take Austin, which has had a clean tech incubator affiliated with the University of Texas for eight years. Its leader, Mitch Jacobson, commissioned a study of the clean tech industry in 2014 and found it employed 20,000 people and was projected to expand by 11 percent by 2020. “There are folks here who’ve decided that it’s not just oil and gas that moves the state of Texas,” Jacobson says.
Boston has perhaps the best known clean energy incubator, Greentown Labs, sponsored by major oil and power companies including Shell, Chevron, Air Liquide, and Engie. It was able to grow in part because Massachusetts in 2008 made clean energy a key component of its economic development strategy, promoting rooftop solar systems, handing out grants and tax credits, contracting with startups for energy-saving services, and starting an agency called the Massachusetts Clean Energy Center to coordinate all those efforts.
“The state had prioritized it,” says Emily Reichert, Greentown Labs’ executive director. “That interested the corporate partners.”
While Houston has lagged, local entrepreneurs still see avenues for the energy leader of this generation could gain a toehold in the next.
John Berger is CEO of Sunnova, a Houston company that builds most of its rooftop solar systems in other states. But, he said, spreading distributed renewable energy is a real estate as much as a technology play. Many Houston millionaires, who made their money in construction, have the knowledge and capacity to devise new ways to incorporate solar and wind power into development.
“Solar ought to be a real estate issue,” Berger says. “It should be a Houston leadership issue.”
Houston and Texas have another advantage: Space is cheap. That comes both in the form of labs for designing hardware as well as open areas for testing grid-scale inventions. “Boston and California don’t have the space and size like we do in Texas,” says Carsten Westergaard, a professor at Texas Tech University who tests his inventions at the National Wind Institute in Lubbock.
There also seems to be some appetite here for putting Houston on the clean tech map. Hanadi Rifai, director of research at the University of Houston’s engineering school, says a corps of researchers is doing work in new energy technologies – especially superconductors and batteries – that could be ramped up with more funding and more exposure. The engineering school is putting together a startup pitch event, where entrepreneurs showcase their business plans to potential investors, which could attract promising businesses from elsewhere and bring those in Houston to the attention of venture capitalists.
That might make things easier for people like Araya, who is looking for private funding to finish a research project with his turbines on top of Hess Tower downtown. Once he has a final version, he’d like to found a company to commercialize the product.
But right now, he’s feeling a little bewildered by how to get there from here.