Our First Five Years
Michael Zilkha
August 2010
In the spring of 2005, my father and I sold Zilkha Renewable Energy, our wind energy company which we loved, to Goldman Sachs.
We sold what had become one of the largest wind developers in the United States because we could no longer afford to fund all the opportunities we were developing. Wind energy had become fashionable, and our business model no longer worked. When we started out in 1998, a large wind farm was 80 MW in size, and cost about $1000 per MW to develop. By 2005 we were developing 400+ MW wind farms, and the cost of developing each MW had risen to about $1, 500. More importantly, you now had to put down deposits to secure wind turbines two years in advance, whereas we used to be able to buy them whenever we needed them. You had to be either a very small operator, with minimal overhead, who developed individual plays to sell on to a larger wind developer, or you had to have a very large balance sheet if you were actually planning to construct the wind farms you developed. Goldman Sachs held the large balance sheet and they appreciated the culture which made our company special, so we felt they were the right owner to carry the company forward. Retaining a net profits interest, I went on the board of the new company, renamed Horizon Wind Energy. When Goldman Sachs sold Horizon to Energia de Portugal (EDP) two years later, it was one of the single largest investments on Goldman’s balance sheet; and including future turbine commitments, they had invested over $2 billion in the company.
We were planning to take a break from energy after we sold Zilkha Renewable Energy, but that summer Joe Romano, our CEO, was shown a business that appealed to us because it combined renewable energy—we would burn wood—with distributed energy—we would get the wood as sawdust from saw mills where it was already being produced—with co-generation—we would sell the heat and the electricity created by direct firing the sawdust into a gas turbine for an incredible 80% efficiency. Each plant was going to cost about $5 million and would quickly become profitable. Power Generating Inc, the company that owned the technology, had been working on it for almost twenty years; the DOE had already invested a lot of money in the project; and we saw an opportunity to develop a new technology that would revolutionize biomass energy.
We agreed to invest 100% of the cost going forward to commercialize the technology, in return for 80% of the new company, Zilkha Biomass Power. Our business model was to pay to install all of the equipment at a partnering facility and then sell electricity to our hosts, undercutting the local utility in price. We thought that at $5 million per installation we had sufficient funds to install as many plants as we could develop, paying for the cost of future plants with income from the early plants and short-term financing.
We immediately began building the first plant. We chose New England Wood Pellets (NEWP), a pellet factory in Jaffrey, New Hampshire, as our host because their founder, Steve Walker, was a visionary. He was willing to bear the inconvenience of a start-up out of a deep love for science, and because, if our technology worked, NEWP would save 20% per year on their energy costs.
What we didn’t quite realize—due to unresolved technological issues we discovered as our first plant was designed and built —was that we were embarking on an R & D project, something we had no experience with in the past. Now five years into this dream, we are approaching a perfected technology that we believe will have innumerable positive effects throughout the energy sector.
The Zilkha Biomass Unit is ideally suited for off-the-grid applications where heating oil or diesel is burned because our energy will be cost competitive. If the host also requires heat, we can reconfigure our plant to use steam to create supplementary electricity. In addition, our Co-Gen unit will generate no sulfur or mercury emissions, and because we use sustainably harvested wood, we are helping the environment by reducing the consumption of hydrocarbons.
We expect our initial market to be in Europe since biomass is already a widely used fuel source there and our machine slots perfectly into their district heating systems. Our unit will also be ideal to serve remote locations in our country and all over the world.
Through our experience in the woody biomass industry, we have discovered a new technology for manufacturing waterproof wood pellets. We hope these pellets will displace coal in large quantities and enable utilities to meet their renewable mandates without costly retrofits. Our Zilkha Black® pellet has given us great optimism and confidence as we continue improving our Co-Gen unit, especially since we are now able to defray our overhead over two businesses.
My father says that in business he has enjoyed the journey more than the arrival, and currently we are on a thrilling journey to commercialize woody biomass and improve our environment in the process.