Microturbine firm nets $23M in Venture Capital.

Some of the original impetus may be gone from the microturbine market, but that's not stopping investors from plowing money into the industry.

One relative newcomer, Bowman Power Ltd. with its U.S. subsidiary, Bowman Power Systems Inc. in Woodland Hills, last month completed a funding round that raised about $23 million for its microturbine system manufacturing and marketing efforts.

Lehman Brothers European Venture Capital Group led the investment round with Quester, OPG Ventures Inc., 3i Group plc and others.

The round is the second phase of an effort begun last August, when the company raised about $20 million in a round led by Schneider Electric and Singapore Power.

Bowman Power has operated in the U.K. since 1994, and the company set up its U.S. operation late in 1999. This year, the privately held company, which does not release revenue figures, has won a place in the Deloitte & Touche Technology Fast 50 for a growth rate of nearly 600 percent between 1998 and 2000. The U.S. subsidiary ranked sixth in the Southwest region.

Still, its efforts are in their infancy.

"What we've been doing is basically trying to seed the market," said Tony Hynes, president of the U.S. company. "We've taken a more pragmatic view of entry that it will take some time before this technology is adopted."

Microturbines, compact generators that can provide power, heating and cooling as an alternative to the conventional utility grid system or in conjunction with it, garnered a great deal of attention in California several years ago when electricity prices were skyrocketing and the state was threatened with severe power shortages through traditional providers.

But almost as quickly, fears over a power crisis subsided and energy prices began to stabilize. At the same time, much of corporate America has retrenched, and with budgets for capital expenditures slashed, microturbine makers found their sales opportunities severely curtailed.

"This is an industry where the stocks go up when the lights go off," said Gary Holdsworth, an analyst with Wedbush Morgan Securities.

Microturbines are more efficient than traditional sources of energy because they can capture energy output and convert it to thermal energy, wasting less power. The more efficient the power source, the lower the energy costs to the user. They are more environmentally friendly than traditional sources. And they are more reliable because the systems are not subject to the outages and surges that can hobble manufacturing operations.

But the initial cost of these systems is high, and absent the panic that took hold during last summer's energy crisis, companies are having a hard time justifying the cost.

That puts companies making these microturbines between a rock and a hard place. Potential customers can't afford to buy the units at current prices, but the only way these makers can lower their prices is by raising their sales volumes.

"If there's no demand for your product currently, how are you going to build your volume?" Holdsworth said.

Bowman's rivals, including Capstone Turbine Corp., with sales of $36 million; Ingersoll-Rand, a $9.7 billion conglomerate; and Volvo offshoot Turbec AB, all face similar disadvantages.

Bowman's strategy to overcome these challenges is threefold. First, it is cherry-picking target markets, looking at users whose energy needs are such that they can achieve a quick return on investment.

Bowman, he said, has done a better job than its rivals of producing generators that can generate thermal power as well as electrical power, and the company is relying on that advantage.

"We're looking for somebody who not only uses electricity, but also has a large thermal use," Hynes said. "The value is the electrical output and the thermal output, heat as well as electricity."

Next, the company is establishing relationships with financing companies who would buy the generators and then lease them to end users.

"If the end user has concerns about the infancy of the technology or is not prepared to outlay the capital, then a lease arrangement, which has more to do with an expense item as opposed to a capital item, seems to be something that's very interesting," Hynes said.

Finally, Bowman is seeking out original equipment maker markets for some of the components of its microturbine units.

"We see our business model as very different because we derive revenue from different markets," said Hynes.

Bowman Power is currently selling its products to several Southern California hotels. Longer term, the company is eyeing hospitals, food processing plants and laundries, "anybody with a large hot water requirement," Hynes said, along with companies that require reliable power sources such as data processing and telecommunications.

Such companies are likely to see a return on their investments within three years. Companies that would not see a payback for more than three years are not likely to be interested in making the investment, Hynes said.

But if Bowman can substantially increase its sales volume levels, it can lower the payback time frame, and broaden the market for its microturbines.

It is that vision that has likely attracted the kind of financial investment Bowman has received, although it won't be easy to achieve, analysts say.

"We do have events such as 9/1l that show the vulnerability of our infrastructure. We have increasing regulation as far as air quality," said Holdsworth. "Other drivers are still there, though they may be muted temporarily. So there's still a case to be made that distributed generation can play a role as a supplement to traditional power sources. But we're still in the early adapter stage."