AN OPEN LETTER TO JOHN DOERR

Dear John,

I want to congratulate you and all your colleagues at Bloom Energy.  Both for putting on a great show over the last several days, but more importantly for having the fortitude necessary to make it to this point. I am sure that you and KR are acutely aware that you are standing on the shoulders of many good technologists from the past.

Welcome to the energy business.

I've been in the business, oops, space -- both clean and not so clean -- for almost four decades. I have to admit that I am a technology junkie and wouldn't make a good VC, since I never met an energy technology or energy technologist that I didn't like (well, almost never).

But I'd like to talk to you a little like a "Dutch Uncle," since you and Bloom are entering what is really new territory for you, but old and familiar to me.

First, the technology is not really all that disruptive. As a matter of fact, when Clayton Christensen published his first book (1997), he spoke at a local angel investors group in Palo Alto. He mentioned that someone told him "fuel cells were a new, disruptive technology for the energy business." He looked a little sheepish when I told him that fuel cells had been around forever. Yes, the technology sizzles (metaphorically, I hope), but there are other ways to get where you say you are right now.

For instance, a 650-kilowatt Caterpillar genset fueled with natural gas and backed up by a 500-kilowatt diesel genset and all the necessary electric panels costs under $1 million. Home Depot had four similar systems operating from 2004 to 2006 around New York City. Gas prices were about $6.50/Mcf (Mcf = 1000 cubic feet) at the meter and the cost of generation was about 10 cents per kilowatt-hour. Home Depot didn't purchase any power from ConEd and saved $30,000 per year (about 10 percent) for each of the stores. Last year, natural gas prices in California to commercial customers ranged from about $6.00/Mcf to about $9.50, so the old-style gensets are still in the mix to the right customers.

Each of the Home Depot units cost about twice what you say your customers pay for each of the Bloom Servers, with all the "price supports." The gensets use about 60 percent more natural gas per kilowatt-hour.  But each of the units at The Home Depot produced more than six times the amount of electricity as each of the Bloom Energy Servers. You can spend a lot on natural gas for the savings in capital costs.

So the Bloom Servers really don't provide such a big disruption in the business of distributed power, and maybe not all that much of a technology disruption.

They do seem, at least from the outside, to be providing some substantial improvements in fuel cells. It used to be that the size of solid oxide fuel cells had a tough time going below about 250 kilowatts because of the sizing of the steam reformer -- that's the thing that takes the fuel and chops off the hydrogen from the methane or hydrocarbon molecule. It sounds as though you have pushed that along pretty well.

I thought General Powell hit on some really good points.

Developing countries need power.  KR can tell you that the gensets that Caterpillar and others supply are a ubiquitous part of life in most of these countries. At least ubiquitous for the elites. There is a fantastic after-market for refurbished gensets from the U.S. and Europe into these countries. So here again, you'll run into some obstacles at the pricing points you currently have. That's not to say that the Bloom Energy Server can't contribute. Since the fuel cell is more forgiving with respect to the type fuel, the generation of biogas and biofuels in developing areas could be huge. At the right price.

The military already has some pretty good substitutes. The M1 battle tank has a 1,500 hp (that's about 1.2 megawatts) gas turbine engine. They're expensive and use a lot of fuel. But they're also not much bigger than your box and they have 12 times the output. More importantly, the Army can have kids with a high school diploma fix them in the field with a small tool kit.

Now for the markets.

About 90 percent of all commercial buildings have access to natural gas. This compares to about 70 percent of all residential buildings (though there are 70 million of them). Both of these markets are really, really, really big. Lots of opportunities.

But it's puzzling from what you said on 60 Minutes -- that you find this to be an electric utility play. Yes, it replaces the need for big power plants. But it uses natural gas. Let me say that again.

It uses natural gas.

Not all customers have the same company deliver natural gas and electricity. Probably half the customers have to write two checks each month. One bill going to the electric company and one to the local gas distribution company. Even where gas and electric service is provided by the same company, they are hardly the same when you view them from inside the organizations. There aren't many CEOs in these companies who got their start on the gas side of the business. Certainly, HR in these companies should check with legal to see if there could be any discrimination lawsuits. The cultures tend to be very different. I had a friend start out on the gas side of his company and later became the COO of the electric side. He said he always had a better time on the gas side of the business than the electric side.

Please don't take that to mean that people who run electric companies are strange. They are not. It's just that the businesses are different. Electric companies are the most difficult business in the world to run. Their customers want electricity when they want it. That very instant. And they can't really put any product into inventory (at least not very easily).

As far as your comments about locating Bloom Servers at electric substations, boy, it's been a long time since I heard that. In the early 90s, it was one of the mantras of the distributed generation crowd. It never really took off much. You don't really find many gas mains close to electric substations.

So let me come back around to the beginning. The Bloom Energy Server looks like a really neat technology. It isn't, at this point, something that's going to knock the market on its ear. But that's how the energy business works. You've got something that you can take to the market and have at least an even chance of being heard. That's all you really need. That and patience.

You should have a clear shot at the commercial market.

The residential market is different. If you can get KR to rework the insides of the box to be able to serve the variations in electric, space conditioning, and hot water that residential customers need, then the sky's the limit. Even if you have to pair it with one of TJ's [T.J. Rogers--ed.] solar panels.

But look to the natural gas side of the business and to the current HVAC market -- including companies like York, Trane, etc. -- to install the systems. They know that market cold.

Talk to the people in the gas transmission and supply side. I'm sure Aubrey McClendon at Chesapeake will take your call and can tell you how to make it happen.

You're going to have a blast making the business work.

And just one more thing...

Remember, above all, this ain't the Web.

Buck