Despite Stormy Seas, Ocean Power Still Afloat

[Reposted with the permission of U.S. 1, a newspaper serving the Rt. 1 corridor. The original article can be found here. Ocean Power Technologies is in Pennington, N.J.]

Ocean Power Technology, a Reed Road-based alternative energy company, is changing course after 20 years of never turning a profit. As its most recent annual report, filed to the SEC in October, states: “We have incurred negative operating cash flows since our inception.”

Last year was a year of setbacks in several arenas, as it pulled back from three projects that were meant to commercialize its wave power technology and fired the CEO who had managed those projects, Charles Dunleavy.

Founded by engineers and Princeton residents George Taylor and Joseph Burns in 1994, Ocean Power Technologies is focused on developing and commercializing wave power: turning the mechanical motion of waves into electrical power. Wave power is not a new idea — it was considered in the late 1800s. But like its counterpart, wind power, it is only now being developed as a source of large-scale alternative energy alongside solar, geothermal, and tidal power.

OPT’s PowerBuoy generators were designed in two basic varieties: a small system to supply offshore platforms, Navy surveillance devices, or other remote locations, and a larger utility-grade system.

The company has now set aside efforts to create the large buoys meant to supply power to land and instead focus on developing the smaller variety. The future of the company hinges on whether OPT will be able to deliver on its smaller, faster ambitions.

Turning Ocean Power Technologies’ fortunes around is now the job of George Kirby. OPT’s board picked Kirby to be the successor of Dunleavy, and he took over on January 20. He is an executive with 22 years of experience in the energy industry, most recently as a senior vice president for AECOM Technology Corporation based in Los Angeles, where he led the company’s North American power generation and delivery projects.

An engineer by trade, Kirby grew up in the town of Port Murray in Warren County, where his father was a hay dealer and a second-generation farmer. Kirby left the family-run business to earn a bachelor of science in aerospace engineering from Syracuse and an MBA from Penn State. He has been a manager at GE Capital, GE Power & Water, and American Superconductor, an Andrew Corporation. He was vice president of utility services at SAIC Energy, Environment & Infrastructure, where he worked with electric utilities in the North American market.

The strategy pivot began under interim CEO David L. Keller, who presided over the company between Dunleavy’s firing and Kirby’s hiring. “We’re moving away from utility scale and focusing 100 percent on autonomous power,” Kirby said. “There are several market segments that could benefit from this. If you look at availability of power in offshore deep ocean environments, there are not a whole lot of options outside of small wind and solar as well as diesel generators, which provide a number of challenges with regard to refueling and operational maintenance. Our plan is to leverage our technology in order to provide power into those market segments.”

The utility-scale PowerBuoy that Ocean Power spent so long developing was an impressive feat of engineering. Its largest model, the Mark 3, was tested off the coast of Scotland in 2011. It was 142 feet tall, but only about 37 feet of that length is above the water. The buoy, anchored to the sea bed, rose and fell with the waves. The motion drove a turbine inside, which created electrical power. The model tested in Scotland was rated to generate 877 kilowatts of energy at the maximum height of ideal waves. “While the PowerBuoy did not produce significant or anticipated power during its deployment period, learning from the deployment was incorporated into subsequent PowerBuoy designs,” OPT said in an SEC filing.

The company at one time planned an even larger “power tower” model that would generate more than 2 megawatts of electricity, but the sheer mass of the proposed machine made it impossible to deploy.

The PowerBuoy was not meant to operate by itself, but as part of a larger “wave farm” of many buoys, all connected to a grid. In 2012 the company received a permit from the federal government to build the world’s first wave farm, off the coast of Reedsport, Oregon. The project would have consisted of 10 buoys, generating enough power for about 1,000 homes. It would have been a milestone for wave energy as well as OPT, since it would have marked the first time they had collected income from the sale of power.

Over the years, the project encountered what Oregonlive.com called “regulatory and technical difficulties” and was scaled back to just one prototype buoy to be floated as a proof of concept. By 2013 one buoy had been built and OPT planned to float it out to sea, then connect it to the commercial power grid as a test. The company set three floating anchors in the water and planned to tow them to the test site. Disaster struck when the anchor capsized an sank en route to the site. The company recovered it a year later.

In April, 2014, Ocean Power Technologies and the government mutually put the nail in the coffin of the project and relinquished their permit to build the wave farm, with the Mark 3 Power Buoy still on its side in a dry dock.

The failure of the project left taxpayers on the hook to the tune of about $5 million from the Department of Energy, to OPT and other companies, as well as about $500,000 from the Oregon Wave Energy Trust, a public-private partnership that promotes wave power. In December the Cascade Policy Institute of Oregon, an independent consultant, released a report blasting the program for “waiving profitability.”

“It is not clear why OWET chose to fund OPT, since even the most basic level of due diligence would have revealed a high level of risk for taxpayers,” said the report. “OPT was founded in 1994 and has focused on testing its PowerBuoy technology. It reported a nine-month loss of $7.88 million, as well as approximately $15 million losses for the two years before that. Its annual reports show losses of $10 million or more every year since 2007. In fact, by its own admission, the company has never made a profit and does not know when or if it ever will. OPT has accumulated an overall deficit of $148 million.”

The report noted most of OPT’s funding came from government agencies, mainly the Navy and the Department of Energy.

The company itself was not unaware of this risk, noting in its annual report that “Currently, the cost of electricity generated from wave energy, without the benefit of subsidies or other economic incentives, substantially exceeds the prevailing price of electricity in all significant markets in the world. As a result, the near-term growth of the market opportunity for our utility PowerBuoy systems, which are designed with the capability to feed electricity into a local or regional power grid, depends significantly on the availability and magnitude of government incentives and subsidies for wave energy.”

The Cascade Policy Institute was overall highly skeptical of the viability of wave power in general.

“If wave energy were as promising as proponents believe, private investors would take on the risk and invest in wave energy. The fact that private investors are not involved signals that they realize there is little potential for wave energy to be profitable — and that is with government subsidies involved. It would be even less attractive without public money,” the report said. “Despite all of this funding, OPT still did not earn a profit, nor did it create a functioning long-term buoy that contributed electricity to a power grid on a permanent basis.”

The Oregon project was not OPT’s only attempt to build a wave farm. In 2006 the company launched a joint venture with European gover
nments and companies to build wave energy generators off the coast of Spain. The Spanish Waveport project was scaled back repeatedly to just one demonstration buoy. The company said in its annual report that the buoy — a 100-foot-long PB40 model meant to generate 40 kilowatts — was sent back to Bayonne and will be deployed off the coast of New Jersey instead of Spain.

Still grander in ambition was OPT’s partnership with the Australian government. In 2009 the company formed a subsidiary, Victoria Wave Partners, to build a 62-megawatt wave power farm off the Australian coast. The project was to be partially funded with $66 million in grants from the Australian government, to be matched by other funds raised by OPT. In 2014 Australia changed the terms of the deal, requiring the company to hit more milestones, obtain additional funding, and meet other requirements. The $200 million cost of the project, as well as difficulty meeting Australia’s terms convinced OPT to cancel the project entirely.

In its annual report, OPT said it was giving back $5.5 million they had already received from the Australian government for the project. Although no buoys were launched, the project did result in four lawsuits being launched against the company. It is facing four class action complaints from shareholders.

The lawsuits stem from a press release issued in February, 2014, when the company announced the receipt of the initial $5.5 million from the Australian government, which had been expected as part of the initial agreement between OPT and Australia five years previously. The lawsuit contends the announcement, which was coincident with a round of fundraising, caused a jump in the stock price, to almost $5 a share, and it has since fallen to about 48 cents.

Amid the controversy, OPT fired its CEO, Charles Dunleavy, and replaced him with interim CEO David L. Keller. OPT also launched an internal investigation into the public statements. The company told regulators the investigation found the matter was “generally routine.” Dunleavy has threatened to sue the company over severance pay.

Kirby said developing the large-scale systems proved both too costly and too risky.

“What the whole industry has seen and what we are continuing to see is that large-scale in general is very much a challenge,” he said. “When you’re trying to develop new technology fast, on such a large scale, you get into not only cost issues, but it’s very high risk. You need much larger equipment for deployment, such as cranes and vessels. When you scale that down, you not only decrease the cost but you are able to more rapidly prove out your technology.”

The company believes there is a market for its smaller systems in “ocean-based communication and data gathering such as for tsunami warnings and seismic surveys, homeland security, offshore oil and gas platforms, and aquaculture.” The company said it has enough funding to continue operations at least through 2015.

The two models it is continuing to develop are the PB40, which is meant to generate about enough power to supply five to 10 homes, and the smaller APB-350 which at just 41 feet long — small enough to fit into a shipping container — is supposed to produce 350 watts of power. Though the APB-350 creates about enough energy to turn on a hair dryer, the company hopes to compete against solar-battery systems that provide about a fifth as much wattage.

Kirby says the company is planning three deployments in 2015, testing the latest versions of both the APB-350 and the PB-40.

Kirby said the upcoming demonstrations are meant to create credibility for the technology and to generate interest in the marketplace. “We are looking to bring partners in, but we are waiting until the technology is fully developed,” he said.

Kirby said the smaller buoys for autonomous systems will prove easier to bring to the marketplace than the utility-scale machines of the past. “I believe that this is definitely a more rapid path to revenues and to full-scale commercialization,” he said. “It’s less expensive and lower risk. We are using smaller vessels to deploy the buoys. Everything is smaller. There are segments of the offshore power market that are looking for just this type of power — power that doesn’t need to be addressed on an ongoing basis.” Kirby says the idea is for a power buoy to be able to work in the harsh environment of the sea for up to three years without any upkeep, making it an attractive low-maintenance offshore power option.

David Heinz, director of autonomous power for the company, compared the trajectory of the PowerBuoy technology to that of wind power. The first wind farm in 1971, meant for utility scale operation, was a catastrophic failure, he said. Only after perfecting wind turbines for use in remote locations did it become commercially viable.

Kirby said the company is hiring more, expanding its Pennington headquarters to a staff of 40.

Antonio Sarmento, a professor at Lisbon Technical University and director of the Wave Energy Center, a nonprofit group based in Portugal, was optimistic when OPT announced its wave energy project in Oregon, telling the New York Times that the development was “very positive.”

Given the commercial experience of OPT and other wave energy technologies, he has changed his expectations. “Wave energy is facing difficulties in moving from technology development and prototype testing to the commercial phase,” he wrote in an E-Mail. “The reasons are manifold and are related to the high cost and risk of development, the long term to market and the unclear path towards a competitive energy technology. These issues are particularly critical in times of economic crisis where the cost of money is high and availability to take risks is low.

“To these reasons add to some degree doubts about the existing technology — mainly in what concerns survivability and reliability. Therefore several companies are approaching niche markets (as the energy supply for offshore applications, namely the powering of scientific instruments in the ocean), while others are looking for innovative solutions that to some extent deviate from previous wave energy technologies.

“In this sense OPT is taking a route that other companies are also taking. The expectations is that developing small units for these niche markets will allow to increase revenues, reduce the learning costs and increase technology maturity at a lower cost.”

Only time will tell if the company under Kirby’s leadership will be able to make the transition successfully.