By Stephanie N. Mehta
October 15, 2009

Conglomerate invests money – and its considerable resources – in young energy firms.

By Marc Gunther, contributing editor

When A123 Systems (AONE), a startup company that makes advanced lithium-ion batteries, had a successful initial public offering last month, one of the big winners was General Electric (GE).

That’s because A123 Systems is by far the biggest holding of a venture capital fund run by GE that invests in energy startups. Over six rounds of funding, GE had invested $69 million in A123, which makes batteries for cars, trucks, buses, utilities and consumer products, like Black & Decker tools.

Today, GE is A123’s biggest shareholder and its stake in the company is worth about $190 million.

With little fanfare, GE’s venture fund has been investing in a broad variety of energy startups since 2006. Most of the investments are small—so far, GE has invested about $160 million in 20 companies.

Besides its cash, the industrial giant brings credibility, relationships and expertise to its portfolio companies. “We’re one of the top-tier players in energy,” said Alex Urquhart, the president and CEO of GE Energy Financial Services, a unit of GE Capital that manages the fund. “We bring a lot more than money. We bring connections. We bring R&D.”

This week, GE invited executives from its portfolio companies and reporters to its Global Research Center in Niskayuna, N.Y., to talk about the venture business. GE has backed startups in wind, solar and wave energy, companies seeking to profit from energy efficiency and the so-called smart grid, as well as a handful of oil and gas firms.

A “popcorn stand” today; tomorrow, the future of energy?

To put the venture operation in context: GE Energy Financial Services has $22 billion of global energy investments, most in fossil fuels, pipelines, electricity transmission and distribution. Of that total, more than $4 billion is invested in renewable energy projects, like utility-scale wind farms or solar plants. By comparison, the energy venture fund is a popcorn stand.

But GE is betting that at least a few of its startups will profit from big global trends: growing demand for power, long-term supply constraints, rising production costs and pressures to drive the world economy with low-carbon energy sources.

“The people in this room have the opportunity to change the world we live in and create new $1 billion industries,” Urquhart said. GE announced two new deals at the event. The company joined with venture capital funds in the U.S., Singapore and Israel in a $23-million round of investment in SolarEdge, an Israeli firm with technology aimed at increasing the output of solar photovoltaic panels.

It also invested in a Colorado startup called Tendril, whose technology enables real-time communication between utility companies and their customers, as part of the smart grid. Financial details weren’t disclosed.

Kevin Skillern, who manages the venture fund, told FORTUNE that it has already more than earned out its $160 million in investment. Besides A123, two other GE-backed startups have gone public—a Chinese company now known as China High Speed Transmission Co. that makes gear boxes for wind turbines, and Orion Energy (OESX), a Wisconsin-based firm that does energy-efficient lighting retrofits for big companies.

Both, it turns out, were helped by GE’s cachet–and clout. The Chinese company, formerly known as Nanjing Gear, got GE’s attention several years ago when GE rival Siemens (SI) acquired another Chinese firm that had been GE’s biggest supplier of gear boxes, a critical component for GE’s wind turbines. GE subsequently began buying gear boxes from Nanjing and invested about $20 million in the company, according to Skillern, who said that GE’s stake is now worth $160 million.

Orion, meanwhile, is a GE customer and supplier. It has sold its lighting retrofits to GE, as well as other FORTUNE 500 companies including Coca-Cola and Kraft. Orion buys light bulbs and electronics from GE.

Since going public in 2007, Orion’s shares have fallen in value by 75%, so GE has lost money on that deal. Other GE startups also have struggled. Think, an electric car company based in Norway, went bankrupt, but has since emerged with big plans for make cars for Europe and the U.S.

Interestingly, while GE’s own energy business, which had nearly $30 billion in 2008 revenues, focuses on large-scale, centralized gas, coal and nuclear power plants, its venture fund is betting on small-scale distributed energy.

Boosts from subsidies and stimulus money

Last spring, GE invested alongside Rockport Capital and Chevron’s venture arm in Southwest Windpower, the world’s largest manufacturer of small wind turbines. Based in Flagstaff, Arizona, Southwest Windpower makes wind turbines that sell for about $15,000 to homeowners, commercial and off-grid customers.

Frank Greco, Southwest’s CEO, said that after federal and state tax credits are factored into the cost, the electricity generated by its 2.5 kilowatt Skystream turbine “is currently competitive and in some cases lower than centrally supplied retail power.”

Government support is crucial to many of GE’s investments. A123Systems and Southwest Windpower benefit from federal tax subsidies for renewable energy. A123 also received more than $600 million in federal and state stimulus funds to build a plant in Michigan to create so-called green jobs.

GE executives said the energy venture fund looks at about 1,000 business plans a year. “We’ve got unbelievable depth in technology that helps us pick winners and, even more important, accelerate the commercialization of technology, which is really what the game is all about,” said Steve Fludder, president of GE’s ecomagination initiative. “Scale can turn these innovative companies into billion-dollar revenue streams.”

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