Friday, July 13, 2012

Clean Tech Has Reached the Mass Deployment Stage (Investors See That)

A new debate is picking up within the clean energy industry: Is the sector facing a crisis? Or is it still on an upward curve?

The bankruptcy of Solyndra and the political wrangling over the Department of Energy’s loan guarantee program have heightened the debate, causing people to ask if there are deeper troubles below the surface. That, combined with a shift in the venture capital community away from early-stage investments, is raising concerns.

Are they founded? Yes and no. But it would a stretch to call this a crisis.

Earlier this week, the think tank Third Way released a report called “Nothing Ventured: The Crisis in Clean Tech Investment,” which calls the shift away from early-stage VC investments a “quiet but severe crisis” that “suggest stark consequences” for the future of the industry.

The report’s goal — to raise awareness about the need for VCs to make bolder moves in cleantech — is certainly an important one. But right after it was released, the latest figures for venture investments in clean energy showed a 73% jump in Q3 over last year’s figures, which showed that “confidence in cleantech continues,” according to Ernst and Young, the firm tracking the figures.

Yes, a lot of that money is going into later stage rounds for more mature companies. But as Ernst and Young Cleantech Director Jay Spencer explains, that’s because “cleantech has reached its deployment phase,” making new sets of investments far more capital intensive than in the past. In the energy market, you don’t make a dent until you get to the billion and trillion dollar scale.

“VC Money does not indicate the success of this industry,” said Jigar Shah, CEO of the Carbon War Room, in an interview with Climate Progress. “There is a huge pipeline of projects and technologies that are now scaling and will continue to drive down costs in the next decade. We are already approaching $2 a watt installed for solar PV — when you get there, you’ll be able to supply up to 30% of global electricity needs cost-competitively.” (For a detailed talk with Shah on deployment strategies, listen to our interview on the Climate Progress podcast.)

Third Way sees things quite differently:

If a sector that helps drive American economic growth loses 26% of its value — $22 billion — and sees a 26% decline in new companies in just three years, would it be a crisis?

It should be. Unfortunately, this decline is happening today to U.S. venture capital, the sector that financed the creation of such iconic American companies as Intel, FedEx, Apple and Google.

The collapse has hit the emerging clean energy sector particularly hard, with investments spiraling down 44% in the last year alone. And it’s happening at a time when the U.S. is locked in an intense competition with China and Europe to win the $2.3 trillion global clean energy market. Yet almost no one in the nation’s capital is ringing alarm bells about venture’s demise.

Yet in the real world, it’s hard to see this collapse.  Further proving strong interest from the venture community, famed venture capitalist Vinod Khosla recently announced that his firm, Khosla Ventures, had raised a $1.05 billion fund, with half of that money going into a broad range of early and late-stage cleantech companies. When the news broke, Khosla Ventures issued a statement explaining that the firm “does not anticipate any change in strategy.”

However, as someone who touts a “Black Swan” approach to investing, Khosla believes that radical innovation is needed to change the energy sector: “What matters are exponential innovations,” he said in a recent speech. “The only way to get there is radical innovation. There is no question you can compete with fossil fuels with renewables and be cheaper.”

According to the Third Way report, the drop in early stage venture investments will severely hamper our ability to achieve exponential innovations:

In 2010 there were more late-stage deals than early-stage deals in clean tech—by a margin of 2 to 1—for the first time since 1999…. Investments in early stages of new technologies are particularly important. This is the point when companies have proven concepts and perhaps a small handful of customers, but they are not yet making a profit. Starved for cash, they cannot implement a business plan that reaches profitability without outside investment.

But calling this a “crisis” assumes that that only exponential technologies will transform the energy system. In fact, experience shows that only technologies with decades of experience in the field attract the type of asset financing needed for large-scale project deployment. With renewables representing roughly 50% of all global electricity capacity additions last year, the deployment data suggests that we are in anything but a crisis.

Shah recently called for the repeal of $380 billion in energy subsidies across both the renewable and fossil energy sectors, a move that he says would level the playing field and cut unneeded expenditures. And he believes that after 2016, the tax credits for solar and some other technologies may no longer be needed due to continued drops in the cost of developing projects:

I think that VC investments are an important thing. But all this nonsense about a crisis is based on the false assumption that we need these dramatic improvements to make an impact. The facts on the ground don’t back that up. We have this huge pipeline of projects coming down the pike.

Of course, many people are concerned that the bankruptcy of Solyndra and Beacon Power are symptomatic of the health of the industry. While much legitimate criticism can be made about the DOE’s management of the loan guarantee program, the reality is that some bankruptcies were expected and budgeted for. And we probably haven’t seen the last of the failures from the loan guarantee program, or elsewhere.

However, the bankruptcies of individual companies don’t prove a “crisis” in the slightest. For every company that fails, many more are thriving throughout the clean energy supply chain — selling products, shipping materials, raising private financing, and deploying projects.

Dismissing the importance of R&D and early-stage VC investments would be dangerous. And we can’t ignore the political backlash on the federal level that is causing market uncertainty. But the environmental and economic macro-trends pushing this industry forward haven’t changed.

The path to wide-scale clean energy deployment is neither easy nor linear — saying that the clean energy industry is facing a crisis isn’t accurate.

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