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Why Massachusetts is leading

Rob Day: December 29, 2010, 9:31 AM

I often get the feeling talking with cleantech investor colleagues in California and contacts in D.C. that they don't think about Massachusetts very much.  Perhaps they think of the innovation center in the universities based in the state, but they don't think very often about the state as being a leading market for such innovations.

But it is.

Over the past few years, thanks to the efforts of the Patrick Administration and earlier efforts, Massachusetts has been a quiet trend-setter in terms of how to support implementation of clean technologies, and how to restructure the electricity regulatory scheme so that utilities have an incentive to tackle real efficiency savings, not just to do token amounts of Demand-Side Management programs.  And it's not just because it's "liberal Massachusetts", but more importantly because Massachusetts uses a lot of energy and doesn't have many energy resources, so there's an imperative to deal with the problems earlier rather than later.  Here in Massachusetts, we've seen:

  • A focal point (albeit far from being the only regional leader) for the Regional Greenhouse Gas Initiative (RGGI, or "Reggie"), a first-of-its-kind regional carbon cap and trade system that's Exhibit A of how the states aren't waiting for federal leadership on this issue;
  • A recently-launched S-REC program that looks like it will prompt a big wave of solar project development in the state;
  • "Decoupling", which incentivizes utilities to target energy efficiency as a "first fuel";
  • Rapid expansion of natural gas generation capacity; 
  • The nation's first major offshore wind farm; 
  • The development of an ocean power center in the southern part of the state;
  • A $2B program to roll out residential energy efficiency retrofits; and
  • A new effort to make the state's government buildings be made intelligent and efficient.

Among other actions.  

My point isn't to launch yet another useless "which state is better?" debate, but simply to point out that that's a lot of really forward-thinking policy and market development.  Yet I don't see as much attention paid to Massachusetts as is paid to, for instance, California's own similar programs, or Texas' smart grid and wind power programs.  The reasons probably being a) those are much bigger states with much bigger economic impact; and b) California has highly visible public referendums and Texas has a conservative reputation at odds with simplistic views of alternative energy motivations.

Nevertheless, the re-election of Gov. Patrick in Massachusetts, while not directly a referendum on the above policies, was still a very important "win" in 2010 for the cleantech industry, since a lot of those policies were and are under implied and real threat of rollback.  

It being Massachusetts, all of the above is often buried under the latest scandal or personality-driven storylines.  And frankly, even living here and paying attention to it all, it's tough to see the whole of all these initiatives, when the day-to-day is full of the kind of political and semi-political machinations over very small details, and with the very bureaucratic processes, that give Massachusetts a bad name.

So when the outgoing Secretary of Energy and Environmental Affairs, Ian Bowles, gave a farewell speech recently summarizing all of this and laying out his overarching vision of policies going forward, I found it to be a fascinating read.  I encourage readers to take the time to check it out.  It's also available through the Massachusetts DOER website.  I've been fortunate to have tapped into Ian for his thoughts and advice at times over the past few years, so it's great that he put all this down to share it with others.  It's a political speech of sorts, as readers will see, but it still has some good meat to it.

I've now invested in two Massachusetts-based companies and I can see the impact these policies have in terms of making it a hospitable place for emerging cleantech businesses to get started, and to go to market.  I wish a lot of other states would take similarly strategic perspectives on these issues.  Especially when the federal government is so inept at providing such leadership, and thus the states are so much more important for making sure we have a robust clean economy here in the U.S. 


In what's probably my last post of the year, I also wanted to thank the team at Greentech Media for being great partners this past year.  They've taken a fair bit of undeserved grief from me at times this year.  In fact I seriously considered not blogging at all any more given how busy things are at Black Coral Capital these days, but the team at GTM talked me back into it, and I'm glad they did.  Thanks, guys, and happy new year.  

11 predictions for 2011

Rob Day: December 27, 2010, 8:21 PM

'Tis the season for nor'easters, new year's resolutions, and venture capital prognostications.  All three, basically snow jobs.

2010 wasn't a good year for many cleantech venture capitalists.  I think 2011 will be better... for some.  Here's what I wrote about my 2010 predictions in retrospect.  And here are some of my predictions for 2011:

1. The cleantech venture capital shakeout will become more obvious

I haven't seen too much written about this by those outside the industry, mostly because it's been pretty quietly done.  But as we've talked about here before, there's been an exodus of investors out of the sector lately.  To date, it's been mostly individuals -- either individual VCs leaving their firms, or the "cleantech guy" at diversified firms now being redirected back out of cleantech investing into other sectors.  But wearing my limited partner hat, I'm seeing a whole lot of cleantech-specific firms out there or getting ready to go out there and raise new funds.  And I just don't think the LP community will be able to support all of them.  The big institutional LPs have been shifting away from venture capital as an asset class, and they've become more tepid about cleantech.  2010 saw a stop of any new cleantech venture firms; 2011 will see the shakeout of existing cleantech venture firms. Certainly there are a good number of cleantech-specific funds that previously had been able to raise funds simply on the basis of being cleantech specialists, but who now will be competing against each other for increasingly scarce LP dollars. And (often because of the overall VC category performance, and the lack of VC exits overall over the past decade) many won't have an advantaged track record, and won't have a really differentiated pitch versus their peers.  I think it'll be lean times for many of those funds.  The firms won't go away, but there may be more obvious slimming of staff as operating budgets go down and the lack of dry powder makes it less necessary to keep staff on.  The good news is, given the continued need for experienced senior management at cleantech venture-backed firms, I think a lot of this will be VCs leaving to take operating roles.  The other good news is that I think things will continue to get gradually better for cleantech venture fundraising...

2. 2011 will be the "Year of Energy Storage"

I predicted 2010 would be the Year of Energy Efficiency, and I think I was pretty much right (for once).  This year, based upon the conversations I've been having with fellow cleantech VCs, I think it'll be the year for energy storage.  By which I mean battery and ultracap technology, and large-format energy storage for grid-scale purposes.  I continue to see lots of very interesting basic innovation going on, and some interestingly pragmatic attempts to productize some previously "exotic" approaches.  I hear VCs harping on the problems the grid faces from intermittent renewables; the need for energy storage inside the meter for grid-tied and backup power purposes; and the continued VC love affair with electric vehicles and electronic devices.  All of which need innovations in energy storage.  This doesn't mean I'm predicting a lot of very capital-intensive bets on brand new chemistries and entirely new battery formats.  Certainly, there will be a fair bit of that, but I'm also seeing a lot of interesting "chemistry-agnostic" approaches to building the systems implementing these applications, and even some attempts at "fabless" (in this case, relying upon contract manufacturing) business models, both of which are less capital intensive than an A123 manufacturing plant (for example).

Runner up is LEDs.  LEDs are going to be ready for prime time in 2011.  And as that inflection point hits and LEDs start to penetrate mainstream lighting, VCs are going to want to get on board -- even more so than they already have. However, I have spoken with a number of investors who see the market opportunity and trend, but don't see a good way to play it.  They don't want to back an LED chip manufacturer; LED "light engines" (ie: the lighting component that would go into a traditional lighting OEM's fixture) are already pretty heavily invested and seeing slow market traction; and they don't want to invest in just an undifferentiated fixture OEM startup, going against the deeply entrenched incumbents.  I think controls will be an area that gets a lot of attention, and I think VCs will find plenty of excuses to put dollars at work in the LED space regardless, but those are the reasons why I expect LEDs to be a runner-up to energy storage in the "Year Of" competition.

3. 2011 will be a moderately up year for cleantech venture dollars and valuations

Despite the cleantech venture capital shakeout described above, there are still lots of investors interested in the category.  And we're all still climbing out of the 2008-2009 trough.  2011 will probably be as up and down as 2010 was, but with a generally upward trend.  

4. A major geopolitical event will spike oil prices above $120/barrel

US crude oil futures for the next few years are already hovering over $90/barrel, and it's a highly volatile commodity market.  And, there are enough flashpoints around the world where something will create a supply-side panic during the year, even if any feared interruption of supply doesn't actually happen.  Meanwhile, the continued slow economic recovery will decrease the market's capacity to absorb such supply-side shocks without corresponding price spikes.  So I think a pretty moderate spike at some point seems likely.  The interesting thing, however, will be to see how that impacts both U.S. politics, and LP interest in the cleantech venture category...  "Been there, done that" or another "OMG" moment?

5. There will be an energy law passed in the U.S., but it will be very patchy and incomplete

The Obama Administration seems bound and determined to reach across the aisle and try to find non-partisan issues to work on over the next couple of years.  The three major ones I've heard being talked about are tax reform, education and energy.  Tax reform is too hard to be first in line.  Education will probably be first, but energy will be considered as well.  I've seen evidence that some of the key players in the White House are now being tasked to think about energy policy, which really hadn't happened before, and what I'd been told by insiders is that "when you see the White House's 'A-Team' focused on this, that's when you'll know they're finally serious.'"  However, I also expect a lot of partisan bickering and stalemate over the next 12 months and more.  Certainly, "climate" isn't going to be the centerpiece of any new energy bill.  And I don't see a lot of encouragement that there will be any serious new commitment of resources put toward development and implementation of new energy technologies.  But it wouldn't surprise me to see an energy bill get passed that extends a few expiring subsidies for renewable energy technologies, does some token reform of subsidies for traditional energy production, and that puts some kind of restriction on the EPA's ability to regulate carbon.  Those subsectors with the loudest constituencies would win out in the big horsetrading that would happen on Capitol Hill, others that are less-organized would get shafted.  All in the name of Energy Independence and Energy Security, of course.  There's an outside chance that a national RPS (or equivalent) gets passed, but I expect it would be pretty toothless by the time the political process did its work...  This is a prediction I feel very iffy about, by the way.  There's a very good chance nothing gets passed at all.

6. A couple of big venture-backed cleantech IPOs (valued over $1.5B) will happen, but still no blockbusters

There are a number of compelling IPO stories starting to line up.  Will they go out in 2011?  Completely up to how the stock market behaves, and what's actually going on behind the scenes at these companies.  It will come as no surprise to many readers that many of the most lauded cleantech companies have questionable balance sheets, cashflow, and growth prospects; whereas some of the ones most beaten down by the press are now starting to come around and show signs of legitimate performance.  I just looked at some journalist's list of the "Ten Most Likely Cleantech IPOs in 2010" from a year ago and I think only two of them actually happened.  So I'm not going to try to pick which ones will be the IPOs in 2011, or even pick the sectors they'll be in.  But I do think, if there's an IPO window on Wall Street at all, there's a good chance a couple of decent ones go out.  Nevertheless, I also don't see the potential for the kind of hype that would allow for a really blockbuster cleantech IPO, either.  I don't see any cleantech startup turning down Groupon-type acquisition offers anytime soon, in other words...

7.  Family offices and other non-traditional investors will become a critical source of funding for cleantech private equity

For the most part, this is already happening, you just haven't seen it written up much in the press because these types of investors typically don't put out press releases.  But I think in 2011 we'll see even more obvious leadership played by the family office and other non-LP-backed private equity community, in the cleantech sector.  Partly by default, as the fundraising challenges for cleantech VCs continue.  But also I speak with a number of such investors who want to start doing more direct investments into the sector.  And also, these investors can typically invest with much more flexibility, which is key for a sector in need of some reinvention of business models.  Speaking of which...

8. New hybrid investment models will emerge

I predicted this for 2010.  It didn't really happen.  But I continue to speak with both LP-backed and non-traditional VCs and PE players who see the need.  So I'll double down for the prediction for 2011.  And what I'm talking about is the emergence of new models that combine project finance and venture capital; that take innovative approaches to the use of debt and equity combined; and/or investment into the kinds of business models (like services, etc.) that VCs have typically had a hard time backing.

9. "Tech-enabled services" will be the new hot buzzword among cleantech VCs

Well, I shouldn't actually predict buzzwords.  I mean, who'd have thought something like "black swans" would have caught such momentum in VC jargon.  I'm not the guy to successfully predict fashions of any sort, rhetorical or otherwise.  But I do think that VCs and other cleantech investors are going to be increasingly interested in making bets based upon interesting business models, not based upon some whiz-bang proprietary technology.  There's increasing awareness of the relative fungibility of various clean technology innovations, since at the end of the day all are just different ways to source basic energy commodities (kwh, or joules).  Fewer VCs are willing to make bets based upon an expectation that a purely technological innovation will be able to take the world by storm, at least within their investment holding period.  And there's increasing respect for how hard it is to bring truly revolutionary technologies to market in these sectors, given the unique challenges along the way in productization and commercialization.  But I see increased interest among such investors in finding better ways of delivering compelling solutions, in relatively capital-efficient ways.  To me, this says they'll want to find service-type business models, but where there's enough of a proprietary technology angle that they can still look at themselves in the mirror and claim to be technology investors.  Or to put it less cynically, they'll want to see enough differentiation and defensibility that they can believe a venture-type growth and exit story, even if it's a service business.  And at the end of the day, service businesses will be who really deploy all these clean technologies we spend so much time talking about.  There's a definite market need for it, but to date it's been undercapitalized as an overall business model category.

10. Among U.S.-based cleantech venture investors, they will devote relatively more dollars to international investments

I see a trend among US cleantech VCs toward investing overseas.  They want to tap into more attractive markets, especially as the US federal government continues to show such a lack of leadership on climate and energy issues.  They want to tap into the overall demographic and economic momentum of the BRICs and other emerging markets.  And they want to not be too heavily tied to the fate of the US dollar, which many expect to fall eventually.  So I expect that in 2011 we'll see even more emphasis put on finding cleantech investments in places like India, Brazil, China, and even Europe.  Which will put a lot more US cleantech VCs on airplanes -- and possibly prompt some opening of overseas satellite offices, and/or partnerships with firms located closer to the investments.

11. The Washington Redskins will have a winning record

Those of you who follow me on my twitter feed (@cleantechvc) will know that I have an unhealthy affection for a certain woebegotten professional football team based in the suburbs of Washington, D.C. This year, they will yet again have a losing record.  But for 2011, I see them getting better.  Not getting great, but hopefully a bit better.  I mean, they almost have to, right?  Well, no they don't.  And recent history suggests they won't.  But even still, I feel a bit optimistic.  Playoff-bound?  Let's not go nuts here, I want these predictions to be at least plausible... 

Thanks everyone for continuing to read these thoughts and for sharing your own in return, in comments, email and on twitter.  I continue to get pinged by great entrepreneurs and investors out there based upon something or other I've written, and I always appreciate it and hope these posts have been helpful in some way...  Here's to surviving 2010, and to good returns in 2011!

“Throwing money”, and a few random notes

Rob Day: December 20, 2010, 3:52 PM

Just a few random notes on a snowy Monday afternoon:

1. As it's getting to the end of the year, I'm pulling together some predictions for 2011.  But it's always fun to look back at how I did last year.  The "year of energy efficiency"?  Check.  "Something in carbon legislation will be passed, but it will be more symbolic than meaningful"?  Not quite right, but directionally correct in assuming a more pessimistic stance than many had at that time.  "A pickup in investment activity, including the return of the megadeal"?  Yeah, probably technically correct, although Q3 of this year wasn't encouraging.  "New hybrid investment models will evolve"?  Never wrong, but often early, I like to say...  "Some booms and some busts"?  Ugh, how could such vague pablum be either right or wrong... What I meant to say with that was that we would see some high profile exits but also a shakeout.  And that was pretty much right, although I think the exits were probably more underwhelming than even I expected.  Anyway, more predictions for 2011 coming soon.

2. Total self-promotion alert, but I thought Kanellos of Greentech Media did a bang-up job interviewing Brian Chemel of Digital Lumens and getting at some of the reasons I'm excited about that investment of ours, so I thought I would pass it along.  Check it out.  Of course, the fixtures are just Step One of the story...

3. I still don't understand why Vinod and others have to go out of their way to castigate energy efficiency, or in general any implementation of today's clean technologies, along the way to advocating more governmental resources for breakthrough innovation.  My only guess is that they see ARPA-E and similarly important programs for innovation under some political pressure right now, and are trying to put innovation to the top of the queue for dollars, instead of things like Homestar.  But it's really quite unnecessary.  And a shame, because I generally applaud and agree with their sentiments -- except when they turn it into either/or type language.

The short answer is that we need both.  We need to be thinking long term, about what breakthrough innovations are needed, and how we can create fertile ground and sufficient resources for these innovations to sprout and emerge over time, perhaps with more ARPA-E type programs like Vinod asked for in his Foreign Policy piece.  But we also need to tackle what can be tackled today.  For the sake of preventing further damage while awaiting the breakthroughs. For the sake of laying the groundwork for the new industries that Vinod and others hope to build.  For the sake of not allowing the U.S. to get even more dependent upon foreign sources of energy, and to fall even further behind in clean technology market development.  And hey, just in case some of those breakthroughs maybe, just maybe take a little bit longer than Vinod and others expect.  

So it's unnecessary and counterproductive to see tweets like "throwing money at today's clean-energy technologies could keep us from discovering tomorrow's".  There's plenty of room to be very much in favor of supporting the necessity of breakthrough innovation while still acknowledging the need for implementation support for today's technology -- see for instance Bilal Zuberi's good post the other day on this topic.  And after all, it's not like anyone argues that "throwing money at treating cancer patients with today's technology could keep us from discovering tomorrow's cures," that would be quickly and loudly attacked.  So I just don't get it.  We shouldn't help people make their existing homes more efficient?  We shouldn't build out wind and solar where it makes sense with today's technology?  We shouldn't encourage switching coal-fired power generation over to natural gas, as a bridge to a cleaner fuel mix in the future?  

Besides, if these investors and pundits REALLY wanted to promote future breakthrough innovations, they'd spend more time arguing for a lot more government dollars dedicated to training tomorrow's engineers and scientists, rather than arguing for more government dollars for their own existing "black swan" bets.  This whole "debate" smacks of self-interest on all sides... Forget the either/or.  Let's all demand both.  And come together to support more resources for basic science and engineering education for all Americans.

4. Watching the "lame duck" session in Congress brings to mind some political lessons for the cleantech industry, for future efforts to get "carbon legislation" passed.  First, stop talking about carbon.  Talk about energy security and preventing high energy costs for homeowners and drivers in the future.  Second, make it a moral issue.  Ask how future generations, or even just today's younger generation, will view today's votes.  More emotion, less wonk.  And third, put military leadership front and center.  Because the U.S. military already understands the necessity of figuring out energy and water solutions today.  For their own logistical needs, and to prevent future conflicts.  And the senior brass is increasingly willing to speak out about it, in addition to quietly reaching out to the cleantech venture community for solutions.  They can and should champion this issue, in a bipartisan way.

Policy issues are going to continue to be front and center for the cleantech industry on into 2011 and beyond.  If you and your company are going to be affected by them, consider joining the Clean Economy Network and adding your voice to the discussion.

It’s “put up or shut up” time

Rob Day: December 17, 2010, 8:57 AM

Yesterday I drank ocean water and ate 31 day old fish.

And it was tasty.

I don't get the opportunity as a cleantech investor to do many taste-tests, yet funnily enough yesterday I got to do two of them.  First I attended a ribbon-cutting for Oasys Water's new facility in Boston's Innovation District, where Mayor Menino and a host of other folks including yours truly were invited to sample some ocean water that had been desalinated using the company's technology.  Tasted like Dasani.

Later that day I was kindly invited to a dinner hosted by Global Fresh Foods where they celebrated their first commercial shipments of sustainably-farmed salmon from Norway to the U.S., by doing a multi-course blind taste test.  GFF management, their investors, and their impressive partner Slade Gorton (and me, an interloper) got to enjoy a very tasty meal with identical courses of, on one side of the plate, salmon shipped by the current expensive and wasteful method (air freight), and on the other side of the plate salmon from the same region shipped via ocean freighter and kept fresh by GFF's technology.  One fish was just a couple of days old, the other was 31 days 'fresh' (as GFF likes to stress).  I honestly couldn't tell the difference.  (And it was also a great excuse for a really lovely meal, my thanks to GFF, S-G and Marty Lagod of Firelake for the kind invitation)

For the past few years, a lot of cleantech investing has been about the promised potential of new technology and new offerings.  Big bets made on solar startups, biofuels companies, car companies, etc.  In many cases, we're still waiting to see the full commercialization of these products, the potential has yet to be realized.  I find it interesting that in the meantime, companies like Oasys and GFF have been able to get out there with actual products and services.  And by now, even some of those longer-term development efforts appear to be poised to bear fruit.

I don't think cleantech investors are feeling very patient these days.  There's some seed stage and pre-revenue investing going on, surely.  But for the most part, a lot of investors I speak with are looking to see actual proof -- not proof of concept, but proof of product and proof of market acceptance.

So yesterday was a lot of fun.  Because it was a day where I got to see some of that proof in action.  Another piece of evidence telling me that once the cleantech sector is able to emerge from the current doldrums, it'll be even more robust and mature than before.  The next decade of cleantech investing will be about many more technologies than just the high-profile ones like solar and biofuels that got so much attention in the past decade.  And it'll be about actual products and adoption, not promised products and potential adoption.

(Btw, I have no stake that I'm aware of in either Oasys or GFF)

Coal and gas, revisited

Rob Day: December 13, 2010, 4:03 PM

I had the pleasure of taking part in a roundtable discussion at MIT a few days back, with researchers, investors, entrepreneurs and others there to talk about what cheap natural gas might mean for U.S. efforts to combat climate change.  The assumption being that unconventional gas development efforts (shale gas, etc.) and the resultant massive expansion of reserves here in the U.S. points to a prolonged period of relatively cheap natural gas.

Somewhat to my surprise, the group mostly thought this was a bad thing.  Because, many felt, cheap natgas would mean building out more of a power infrastructure based upon gas instead of solar/wind/etc. power.  "We cannot achieve our 2050 carbon emissions targets if our energy mix is heavily based on natgas," I heard.

That's a fair point, and it was a good discussion.  But once again I saw a missed opportunity to embrace a key industry as a partner, and a tendency to push natural gas aside as at least part of the solution.

A recent analysis by researchers at the Lawrence Berkeley National Lab (LBNL) concluded that global coal reserves are significantly less than what has been previously reported.  It suggested that coal price spikes are already being felt in places like China and are likely to begin happening in other regions like the U.S. as well.  The authors argue that the era of cheap coal is coming to an end.

Meanwhile, I also got a copy of a briefing by the Worldwatch Institute pointing out that natural gas, if produced responsibly, may hold a vital role as a backup power fuel that can help backfill sporadic power from major renewables like solar and wind power.  It's a good summary report that should be released soon, look for it.

I see a lot of cleantech VCs investing in grid-scale energy storage options, with an eye toward solving the "intermittent power" problem.  But a data point in the Worldwatch report caught my eye.

  • According to NREL and Worldwatch, the estimated levelized cost of backup electricity (I presume including utilization factors) is $0.13/kwh for compressed air energy storage, $0.14/kwh for pumped hydro, $0.15/kw for natgas combustion turbine, and then batteries and fuel cells come in at higher than $.20/kwh (in most cases much higher).

If this is correct, CAES and pumped hydro are only marginally better than natgas as a backup electricity generation tech, all three leaving the other options behind.  And guess which of the three is more readily available and easy to scale?  (Altho, I think they missed a fourth, probably even cheaper option over the near term, in demand response and other reactive use of the grid as a virtual energy storage option)

My point isn't that other grid-scale energy storage options aren't going to work better than this, eventually.  But the key being "eventually".  VCs making those bets are making, for the most part, very long-term bets. 

If the LBNL analysis is correct and coal prices will begin rising, there will be pressure to find other baseload power supplies, and much sooner than those emerging energy storage technologies could be ready for prime time.  Natgas alone, and intermittent renewables with natgas backup, are technologies that are ready today to fill that gap cost-effectively.  Non-intermittent renewable power (e.g., geothermal and ocean power) would also see a boost in interest, but have demonstrated they have trouble scaling rapidly.  So given the choice between natgas alone, or intermittent renewables with natgas backup, which one would the renewable power industry prefer to see fill that gap?

Thus, proponents of renewable power push away natural gas to their own detriment.  They should be embracing natural gas as a key partner for the near- to mid-term.  Not rhetorically and conceptually lumping natgas in with the other fossil fuels, and pushing the industry away, while focusing more on making the coal industry happy.  That's not to say renewables proponents should ignore the potential environmental impacts of production, but those should be engaged from a collaborative perspective of "let's figure this out," not adversarially "let's shut it down."

Because you know what?  Like it or not, those reserves will be accessed by an energy-hungry society, one way or another.  Furthermore, the natgas industry is a lot bigger than the renewables industry.  If they can't get along, it won't end well.  Especially if the natgas industry can only find friends among the oil producers, while the coal industry is given significant subsidies in hopes of a "clean coal" future.  Which the LBNL analysis, if correct (and it's definitely debatable), would say is a doomed effort anyway.  The whole concept of "clean coal" is predicated on the assumption of long-term cheap coal supplies, after all.  

Coal and renewables will likely never be good friends.  Natgas and renewables can at least be allies.

Dangerous times for U.S. cleantech

Rob Day: December 8, 2010, 5:13 PM

WARNING: Personal political opinion and discussion follows.  Feel free to ignore if you think it's not relevant to you.  But trust me, it actually is...

It is a dangerous time for the cleantech sector, which is now under pressure on multiple fronts.

The moribund economy continues to hinder the revenue growth efforts of many cleantech products and services companies that, often after several years of development efforts, now have a product ready for the market.  

Cleantech VCs are also increasingly tapped out -- at or near the end of their funds.  And as we've discussed here recently, many VCs who had been investing in cleantech are either narrowing where within the sector they'll invest, or getting out altogether.  Certain sectors like energy efficiency, advanced lighting and batteries are still "hot" subsectors, but for many power generation, transportation and alternative fuels subsectors it remains tough sledding to get new financing.

Project finance, particularly so-called tax equity, remains tight.  Which makes it even tougher for any innovative powergen technology to successfully get traction in the marketplace.

And now the government support that has been critical to promoting energy independence during this downturn is in danger of being withdrawn.

It hasn't been getting a lot of attention because of other news items like the general debate on income taxes in Congress, and the carbon talks in Cancun.  But because of congressional ineptitude inaction, multiple supportive regulations are in danger.  Especially for many power generation projects and manufacturing operations, some critical incentives are either expired or in danger of expiring.

The cash grant option in lieu of an investment tax credit ("Section 1603"), for example, has been crucial for the wind and solar industry over the past couple of years.  When credit got tight (and lacking profits themselves to take advantage of tax credits), many projects couldn't get financing to do the build-out that the existing ITC and PTC were intended to promote.  So the ARRA allowed the industry to access the equivalent amount of government support in the form of a cash grant from the Department of Treasury.  According to the Clean Economy Network (full disclosure: I'm co-chair of the board of the Clean Economy Network Educational Fund, a related but separate entity), the Sec. 1603 program had distributed grants to support almost 1,500 electricity projects, and created 15,000 jobs related to solar and 55,000 jobs related to wind and geothermal projects.

According to one account, 100,000 U.S. jobs are at risk if this particular provision isn't extended.  

And let's be clear about this:  Section 1603 is not about more government spending.  It's about making sure that existing government spending is done more effectively.  

Another important incentive at risk is the Sec. 48C advanced manufacturing tax credit, which has helped finance domestic solar panel and battery production, among other stated priority industries.  It's also due to expire.

We've already seen what can happen.  The past decade's bi-annual boom and crash of wind power generation additions, for example, as Congress repeatedly failed to extend the PTC in a timely fashion.  The collapse of the U.S. biodiesel market as the PTC for that market expired last year.  Etc.  Letting these things lapse has immediate negative impacts on these industries.  And it has horrible long-term impacts as investors learn to be wary of the entire sector if it's going to be whipsawed around like that by Congress, like Lucy yanking the ball away from Charlie Brown.

It's the ultimate example of utter failure by U.S. political leadership:  They signal legislative priorities and encourage significant private sector investment in a sector, and then pull the rug out from underneath all the investors, entrepreneurs, and workers who subsequently went into the sector.  And this isn't a partisan statement.  Even if you disagree with the strategic choice to support these markets, you have to agree that if it's to be done it should at least be done right.  Senate leaders from both parties have stated they want to support these industries and then allowed this to happen.  And it was the White House that most recently capitulated on these priorities when making the compromises on tax policy that are now the subject of more visible public debate.

I'm sure a lot of cleantech investors and entrepreneurs like me would prefer to not have to worry about all this political nonsense at all and just put our heads down and get to work, driving innovations and installations.  But unfortunately, cleantech companies and those that service the industry now need to once again get involved in the process, in hopes that Congress can be encouraged to at least not COMPLETELY drop the ball.

There's a credible free-market argument (albeit one I disagree with) that says government shouldn't be supporting any new emerging markets at all, just staying out of economic and technology policy altogether (and I guess just being okay with being increasingly dependent on middle eastern oil and Chinese equipment for our energy needs).  There's an even more compelling free-market argument (and one I strongly agree with) that says you can't subsidize emerging technologies and markets forever, but need to limit such subsidies only to helping them get through their early small-scale phases -- to ramp them up and let them drive down to competitive prices, and then let them either succeed or fail on their underlying appeal to the free market by reducing and eventually eliminating subsidies.  But even under that argument, now is not the time for such support to be withdrawn from these markets.  It's too early.  And incoherent and inconsistent political "leadership" from the White House on down Pennsylvania Ave., and on both sides of the aisle, does more harm than never having tried to help the industries at all.  I know at my firm, it makes us want to invest less in the U.S., and more in overseas projects and companies.

Unfortunately, this is a critical time in the policy arena that cleantech entrepreneurs and investors and workers need to pay attention to.  And as painful as it is, they need to think about getting involved (for example via groups like CEN) if it threatens their businesses and jobs.  Because it's completely unclear that the politicians "get it".

>>NOTE: the above opinion is mine and mine alone, and may or may not reflect the opinions of anyone I may have ever worked with, met, exchanged emails with, thought about in an idle moment, or simply made up.


12/10 update, from an email I received today:

"As you have hopefully all heard by now, the 1603 Treasury grant program was put back in the extenders package late last night. While 48c unfortunately did not make the cut, the re-inclusion of 1603 is a big victory for the clean economy community. In a 48 hour period, we were able to make 1603 the top issue during the negotiations on the final language. CEN was a big part of this effort and while we aren’t out of the weeds yet with final passage still required, we sent a strong signal to both parties that the clean economy community is not just up for the fight in California."

Now we'll have to see if that can survive through the rest of the broken process.