It's back to school season, so apparently that means it's time for a couple of book report assignments.
Had the opportunity to review Ron Pernick and Clint Wilder's new book, Clean Tech Nation.
In the book, Pernick and Wilder make the basic argument that the U.S. is on the verge of missing out on an opportunity to have the world's leading cleantech industry. It's also a good snapshot of the current state of the U.S. cleantech sector, and a download of a bunch of CleanEdge's always-useful data on the sector. It's worth getting a copy for all of that good info by itself, although I suspect some of the startups they highlight as industry leaders might have a pretty short half-life (as is true with most books in this category). But it's a very good read, recommended for anyone involved in our industry.
Pernick and Wilder's argument necessarily involves policy prescriptions, and they boil them down to seven key recommendations:
1. Enact a Renewable Electricity Standard of 30 Percent by 2030
2. Create and Fund a National Smart Infrastructure Bank
3. Leverage Proven Investment Tools from the Oil, Gas, and Real Estate Sectors
4. Phase Out All Energy Subsidies within Ten Years (but wouldn't that obviate the previous point?)
5. Foster Open-Source Collaboration to Set Cleantech Standards
6. Fully Fund Military Initiatives on Energy and Water Security
7. Launch Federally Backed Prizes for Cleantech Innovation
It's a smart list, but it's interesting to note that it doesn't say anything about carbon pricing policy.
This acted as a nice segue to the next book I read, The New New Deal by Michael Grunwald. At the recommendation of an old colleague I started reading this book, and then gave up quickly, as I found it too frustrating of a reminder of what could have been done in Obama's first term. But when I tweeted as such, that turned into a good conversation with Grunwald, and he convinced me to read the whole book and then get back to him with my thoughts. Here is a summarized version of what I told him earlier this week after reading all the way through:
First of all, it’s a very well-done book and a strong journalistic effort. I recommend it highly. I think Grunwald makes his main argument -- one I agree with -- cogently. I’ll paraphrase it as, “The stimulus was a big deal and a herculean political/policy effort, and it had a big positive impact, even if it was communicated horribly and thus has an undeservedly bad reputation.”
But the story of a boosted clean energy technology industry Grunwald paints looks very different from the market we're all operating in right now. While there may have been a lot of positive impacts from the stimulus -- and I’ll discuss some of them below -- in our industry I am sensing a massive “extinction event” happening among cleantech startups and cleantech investors. Every week I see cleantech startups struggling to raise funds or even going under, and at this point I’ve lost track of the number of my cleantech investor colleagues who’ve had to leave their firms or redirect their focus as their funds pull away from investing in the sector. And fewer investors writing checks means the difficult times for capital-seeking cleantech entrepreneurs are only going to continue for some time to come.
So you can understand the painful cognitive dissonance I felt, reading the book with its sparkling enthusiasm for how valuable the stimulus has been for my industry, when I know full well that this is a really painful time for many in the industry. In my opinion, the stimulus and the Administration's subsequent lack of focus on our sector fell way short of what was needed, and in fact has in some ways contributed to this challenging period.
With such good intentions and so many resources thrown at the sector a few years back, how did that happen? It’s a complex and nuanced story as to how I think these two perspectives must be reconciled. Here’s how I view it:
First a quick reminder: Back when times were good, the big-dollar VCs who jumped into the sector too often viewed it happily as a “capital-intensive” sector where they could park a lot of capital and hope for big returns. Remember: 1) Big-dollar VCs will inherently have a bias toward capital-intensity even if they profess otherwise; and 2) they need $1B+ exits (really, big IPOs) to get buy-in from LPs to keep doing more of the same. For reasons I’ll describe below, the stimulus package and messages from the White House fed into this dynamic and facilitated it, unhealthily.
Secondly, the stimulus’ efforts toward energy were a hodgepodge of disconnected elements. Yes, I can hardly blame the White House and their advisors under the tight timeframes and trying circumstances for not having been able to develop and argue for a coherent energy innovation policy framework from scratch. And yes, they did purposefully attempt to address several real market barriers and did put thought to addressing the full “innovation life cycle” from invention through to market activity, via a myriad of separate programs. Grunwald does a very good job of giving a lot of the backstory to this effort. The problem is, by failing to connect the dots, they actually addressed completely different types of businesses at different stages, meaning any single business was very unlikely to get to ride that full life cycle of innovation commercialization assistance.
If there’s one thing I’ve learned about the energy technology market, it’s that customers (whether businesspeople or individual consumers) simply don’t grab onto the “new new thing” nearly as fast as they do in other technology areas, even when it would make compelling economic sense to do so. I see examples all the time of startups offering customers a compelling economic value proposition and yet those customers don’t make the purchasing decisions fast enough for the startup to scale up and achieve “escape velocity”. The technological innovation is not enough, and “newness”often is actually an impediment, because customers are distracted by the day-to-day, resistant to replacing existing solutions that are "good enough", and take a long time to do the research and make their decision to buy from a startup.
What does this have to do with the stimulus? Basically, the stimulus didn’t address the early-adoption gap for startups commercializing technology for the first time. The weatherization program was excellently administered and did a lot of economic good. But there was little in there to encourage the residential energy retrofits to include new technologies; if anything it created perverse incentives to do so. With the exception of rooftop solar, residential energy tech startups have been just treading water, even as the number of home energy retrofits has grown dramatically.
And rooftop solar presents another example: Grunwald notes in the book that the US solar market has grown significantly over the past few years, and attributes that in part to the stimulus, while implying that Solyndra was an outlier in going under. But that conflates two very different ends of the value chain. Yes, rooftop solar installation has grown dramatically, thanks to some incentive programs but also to a whole lot of factors having nothing to do with the stimulus. And yet, similar to the residential efficiency example above, that hasn’t led to much increased demand for next generation solar panels. Instead, the incentives and Chinese subsidies evened the playing field price-wise for old silicon-based PV vs. next-gen thin-film, and thin film companies have been going under in droves. It’s a wonderful thing for the US homeowner and US solar installers that panel prices have plummeted. But the stimulus didn’t result in a US-based panel manufacturing industry.
What could have been done instead to encourage commercialization of innovative technologies? Here are just a few ideas that could have been implemented after the stimulus dust settled, at little or no cost (and it's not too late):
- Simply setting up a comprehensive wiki-based buyers guide for emerging technologies could do a world of good for accelerating adoption, if it was moderated and policed by just a couple of DOE staff. No endorsements, no need for any government person to put their career on the line picking a winner, just some basic quality control on user-generated input. Start with industrial and commercial buildings technologies, where some of the lowest-hanging fruit is. Providing a one-stop-shop for the info facilities managers need before purchasing a new lighting system or an industrial load controls system would greatly improve things.
- Conservation block grants could include a requirement for subsequent energy performance tracking of some kind. That's a "gateway application" for adoption of a lot of other smart-home technologies.
- The LGP never should have pivoted to manufacturing plants, IMHO. At least not within that programmatic structure. But it could have been applied as first-loss guarantee to project finance funds specifically raised for that purpose by leading private sector firms, with much less PR and financial risk, and perhaps more effectiveness overall. OPIC does this, and it seems to work very well.
- Mandating ever-tighter performance standards for those green building programs similarly could have done a lot of good – raise the bar high enough (phased in over time, perhaps) that only new technologies can achieve necessary performance to get the incentives already being offered, and watch how quickly the service providers get smart about the new technologies.
- A special one-time tax incentive, or some other advantage, could be provided to large corporations who are early adopters of ARPA-E derived technologies. It wouldn't have to be much, just enough to get skeptical or inattentive corporate buyers to take a look.
- And of course, simply putting in a big PR push to tell homeowners, building owners, car owners, etc., about specific technologies that are now “ready for prime time” and would save them big money. And no, that doesn't mean the usual "conserve energy!" vague message, but instead let's publicly celebrate the stories of those businesses that saved jobs by saving money by installing LED lighting, homeowners who were an early customer of a new type of air conditioner, etc. So much time spent in PR events at "green jobs" manufacturing plants, not enough time spent celebrating the customers so as to encourage others to follow their footsteps. The DOE puts out case studies and those who do web research can find some DOE-funded information, but so much more could be done to raise visibility and to validate these recently-commercialized technologies, and to connect them with customers.
- Call a special summit of Fortune 500 CEOs and CFOs across all industries. Have President Obama come out and tell them it is their patriotic duty to save energy, and good for their shareholders too. And then let a few leaders within the large corporate world spend an hour explaining how they've done so. Send them back to their companies with a mandate to make it a priority. Far too often it's just not a corporate priority, so it doesn't happen, even when it would make all the economic sense in the world if given attention.
There are bigger things to be done that could do much more good, we need a lot more market adoption support than this, and eventually an appropriate price on carbon. But these are some "easy" wins that are available, most without any congressional action needed.
Which brings me to my third point, namely, that the stimulus’ communications failures have had a particularly vicious impact on our industry. The very public failure of Solyndra, and then Congress successfully grabbing it and using it to politicize our industry, took what used to be a PR tailwind for the industry and has turned it into a PR headwind. And it didn’t need to be that way. I’ve seen the complexity of the loan guarantee program and its requirements firsthand, and seen how it therefore creates a negative selection bias for the DOE. Basically, it became such a nightmare of a process that many better-positioned companies decided not to go through it in the first place. And the process forced recipient companies into committing to a capital-intensive approach, making it riskier for them when the market price collapse hit. I’ve watched a succession of loan guarantee recipients go around the investor community, trying desperately to raise the necessary matching funds, and post-Solyndra having a hard time of it. Going through that has been not just a distraction for startups, it’s actively guided some down a dead-end path.
I don’t blame the White House for the poor construction of that law. I blame the Senate, which wrote it up with such a byzantine process and structure. But I've been told that Senate staff never intended it to be used as venture capital. It was intended rather for big wind farms and other projects with low tech risk and low market risk. Yes, the capital for a “first project” blurs the lines between project finance and venture capital, and yes I agree it’s a major need, so I understand why the DOE decided to try to use the loan guarantee program to address this gap. And it's well worth noting that they did so only at a level where even if every one of those manufacturing-plant guarantees failed they would still be in the okay zone from a capital reserves standpoint. But that was a fatal decision, in my mind, when the PR plan around how to deal with the inevitable failures was apparently non-existent. It was a doomed effort from the beginning simply because of the negative selection bias (as evidenced by the drive to push Solyndra over the finish line even over the objections of experienced investors inside and outside the DOE) matched with the lack of forethought about how to deal with the first and following visible blowups.
Which brings us, of course, to Solyndra. I'm not going to go into specifics about how and why it happened. Suffice to say, it was inevitable that some mistakes would be made in the Loan Guarantee Program, and the staff there wisely accounted for that in their financial planning. But the problem was that, lacking a coherent communications strategy for how to deal with those mistakes, this first one became a scandal. And then it became an overly visible negative indicator to Wall Street and to venture capital investors about next-gen solar technologies. And then solar IPOs became toxic on Wall Street. And even beyond thin-film solar, it made it okay for politically-motivated attacks to be made on all sectors of cleantech.
This is how Solyndra hurt the industry more than you might realize. It took the halo off the industry. It made it politicized. It killed the IPO window that had just started to reopen for cleantech companies. And the net result was that LPs told the VCs not to do any more such investments. So the capital dried up both from VCs and from Wall Street. The dominos started to fall. And not only that, many investors now want to actively stay away from investing in companies that are loan guarantee program recipients, so the effects are just being made worse. None of this would have happened without the stimulus...
The fourth point I’ll make was that, at the time, a lot of this was excused by the fact that there was going to be a cap and trade law passed, which would fill these policy gaps and prevent some of the failures. Common wisdom was that it was going to happen. But I had a real cold-shower awakening during one trip to DC as part of a series of meetings on the topic in 2009. I and a group met with senior White House staff. And they were vocally supportive. But they clearly hadn’t really thought about energy technology topics as much as they would have needed to if they were planning on driving the debate on Capitol Hill. And the real political team, the Axelrods et al., weren’t there and weren’t ever out on the Sunday talk shows talking about climate or energy. Here's my personal impression, which may or may not be accurate, but reflects what I saw: Obama may buy into the logic of energy technology and vocally support the industry. But unlike with health care, he seems never to have had a passion for it. And that lack of passion translated to it being a diminished priority for the rest of the senior White House leadership, and therefore to basically leaving Congress to develop and push KGL and Waxman-Markey largely on their own. Those became muddled efforts and lost momentum. White House leadership was needed to force a better bill and a better process, and while clean energy always got its public mentions, White House arm-twisting was notably absent in the halls of Congress, unlike what happened with health care reform.
So given all of the above, the net result was that a lot of entrepreneurs and investors were encouraged by the stimulus bill and the White House / Congressional rhetoric to start driving full tilt toward a promised outcome that never materialized. Rather than go conservative in the face of horrible economic conditions, many VCs sought to ride the anticipated wave of support, and many promising startups embarked on even more capital-intensive growth strategies. And, given the lack of adoption-oriented policies for many of these technologies as described above, many startups therefore went into a commercialization phase in high cash burn status, with slow customer adoption, and little capital availability. And since then -- and not just because of the failure of cap and trade -- those efforts have been collapsing.
But let's not dismiss the positive impacts, and there were many. Simply forestalling another Great Depression was a lifesaver by itself. The weatherization program and other programs aimed at demand growth really did provide a springboard, alongside several very supportive state-level policies (Massachusetts has been a real champion, for example), for developing downstream markets for existing commercialized technologies that had long deserved more scale, and that’s a great step. ARPA-E is also a terrific program, and the manufacturing tax credits have done a lot of good. Even the more project-oriented parts of the loan guarantee program have helped project developers roll out generation capacity for established green technologies. Grunwald makes a compelling argument that, net-net, the stimulus has been a strong positive for the broader industry and the overall economy.
But when I see exuberant prose about support for electrofuels/biofuels and solar manufacturing and battery manufacturing and smart grid, and then I juxtapose that versus the struggles I’m seeing among entrepreneurs in those very same markets, it’s painful to be reminded of the missed opportunities to have done so much more, or simply to have avoided some of the more damaging incidents of the past few years.
The pendulum will eventually swing back, cleantech will come back in favor. I and other investors are working to reinvent the way venture capital is done in this sector, and I now spend more of my time trying to figure out profitable ways to disrupt how customers buy, sell and use all these innovations, rather than chasing new tech innovations themselves. I know that despite the negative politics right now, Americans do understand how important these innovations and market shifts are for our national security, and for our long-term economic and environmental health.
I definitely encourage everyone to read the book. Despite my visceral reaction and my critique here on this particular aspect of the story, I think most readers would be encouraged by it. But let it be an important lesson that if we ever get such an opportunity again, let's do it better.