The invisible hand — good, but not enough

We’ve heard a few folks recently point to the fast-growing cleantech market and draw two conclusions:  1) that additional government policy shifts aren’t necessary for cleantech to be a lucrative investment area; and 2) that the “invisible hand” of economics may mean that all this cleantech activity could address climate change even without additional government policy shifts.

The first of these conclusions is right, but the second probably isn’t.

One need only look at the tremendous CAGRs for markets of solar, wind power, and even “unsexy” sectors like energy efficiency to see that rising energy demand, and increasingly constrained supplies, is behind the attractiveness of clean energy as an investment area.  Yes, government is playing a vital role as well, but few are investing in cleantech with the expectation that further policy shifts are NECESSARY for it to be a lucrative market (or, to put it another way, if you DO believe that, you’re probably not investing in this sector).

On the other hand, change isn’t happening fast enough to adequately address climate change.  There’s a big difference between the clean energy market growth being attractive, and it being sufficient.  To paraphrase Coase (note: link opens pdf), the invisible hand of the market will by itself drive to an optimal outcome in terms of appropriate resource allocation if and ONLY if three assumptions hold true:  1) perfect property rights; 2) perfect information; and 3) zero transaction costs.  When these three assumptions are valid, then things sort themselves out quite nicely.

Unfortunately, they are almost never totally valid assumptions in real life situations.  And for “tragedy of the commons” situations like global climate change, assumption #1 clearly doesn’t hold true (who owns the atmosphere?).  There’s no need here to re-hash all of the various statistics and stories from the past year or so to illustrate just how critical the challenge is that we are facing as a planet, but clearly some urgency is warranted.

All of which is a dork-y way of showing that there is a vital role for government policy to shape the course of the invisible hand in such situations.  Which explains the urgency around the need for additional significant government policy shifts, so that externalities related to climate change are adequately addressed.  In this case, the invisible hand is strong enough to drive powerful growth in clean energy markets, but not sufficient for fully addressing global needs.  And of course, further governmental shifts are likely to have a further beneficial effect on our markets…

Cleantech investors face a bit of a messaging challenge in arguing that on the one hand, our investments don’t require further policy shifts to be successful; but on the other hand, further governmental change is necessary.  The wonky argument above clearly doesn’t resolve this messaging challenge, but it does help explain it…

Deals from the past week:

• Seattle-based Optimum Energy, a developer of software for building energy efficiency, announced a $5mm second round of financing, “virtually all picked up” by Columbia Pacific Management.

• Semplice Energy, a UK-based provider of turnkey energy efficiency and renewable energy services to customers like McDonald’s and the London Fire Brigade, announced a $1.23mm round of financing from BIP Fund, a Bahamas-based VC group.

• UK-based Bac2, which has developed proprietary plastic materials for use in fuel cells and other applications, has raised a GBP2mm round of angel financing from London Seed Capital and London Business Angels.

• Magnetic bearing manufacturer Synchrony has raised a $10mm Series B round, from affiliates of Third Security LLC.  Third Security affiliates had also provided the company’s Series A financing.  Synchrony’s technology has applications in maglev.

• Sweden-based NanoFreeze has raised an SEK 7.4mm round of financing (note: opens pdf) from Northzone Ventures and TeknoSeed AB.  The company’s technology helps capture waste heat to generate electricity.

• VWire reported this week that American Aerogel has raised a $3.2mm Series B, led by Vimac Ventures and including participation by Mount Royal Ventures.

• Australia’s Smart Storage Pty Ltd has raised a “significant” amount of venture financing from Oz-based Cleantech Ventures and the national science agency CSIRO.  The company is developing grid-scale electric storage technology.