The energy business – like telecommunications, defense and healthcare – is heavily regulated and given its ever-increasing geopolitical, economic and strategic importance, it will be linked even closer than ever to public policy objectives. So now, more than ever, forward-thinking companies must add political and regulatory risk to their list of top-tier hazards that require consistent attention.
For cleantech companies, this is a necessity for two critical reasons:
1. With limited capital availability and soaring capital costs, cleantech companies will be at a distinct disadvantage if they aren't actively contemplating government funding sources and financing opportunities; and
2. Federal energy policy and a renewed national commitment to climate change will fundamentally shape the markets in which they operate.
Indeed, the cleantech industry, once flush with financial resources, is now being squeezed like everyone else as the capital markets have tightened up. Debt financing for infrastructure build out is much more difficult to obtain and is prohibitively expensive. Venture capital firms, many of whom are advising their portfolio companies to stretch their burn rates, are distributing their funds for early stage development far more judiciously.
But at the same moment that traditional capital sources for infrastructure and development are contracting, the government is doubling down on both sides. Washington has $10 billion in loan guarantees for renewable energy infrastructure projects that it is preparing to allocate over the next couple of years, and given both political parties' stated commitment to greater renewable energy development, Washington will significantly amp up investment dollars for early-stage cleantech companies in 2009 and beyond.
In this economic environment, clean tech companies simply cannot afford not to pay close attention to Washington. Significant policy shifts and accessible, low-cost and non-dilutive federal funds and incentives for clean energy technology can be the ultimate difference between success and failure. So, if you're in early-stage development, ready to scale, or somewhere in between, a constructive capital strategy must include government funding sources.
Honestly, avoiding Washington will be next to impossible for cleantech companies in the weeks, months, and years ahead. President-elect Barack Obama has made clean energy development and investment a top priority for his administration, and the Democratic Congress, which expanded its majority, has vowed to once again revisit national energy policy and examine potential climate change solutions. And both have linked the development of clean energy to the nation's economic recovery.
As a result, the stage is set for significant policy movement with an eye towards clean energy market-making initiatives such as a federal Renewable Portfolio Standards, a more forward-leaning Renewable Fuel Standard, improved fuel economy, more aggressive tax incentives and increased direct investment. The pending policy shifts will re-emphasize investment in clean energy and will move policies and money toward this sector - for infrastructure, research and development - at a time when the capital markets are contracting.
Ultimately, understanding Washington's influence on clean technology – and factoring it into strategic risk analysis – can provide an essential competitive edge that can become a make-or-break factor in today's bumpy and uncertain economic environment.
For example, while some firms are being forced to delay infrastructure projects because they cannot obtain affordable capital, forward thinking companies have identified, and are actively pursuing, loan guarantee programs as an innovative way to obtain financing in a soft market. Others are leveraging the possibility of low-cost government financing to put pricing pressure on existing or would-be commercial partners.
We're also seeing cleantech companies who think two steps ahead about how new government regulations will impact key market verticals. They're currently factoring the anticipated Washington variable into their product planning, business planning, and exit calculations. In a hotly contested and emerging market space, where the edge comes in slivers, "getting" Washington provides a measureable competitive advantage.
Many cleantech entrepreneurs and investors understandably have avoided government interaction in any form because of concerns that it is too slow, overly bureaucratic, comes with too many strings attached, complicates their intellectual property rights or invites more trouble than it is worth.
The skepticism is warranted. However, the past isn't always prologue in Washington, and given the current political and economic environment, those risks are looking better all the time. The government's non-dilutive grant funding or financing with low single-digit interests rates is beginning to prove more accessible and more affordable than private debt financing. The government is also organizing itself to quickly and effectively unlock the opportunities.
Clearly, the public sector isn't perfect, but it is serious about energy policy. In Washington, change comes in increments, but when the tipping point is reached, it's a waterfall. That's where we are today. Gas prices, the Iraq war, job creation and economic growth, global competitiveness, national security, and climate change have all converged and are motivating a once-in-a-generation re-regulation of the energy markets on terms that will broadly benefit the cleantech industry.
If you're a cleantech investment manager, your algorithm will probably have to be adjusted; if you're nurturing a start-up, your capital raising strategy and exit plan will probably have to be revised; and if you're the CEO or CFO, your product development cycles and market analysis will probably have to be reviewed.
The key to getting ahead of the curve here is early intelligence – understanding before others understand. But the real insight right now is looking out over the next 12 to 18 months and anticipating the ways that Capitol Hill will morph into Capital Hill for the emerging clean technology industry.
This opinion piece is from an independent writer and is not connected with Greentech Media News. The views expressed here are those of the author and are not endorsed by Greentech Media. Steve McBee is President and Chief Executive Officer of Washington, DC-based McBee Strategic Consulting.