Will the Economy Sink Renewable Energy and CleanTech?

5

It already has to some extent.  I hate to be overly pessimistic, but sometimes you can’t just “make do.”  With the exception of high expectations from the Obama administration, things don’t look particularly great between the news of job cuts from Ausra, SunTech, OptiSolar and the abysmal rate at which new companies (and projects) are getting financed. Since the valley-jarring Sequoia deck slowed down bandwidth throughout the bay area in a display of viral marketing that rivaled anything put together by web 2.0 gurus, valuations have gone down, budgets have gotten stretched, and start-ups with great teams and traction have been told to jog in place.

To be clear – the current state of affairs is certainly not Sequoia’s fault – all they did was send a clear warning to their VC brethren. Without a clear horizon for when more funds will become available, many companies that are developing technologies and meeting agreed-upon milestones are struggling to find the cash for follow on rounds. While they scramble for dollars their values plummet as they let employees go.  Having made big bets early with the expectation that 1) valuations would rise if targets were met and 2) syndicating further investment rounds would be a straight forward process, early stage investors like Khosla Ventures and Kleiner Perkins (KPCB) are particularly at risk. Now that valuations are plummeting, their investments – should they find further funding – will be diluted heavily.

On Tuesday I wrote that MMA’s success won’t be measured by its past performance deploying capital but rather on how quickly it can raise its next fund. The problem is equally pressing on the Venture Capital side; KPBC is seeking funds to extend the life of some of its investments, allegedly opening the door to new LP’s (limited partner investors).

The frivolous use of equity financing by venture capitalists in 2007 and 2008 has reared its ugly head.  Like the picture, there are some things you take for granted in good times.  Going forward, debt financing will have to be used more cleverly to fund the less risky portions of capital investments, specifically in expensive plant outlays that have value in other applications.  Naturally, the problem is that this fact is becoming patently clear just when there isn’t debt out there for the taking.

Why did investors and CFOs use equity to finance the projects and these companies?  Well, debt takes longer to justify, and during the heady times of CleanTech time was of the essence. Installing plants was critical for keeping a company’s name in the green energy tabloids.  Those that will suffer are the equity investors and the entrepreneurs and scientists that were focused on their projects that failed to realize until too late that venture capital should be used to fund salaries and the tech-risky and proprietary portions of a company.

As for finding a job in clean energy, if you are a generalist, you’ll likely have to wait; right now you just can’t add value to the bottom line because there is nothing to market or sell, however experienced scientists and engineers are still going to be needed to prove their founders’ claims. Once they do, and legislation stimulates debt financing, the market will pick up but career changers will need to network and make relationships to beat out those that were just released from service at companies around the globe because they have the rolodex to find the deals.

About Author

  • Matthew

    I’m in the wind space which is a different animal to some degree from the solar world which is more closely aligned with VC money and will no doubt see some consolidation. In the wind (and more established clean technologies) world the answer is, “long term still looks good, short term is bad- but halfway recoverable with a policy change”. Congress is promising a policy change by President’s Day as part of the new economic stimulus package. That speed is good but we aren’t sure what form it will take.

    The lack of debt financing, is painful to wind which usually take debt financing. The little debt there is is extremely risk averse and that means that all projects have to lock up offtake agreements that limit upside. But it doesn’t stop at the debt captial markets. Another huge source of capital for a wind project is the tax equity. About 40% of the value of a wind farm is in monetizing off the tax benefits. If nobody expects to make $50Million in the coming years (i.e. have a tax appetite), no one wants to chip in to buy the tax benefit and wind goes unsubsidized (other than RECs). That is devastating as very few wind farms in the country work without the tax benefits. Congress is kicking around making the tax benefit exchangeable for a grant, or refundable against previous years’ taxes paid, but the question are ‘will there be a change?’, ‘how many years back can you go?’, ‘are banks that recieved TARP funds eligible?’, will it be ‘a production tax credit or an investment tax credit?’

    Additionally, energy commodity prices are way way down in the economic slowdown. This includes gas which drives down market power prices, making wind less appealing to utilities who have increased pressure to keep generation costs low.

    I think we won’t see the boom of late 2007, early 2008 again, but if credit restores, policy changes on the PTC side and holds strong on the state mandates, technologies that utilize the PTC can recover far more quickly than the broader economic slowdown.

  • sherry

    I just finished a wonderful new book called The Manhattan Project of 2009 Energy Independence Now by author Jeff Wilson. It is without a doubt the best book out there. We seriously need to get on with utilizing alternative energy. The high cost of oil this past year seriously damaged our economy and society. The trickle down effects will be felt for years to come. The cost of fuel affects the price of every consumer product. Oil is finite it will run out one day in the not too distant future. We are using oil globally at the rate of 2 X faster than new oil is being discovered. We have so much available to us in the way of natural energy, wind , solar, wave plus the modern technologies of hybrid etc. What America seems to lack is a plan. This book even outlines a plan, a legislative agenda. It is fascinating and brings the act of weaning America off oil into perspective.

  • Chris

    Based on the bill passed in the house, I’d say that we may be at a relative low point. There’s a great deal of government investment that will likely be retained in the Senate’s version. I think there will also be a shift toward energy efficiency/conservation (putting construction back to work), grid improvements (same), and energy storage (vehicle to power plant scale).

    This shift in the landscape may be neutral for solar and wind in the short term, but with a better grid, more efficient buildings, and better storage options we are setting ourselves up for better use of renewable energy.

  • http://renewables-usa.blogspot.com/ sebastian

    annoying how they spam every renewable blog with ads for this book. congrats on the award and keep it up Ian

  • Tom Saidak

    This is a twofold problem. The first problem is that there is no perceived, clear cut winner. The US has no coherent policy that says we are building X nuclear stations, Y wind turbines, Z solar plants…. We do not know what, when or where we are building. We have a patchwork quilt of “renewable portfolios”. This relates to the second problem – infrastructure. Wind farms are mostly not willing to also develop storage. Concentrated Solar Power has storage, but requires massive amounts of water (unless I missed something, somewhere….). Nuclear power for the foreseeable future will require massive amounts of water. It will be 2017 before the NRC will have a procedure for new design licenses. That means it will be at least 2027 before we see something waterless operating. For wind, we need both a widespread grid AND some sort of storage in place. Nuclear will require a widespread grid AND coastal areas for water. CSP will require a centralized location for the grid AND massive water works systems.

    IF we could state what we are building in a clear fashion, then it would be possible to formulate a plan to finance the effort. Going by a 30 year old community college education….. For example, if we established a carbon tax that raised $85 Billion, and used that to establish an Energy Industry Bank, we could then loan out $245 Billion the first year (assumes required reserve at 25%). Starting the 2nd year, P&I payments would be about $32 Billion, which would allow for additional loans in the amount of $96 Billion. This would finance funds to do A LOT – including a complete waterworks system for CSP or a ton of storage for wind power. To do this though, would require someone, somewhere, putting together a policy to build to.

    Hey, since someone else mentioned their published book, can I mention that I am working on an energy policy book too??