Clean Energy Funding Issues May Attract Investment from China
Policy + Politics

Clean Energy Funding Issues May Attract Investment from China

President Obama is touting alternatives to foreign oil, research funds are flowing into renewable energy and venture capital is again surging into the clean technology sector. But the shift to clean energy is still a long way off. As established startups move towards building their first commercial facilities, some are struggling to find the funding to scale up. They’ve exhausted much of their venture capital and can’t yet satisfy the strict risk terms of traditional lenders.

The struggle to find funds to commercialize innovative clean technologies is turning into what industry insiders call the “valley of death,” delaying implementation of wind, solar power, low-carbon fuels, and systems that make energy use more efficient. To build their first full-scale facilities, clean technology startups can require up to 100 times more capital than new software or biotech companies. “Instead of dying for lack of $5 million, clean tech startups can stall and die for the lack of $50 million or $500 million,” says Greg Neichin, vice president of Cleantech Group, which tracks market trends. It may be easier to invent green technologies than to finance their commercial production.

Consider GreatPoint Energy. The Cambridge, Mass., company has raised $150 million in venture capital and strategic investor funding since 2005 to develop a process that converts coal into cleaner burning natural gas and that can capture and store its carbon dioxide emissions. Big companies, including AES Corp., Dow Chemical, Peabody Energy and Suncor Energy, lined up early to invest and team up with GreatPoint. Now that the process has been proven on a pilot scale, GreatPoint needs another $200 million to $400 million to build a plant big enough to prove the technology will work at commercial scale. That’s more than many venture capitalists are willing to risk. And because the technology is still evolving and GreatPoint’s business model is untested, project financiers and private equity investors lack the experience to assess the project’s risks.

Green Innovation Requires Financial Innovation
There’s a need for financial innovation to lower the cost of capital, says Kassia Yanosek, a clean technology investor and co-founder of the Partnership for Renewable Energy Finance. She recently declined to put money into a promising green-building startup. “Their technology was great, but as a prudent private equity investor, I needed proof of commercialization,” she says.

The shortage of mid-stage funding further dims hopes that a clean energy boom can accelerate economic output or boost jobs. The climate could be another casualty. “If we don’t accelerate clean technologies in the marketplace, we’re not going to be able to cut our carbon dioxide emissions quickly,” says Daniel Goldman, GreatPoint’s chief financial officer and executive vice president. “It’s the penalty of procrastination.” Output from renewable energy systems has nearly tripled since 1980, excluding hydroelectric dams. Yet because U.S. energy consumption has grown almost as fast, renewables’ total share (including hydro) has barely budged in that time, inching up from 7.5 percent then to 7.8 percent today.

Thirty-two states and the District of Columbia require that renewable sources provide a minimum share of all electricity. In California, where the goal is 33 percent — among the country’s highest — big utilities have taken direct stakes in emerging technologies and energy-generation projects. In June, for instance, PG&E Corp., the big California utility, stepped into a role traditionally performed by banks, putting up $100 million to help SunRun, a San Francisco solar financing company, finance solar panel installations on more than 3,500 homes across five states.

“It would be the difference between us developing this technology here,
and licensing it to China. It could end up being the other way around.”

The struggles of some mid-stage cleantech players belies the availability of funding for companies just starting out. After pulling back in 2009, venture capitalists are pouring funds into green start ups at a record clip. VC investment in clean tech hit $4.06 billion in the first half of this year, on track to exceed 2008’s record, when full-year funding peaked at $8.5 billion, according to an analysis by Cleantech Group.

Companies cultivating new approaches to solar, biofuels, and energy efficiency are attracting the most dollars. As a category, clean tech attracted nearly $1 out of every $3 of venture funding so far this year, eclipsing past leaders such as biotech, software and medical devices, which each fell to under 20 percent of the total.

The Public Sector’s Role
The economic stimulus package enacted in 2009 designated $32.7 billion for energy and efficiency. The Department of Energy has already awarded nearly 90 percent, or $29.4 billion. Of that, $5.4 billion has been paid out. With a September deadline, the rush is on to award the remaining funds. DOE’s recent initiatives included directives to renovate the roofs of federal buildings with materials that reflect sunlight and reduce air-conditioning costs, and funding to upgrade decades-old nuclear research facilities. Funds also have been directed to technologies that can capture and store greenhouse gases emitted by coal. Other programs encourage utilities to invest in solar panels and advanced electric meters. “Historically, the DOE focuses on basic research and broad programs that can lift whole areas of technology,” says Neichin. “They are shy to step in where they think private capital can do the job.”

But private capital may not be enough. A recent study by California Clean Energy Fund, a nonprofit venture capital fund and think tank, supports increased public sector involvement, including government loan funds or federal loan guarantees. Bills in the House and Senate outline development of a Clean Energy Deployment Administration, or CEDA, which would be seeded with federal money to supply loans, loan guarantees and insurance products that, when matched with private funds, would target pre-commercial companies, says Yanosek. But passage remains uncertain. Congress in July failed to enact climate legislation.

Facing a funding shortage in the U.S., GreatPoint is pursuing a deal in China, where the domestic market for clean energy is growing rapidly, financing is readily available, and the cost is lower and time shorter to develop a project, says Goldman. “China has the capital and an incredible appetite for energy technology,” he says. “It would be the difference between us developing this technology here, and licensing it to China. It could end up being the other way around.” China is slated to spend $397 billion on clean tech from 2009-2013, more than twice the $172 billion planned in the U.S. during the same period, according to a report by the Breakthrough Institute and the Information Technology and Innovation Foundation.

Related Links:
Obama Urges Action on Energy (The Fiscal Times)
Wind Energy Lacks Investment (CNET)
California’s Clean Energy Future Threatened (Los Angeles Times)