After a surge of investment dollars into solar power, wind farms, biofuels and other green technology, Wall Street and Washington are threatening to curb their enthusiasm for clean energy innovation, which helped re-energize Silicon Valley after the dot.com bubble burst in 2001.
A still-lackluster market for initial-public stock offerings has forced some venture capitalists to re-assess their commitment to risky startups such as advanced solar factories or biofuels plants, which can cost hundreds of millions of dollars to get off the ground. The need for deficit reduction, coupled with an anti-spending Republican House majority could easily translate into less support for the big-ticket subsidies, loan guarantees and other government programs that have kept many clean-tech ventures afloat.
Meanwhile, China continues to pose a low-cost, competitive threat to green startups in the U.S., particularly in markets like solar and wind, owing in part to loan guarantees and other help from the Chinese government. Clean energy “is an industry that’s intimately tied with policy,” says Greg Neichin, vice president of research for the San Francisco-based Cleantech Group, a research and advisory firm.
Some venture capital-backed companies that made it to the public markets recently have done so largely because of government help: Electric-car company Tesla Motors, backed by high-profile entrepreneur Elon Musk, went public earlier this year after snagging $465 million in loans from the Department of Energy. Technology companies updating the country’s aging electric grid won new business from utilities partly because of incentives tucked into the federal stimulus package.
President Obama in his 2008 campaign, promised to invest $150 billion in the “clean energy economy” over the next decade, which he says could help the private sector create five million new jobs. Now, big-time, government loans and loan guarantees from the Department of Energy (DOE) are nearly tapped out and may not be revived as Washington tries to put a lid on non-essential spending. And some clean-energy tax incentives and other federal inducements that have propped up “green” markets are due to expire on December 31st.
China, Brazil, Germany and Spain are among the countries with stronger national policies to compete in the clean energy economy, according to a report from the Pew Charitable Trusts. Relative to the size of its economy, Spain spent five times more than the U.S. last year on clean energy finance and investment.
There are provisions for some smaller clean energy programs in the big, compromise tax package that passed in the Senate Wednesday and is being debated in the House today. Tax credits for electric- and natural-gas refueling stations, an excise tax credit and import tariff on ethanol, and increased tax credits for making homes more energy efficient are included, but questions remain about many other incentives and more broad-based government support.
Budget cuts will “make it difficult to extend these renewable and clean-technology programs” if they aren’t included in the final tax bill, says Christine Tezak, a director and senior energy and environment policy analyst with Robert W. Baird & Co., an investment bank. Congress may demand offsetting the cost with tax increases or cuts to other benefits, which Tezak says would be hard to achieve.
One program important to U.S. startups that is included in the tax package, gives clean-energy developers cash grants, instead of tax breaks, for renewable-electricity projects, including expensive solar and wind plants. The grants became a lifeline for many companies after traditional funding dried up in the wake of the 2008 financial crisis.
Some Silicon Valley investors — particularly those who have plunked significant money into clean-energy startups — remain sanguine about the situation in Washington. “It’s not Washington, but the market that will determine whether there’s more interest (in clean-tech) or not,” says investor Vinod Khosla, one of the Valley’s biggest backers of clean energy. He says his firm, Khosla Ventures, tries to invest only in companies that, when operating at large scale, could succeed without government subsidies. While subsidies can speed clean-tech product development, “at least from my point of view, federal support is opportunistic, not necessary, for survival,” he says. “Obviously, if the government said none of this matters, it would hurt.”
Market forces have already put a crimp in clean-tech investing without any help from a spending-averse Washington. According to a report by PricewaterhouseCoopers and the National Venture Capital Association, investment in clean energy peaked in 2008 at just over $4 billion and was almost halved to just under $2.1 billion in 2009, though it’s rebounded somewhat this year to nearly $2.9 billion through the third quarter.
Many investors pulled back because they plunged into new clean energy sectors too quickly and made bad bets. Some lost money with biodiesel companies, which suffered when prices for vegetable oils skyrocketed while petroleum diesel declined. Meanwhile, some companies trying to manufacture new types of solar panels sucked up hundreds of millions of dollars in capital but were hit by product delays and other problems. Solyndra, which recently delayed its IPO, got a $535 million DOE loan guarantee last year, but last month said it would close one of its plants and lay off staff.
There’s increasing interest in clean-tech software and communications companies, which don’t require as much initial capital. Paul Holland, a partner with Foundation Capital in Menlo Park, Calif., says his firm has always focused on energy efficiency and “smart” utility meters and networks. “If we had a bunch of stuff that was really based on subsidies, that would be a lot harder,” he says.
Clean-tech IPOs did rise significantly this year, to nearly $621 million through Dec. 12, from $380 million in 2009. But the peak in 2000 was just under $719 million. A recent report from Baird said that while there have been some clean-tech stock offerings of late, most investments have morphed into longer-term holdings requiring additional funding. And a number of startups with unmet financial needs have been acquired at “sobering” valuations, according to one of the report’s authors, Melody Jones McDowell.
VCs who have lost money on big clean-tech bets could find it even harder to raise new funds for truly innovative startups that could succeed, analysts say. Greg Neichin says clean tech has been “operating for many years with a low level of confidence that we would get a federal energy policy.” As a result many green startups are now targeting overseas markets. Perhaps the current volatility in Washington is just another speed bump on the long — and costly — road to energy independence.