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The Cleantech Funding Challenge

First published in Cleantech magazine 2011 Issue 5. Copyright Cleantech Investor Ltd

By Anne McIvor
Cleantech magazine Issue 5 2011Government policy is an important driving force behind the adoption of clean technologies, a feature which cleantech shares with only a few other industries, e.g. pharmaceuticals. As a result cleantech is, in many respects, an unusual sector.
 
Policies encouraging the development and adoption of clean technologies came to the fore in the 1970s, during the energy crisis, but subsequently slipped down the agenda again. This time around environmental concerns have combined with energy security issues, ensuring that cleantech remains a priority for governments around the world. However, the policies of the governments of many developed countries are proving insufficient – if not detrimental – to the growth of clean technologies companies and a cleantech industry.

An article by David G. Victor (University of California, San Diego) and Kassia Yanosek (founder of Tana Energy Capital LLC), published in Foreign Affairs Journal, July/August 2011, predicted a crisis for the clean energy industry. The authors argue that the 25% annual growth rates in clean energy in western countries have been achieved through public subsidies, which are now unsustainable. They claim that government stimulus programmes post the 2008 crisis “merely delayed the bad news” – citing a drop in the number of new wind turbine installations in the US in 2010 as government support eroded.

The crisis predicted in Foreign Affairs came to a head not long after the journal hit the newsstands in the US. The US cleantech industry suffered a severe setback over the summer months with the failures of three solar manufacturers. The highest profile casualty was Solyndra, a thin-film solar developer which filed for bankruptcy, resulting in 1,100 redundancies. Solyndra followed in the footsteps of Evergreen Solar (which had developed the String Ribbon wafer technology) and SpectraWatt. Combined with the decommissioning of two European-owned production lines, including the Tucson, Arizona plant of Germany’s SOLON, the US lost 20% of its solar manufacturing capacity during August, according to some calculations.

California-based Solyndra had received a US$535 million loan guarantee from the US Department of Energy for a 450MW factory – and the company has been the subject of a congressional investigation into the possible acceleration of the timetable on its loan guarantee application. However, the debate about whether the company abided strictly by the rules on government funding has threatened to overshadow the fact that Solyndra’s troubles derived in large part from the falling prices of solar panels, as a result of global oversupply. When Solyndra first received funding from venture capitalists in 2007, its innovative product, a cylindrical cadmium-indium-gallium-(di)selenide (CIGS)  thin-film panel, was expected to prove cheaper than competing crystalline-silicon (c-Si) PV technologies. At that time, the cost of pure polysilicon, the raw material for crystalline-silicon, was close to US$1,000 per pound. Neither Solyndra nor its investors anticipated a decline of nearly 90% in the price of the competing product. Solyndra did not have sufficient funding to ramp up to full scale production quickly enough to compete with the competition – despite raising over US$1 billion in equity funding over the four years.

Solyndra had in fact received the loan guarantees under schemes set up to promote innovative technologies as far back as the Bush administration, and long before the credit crisis. However, it took several years before the funds were granted. Mike Koshmrl and Seth Masia of Solar Today/The American Solar Energy Society argue that perhaps, if Solyndra had attracted investment to ramp up quickly three years ago, its product may have achieved price competitiveness by now. However, it’s a ‘chicken and egg’ situation: were the company’s problems the result of a technology which wasn’t competitive? Or were they the result of a lack of funding to ramp up the technology to make it competitive?

There has been a tendency in the US media to blame Solyndra’s demise on China – where government backing for investment in solar has underpinned the industry’s growth, helping factories achieve economies of scale and forcing down prices for crystalline-silicon. Koshmrl and Masia argue that: “It’s not that Western manufacturers can’t make competitive, well-made products. The problem is that they can’t get competitive financing.”

Victor and Yanosek, however, call for “an open and competitive global clean-energy market, underpinned by an innovation-driven clean-energy strategy”, arguing that governments, including that of the US, should do more to encourage innovation in countries such as China.

It seems contradictory to critique ‘cheap’ Chinese products at the same time as the renewables energy industry is striving to reach ‘grid parity’. Victor and Yanosek blame the cleantech industry’s troubles on “a boom-and-bust cycle of policies that have encouraged investors to flock to clean-energy projects that are quick and easy to build rather than invest in more innovative technologies that could stand a better chance of competing with conventional energy sources over the long haul”. They claim that “nearly seven-eighths of all clean-energy investment worldwide now goes to deploying existing technologies, most of which are not competitive without the help of government subsidies”.

Koshmrl and Masia make a similar point, observing that some in the US are rethinking the “national emphasis on end-use incentives” – and noting that states such as Tennessee and Michigan “...have laid out incentives to get factories built, as a priority over forcing utilities and ratepayers to subsidise PV installation.”

But incentives for production serve little purpose unless they focus on production of new and innovative technologies. There is little point in providing government incentives for technologies which have already come down in price.

The popularity of “end-use incentives” has already declined in Europe, where a host of countries, including Germany, Italy, Spain and the Czech Republic, have cut back on, or reversed, subsidy schemes such as feed-In tariffs.  

Amongst investors, we regularly hear the call for consistent policy on the part of governments. At the project finance level, there is clearly a trend to follow government subsidies, and visibility on subsidies is important for investors to take long term decisions.

Many venture capitalists will insist that a company has a business plan with the ability to stand on its own merits and which doesn’t require government subsidies to succeed. So the message to companies seeking finance should be that they should not build a business around a government subsidy.

As the credit crisis has persisted, however, investors have a reduced appetite for risk, resulting in a major funding gap for early stage companies. Government schemes exist to encourage innovation and to help a company develop a technology, but then comes the ‘valley of death’, where companies need to secure private sector funding to commercialise that technology. Rob Wylie, founder of cleantech fund WHEB Partners, comments that: “the gap will get worse because venture funds either moved to later stage or – if they haven’t – they are finding it increasingly difficult to raise money from institutions since the credit crunch”.

Victor and Yanosek are concerned that this “commercialisation gap” is tricky to plug because “the costs are greater and the best policies require government agencies to work alongside private actors without undermining market competition”. This is the area in which they consider clean energy to be in most trouble today.

On a positive note, Wylie comments that the situation “... has created opportunities for corporate VCs and private investors of large funds who wish to allocate part of their early stage investment for venture deals”.

China’s approach, to flood the market with cheap solar products, has been compared to the Japanese approach to consumer electronics equipment in the 1960s and 1970s. But Victor and Yanosek note that the provision of steadier government support in China has transformed the country into a leader in clean energy. They make the case for a federal clean energy standard in the US – an example of a ‘pull’ policy, rather than “expensive subsidies that ‘push’ technologies into the market”. Ironically, the US solar industry is adding jobs much more rapidly than the overall economy – predominantly on the installation side with the demand to install the ‘cheap’ Chinese solar imports.

Much of the funding from Obama’s ’Green New Deal’  stimulus package, rolled out in the aftermath of the 2008 credit crisis in an effort to create ‘green’ jobs and kick start economic recovery, benefited sectors such as electric vehicles and batteries. The battery industry lobbied strongly, creating the National Alliance for Advanced Transportation Battery Cell Manufacture in 2008, which argued that the US was in danger of losing out in terms of jobs to Asian battery manufacturers. But some of the partnerships which were forged in order to secure US Government funding have failed to blossom. For example, UK electric van company, Modec, entered into administration earlier this year despite a high profile joint venture with Navstar in the US, which had received stimulus package funding.

Victor and Yanosek  also make the case for backing more fundamental research in universities and government laboratories and argue that governments should “shift scarce public funds to the development and testing of more radical innovations” in biofuels, electric power and energy storage. However, they acknowledge that it’s not an easy task.

In the meantime, there are no easy solutions for cleantech companies searching for funding, be it for project development or to roll out a new technology. Let’s hope that governments take on board some of the lessons of failures such as Solyndra and devise appropriate policies to secure the future of the cleantech industry.

 

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