Financing Problems and the New Energy Revolution

No matter how good your cleantech idea is, without money you are not going to be able to turn your dream of using expired milk to power your car into a reality.  The financing system is broken for most businesses right now but innovative ideas in the energy space face their own special set of hurdles.  A lot of electronic ink has been spilled this year trying to explain and come up with possible solutions to the cleantech financing problem and I thought this would be a good time for a review of some of the better ideas from 2010 in this area.

The Valley of Death: The Wall Street Journal, Bloomberg New Energy Finance, and numerous blogs have all been writing about the financing “valley of death” facing cleantech startups.   The basic idea is that VCs are reasonably good at funding high risk technology ventures between a few million and a few tens of millions of dollars but when it comes time to scale up for a large scale demonstration or manufacturing facility VCs usually aren’t able to invest the $100s of millions needed to take the company to the next level.   Banks won’t lend to businesses that are as risky as many of these companies and the whole IPO system is currently broken.  Many Silicon Valley VCs that thought investing in cleantech would be akin to investing in online tech companies are now realizing that both the expertise needed and the exit scenarios for these companies are significantly different from what they had experience with in the past and are now pulling back from the sector.  So how can cleantech startups make it to the other side of the financing valley?

Government vs. Market Solutions: There is a debate about the degree to which government should get involved vs. letting the market place resolve this financing gap.  The Fiscal Times has a good story about the ways that the U.S. government is trying to help cleantech companies get access to capital.  Included in the stimulus package is funding for loan guarantees that, although they do not provide money directly to energy focused startups, makes it possible for them to get money from other sources.  Tesla probably would not have been able to undertake its IPO without a $465 million loan guarantee from the Department of Energy.   The government can also make investments in alternative energy more valuable through policy decisions that incentivize or mandate the use of clean energy sources.

The main market solution available in the absence of a functioning IPO system or bank lending is acquisition of startups by larger energy companies.  However, there aren’t many established market leaders in the cleantech space that can serve an Apple or Facebook like function of scooping up promising young upstarts.  The obvious candidates with deep pockets and an appetite for acquisitions are the big oil companies like ExxonMobil and Chevron but some people argue that they are mainly interested in alternative energy for public relation reasons and have little interest in going all the way with new technologies that will interrupt their existing business models.  Utilities make sense as buyers for certain kinds of new technologies although entrepreneurs and investors are often disappointed when they pay a small multiple of what is referred to as EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), which is how normal businesses are valued, rather than the much higher valuations given to tech startups based on what a revolutionary idea might be worth.

Revolutionary Technologies: Serial entrepreneur and influential cleantech investor Vinod Kholsa has an article in the December issue of Foreign Policy arguing for increased investment in revolutionary technologies.  He thinks that investing too much in today’s technologies that are an incremental improvement in terms of efficiency will leave us with an overhang of large scale infrastructure that will not be a significant enough improvement to stave off serious climate change.  Therefore, we should hold off on large scale changes of infrastructure and have governments invest more in swing for the fences ideas through entities like the Advanced Research Projects Agency – Energy.  Coming from anyone else I would think this idea an excuse for inaction in the near term but Kholsa has a record that can’t be ignored of effectively pushing the envelope on innovation.

Financing and Solutions to Energy Poverty: Looking at the financing challenge from a completely different angle The New York Times has a great Christmas Day article about energy poverty in Africa.  Although a significant market is developing for renewable energy solutions that can help people that are off the main power grid, one of the big constraints is that African companies cannot get the finance to develop new products in this area or import existing products in large quantities from other countries.  The Times notes that “a $300 million solar project is much easier to finance and monitor than 10 million home-scale solar systems in mud huts spread across a continent.”   The business model for off the grid power renewable energy in developing countries is still being developed and this is an issue Ideas on Energy will be following closely.

So as we go into the new year, what are your predictions for what is going to happen in cleantech finance?  Will we see more IPOs?  Will bank lending unfreeze for the sector?  Will the big energy companies swallow all the smaller players? Or will we become more reliant on government assistance and policy?  Whatever happens, 2011 in going to be a big year for new ideas in the energy sector and entrepreneurs are going to be looking for new ways to get money to turn those dreams into our new energy future.

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3 Responses to Financing Problems and the New Energy Revolution

  1. Excellent commentary on the gaps in energy financing that exist around the world. While clean tech investment in the US is a pressing issue that needs to be on the forefront of the national agenda, energy poverty in the developing world attributes to climate change, which translates into equally important issues on a global scale.

    The limited, but powerful, coverage these issues are receiving is a hopeful sign for progress to be made in 2011. A commitment to reenvision how energy and clean tech financing is undertaken, both domestically and globally, in 2011 is an essential step forward!

    E+Co, an organization that invests in clean energy SMEs in Africa, Asia and Latin America, works to tackle this issue by providing financing to the “missing middle”. E+Co’s model works to provide capital and services to clean energy entrepreneurs that require funding amounts that fall outside the range of lending typically undertaken by VCs and local financial institutions. This concept is one solution to the question posed above – we are always interested in other innovative concepts and idea and would love to hear others!

    Looking forward to your continue attention to this issue in 2011!

    • Thank you for your feedback and congratulations to E and Co on making it to the final round of the Zayed Future Energy Prize! I think a lot of good ideas are going to come to fruition on both the technical and business side in the near future for addressing energy needs in the developing world. I look forward to seeing what 2011 brings both from your organization and others trying to address these challenges.

  2. It is interesting that you highlighted the off-grid distributed energy market in your article. Our company, Mera Gao Micro Grid Power (MGP), is a new entrant in the sector in India and the potential for scale is incredible. In a recent WRI report, off-grid distributed energy has the potential to be a $2 billion a year industry in India alone – 80 million households without power times $2 a month times 12 months. And as the sector is undeveloped, players that can take to scale a network of small scale facilities will have limitless growth potential for the next decade.

    I see the off-grid distributed energy sector as training the micro finance sector by 15 years. There is an abundance of subsidized and donor-funded work that simply will not develop into commercial opportunities. The truly commercial players are unfortunately few. The technologies being used are too broad and the non-technical processes of payment collection and community engagement vary from each organization. All of this makes it very difficult for investors to evaluate the technical and commercial viability of new entrants.

    The industry needs structure; by working together, common processes and designs can be developed that strengthen the operations of all companies involved. Common designs will also help simplify the evaluation process for investors. MGP is working with a few partners to develop a Network of Micro Grid Operators in India that we hope can begin doing just that. Our current micro-grid design has the lowest CAPEX and OPEX of those in operation and we would like to offer it to the network as a starting point for developing better, more efficient, and more cost effective micro grids. If there are other operators interested in participating, please feel free to contact me at njaisinghani@vdigroup.org.

    Sincerely,
    Nikhil

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