With Uncertain Financial Future, Cloudy Skies Ahead for American Cleantech
Clean energy innovation in the United States is moving to financially friendlier shores—like China
Looking at 2011 VC investment figures, it seems like the cleantech industry in the United States is doing just fine. According to the Cleantech Group, a market intelligence advisory group based in San Francisco that has been tracking cleantech investments for the past decade, 2011 is the first year that saw more than $2 billion in cleantech venture investment in all four quarters. 4Q11 saw an impressive $2.21 billion in cleantech VC investments.
But if you take a closer—and wider—view, the bigger story isn't all that great. For one thing, the numbers for seed-stage deals were flat as investor focus turned to re-investing in firms already in their portfolios, firms that needed later-stage growth capital. In dollar terms, the news for early-stage startups across all industries is even worse. In 2011, VCs invested just $919 million in seed capital in 396 companies, a decrease of almost 50 percent from the previous year. In fact, seed-stage deals were the only stage of VC funding in 2011 to experience a decrease in average size. On the other side, late-stage VC investments in 2011 experienced a 37 percent increase.
TROUBLED TIMES FOR CLEANTECH VC
That change in focus is part of a worrisome trend: According to Third Way, a Washington DC-based think tank, there were twice as many late-stage deals than early-stage deals in the cleantech sector in 2010—the first time that late-stage financing overtook early-stage development since 1999.
The trend has sounded alarm bells about the state of cleantech innovation in the United States: If VCs are targeting re-investments in portfolio companies, where does that leave innovative start-ups in dire need of financing? One concern is that without VC interest in committing seed money to new ideas, America's start-ups will look overseas for funding, leaving the nation in a cleantech innovation drag.
For investors, the move away from start-up financing towards companies that are closer to turning a profit is understandable, particularly considering the nation's uncertain economic state. Untested ideas, though they may have merit, are left to the wayside. "Cleantech hasn't been a failure," noted Daniel Yates, CEO of Opower, a customer engagement platform for the utility industry. "It's VC investment in cleantech that has been troubled."
THE VALLEY OF DEATH: ONLY UNCLE SAM CAN HELP BUILD THE BRIDGE TO CLEAN ENERGY
The answer, according to some analysts, isn't to stimulate the VC industry, but to look to Uncle Sam. Indeed, over the past few years, the federal government's investment in cleantech has dwarfed that of venture capitalists. Between 2009 and 2014, Washington will have spent more than $150 billion in cleantech—more than three times the amount spent during the previous five-year period.
But, according to researchers from the Brookings Institution, the World Resources Institute and the Breakthrough Institute, in the excellent 2012 report Beyond Boom and Bust: Putting Clean Tech on a Path to Subsidy Independence, "To ensure a fully competitive energy market, the federal government must also do more to speed the demonstration and commercialization of new advanced energy technologies."
The authors—Jesse Jenkins, Director of Energy and Climate Policy, Breakthrough Institute; Mark Muro, Senior Fellow, Metropolitan Policy Program, Brookings Institution; Ted Nordhaus and Michael Shellenberger, Cofounders, Breakthrough Institute; Letha Tawney, Senior Associate, World Resources Institute; and Alex Trembath, Policy Associate, Breakthrough Institute—note that "private sector financing is typically insufficient to move new energy innovations from early-stage laboratory research on to proof-of-concept prototype and then to full commercial scale."
They cite two financing gaps that they say "kill off too many promising new technologies before they have a chance to develop." One is known as the "technological valley of death," in which investors are hesitant to invest in early-stage R&D, hampering a start-up's ability to develop breakthrough concepts into marketable products. The other is the "commercialization valley of death," when young firms cannot find financing to take them from the pilot or demonstration phase of their product's tech development cycle to full commercial readiness.
"To avoid locking America's entrepreneurs and innovators out of energy markets, Congress should implement new policies to navigate the clean energy valleys of death," the authors recommend. "Without such policies, conventional fossil energy technologies are effectively insulated from new challengers, preventing a fully competitive US energy market."
THE WELL IS RUNNING DRY: FEDERAL CLEAN ENERGY INVESTMENT TO ENTER STEEP DECLINE
The problem, however, is that federal cleantech funding, as described by The New York Times editorial board, "is about to drop off a cliff." The reason for this is simple: The clean energy incentives and subsidies provided by President Obama's 2009 economic stimulus bill—amounting to $65 billion, including loan guarantees for wind and solar power—will largely be dismantled by 2014. To make matters worse, other longer-standing subsidies, like the mission-critical Production Tax Credit (PTC), are expiring.
For the cleantech industry, the numbers are hard to swallow. By 2014, annual federal cleantech spending is set to decline 75 percent to $11 billion (the high, in 2009, was $44.3 billion). In addition, 70 percent of all federal clean energy policies that were active in 2009 are set to expire at the end of 2014.
There's also the effect that the expiries will have on jobs. According to a Brookings Institute report, Obama's stimulus package was the cause of an 8.3-percent increase in jobs in the renewable energy sector, an impressive figure especially considering it happened at the height (or rather, depth) of the recession.
The thought of renewing such incentives is a bit pie-in-the-sky. Obama's stimulus bill was passed when Democrats controlled both houses of Congress. While the clean energy-friendly side of the aisle still controls the Senate, "the Republican wrecking crew in the House," as The New York Times notes, "remains generally hostile to programs that threaten the hegemony of the oil and gas interests."
DRILL, BABY, DRILL: THE GOP WILL KILL CLEAN ENERGY
The House, for example, recently defeated an amendment proposed by Rep. Ed Markey (D-Mass.) to extend the wind energy PTC, mostly along party lines. Many analysts say the loss of the PTC is a significant blow to America's wind sector.
"There's such uncertainty in the market right now," said Laura Arnold, who sits on the board of directors of the Indiana Renewable Energy Association. "Uncertainty is not a positive stimulus for the growth of the industry…It's not completely over, but it's going to be on life support until we have another policy in its place to give the right inducement to the industry."
And if Mitt Romney wins the presidency, more dark days for the nation's cleantech sector are certain. The GOP hopeful's recently unveiled energy plan calls for opening up oil and gas development along the Atlantic Coast and—much to the chagrin of environmentalists and conservationists—the Arctic National Wildlife Refuge (ANWR), while ending much-needed subsidies for wind and solar.
FOR AMERICAN CLEANTECH CEOs, A ONE-WAY TICKET TO CHINA
With venture capitalists largely abandoning early-stage projects and the federal government's investments set for a massive decline, America's cleantech industry is bracing for tough times in the coming years. "America's innovators will likely be forced to commercialize their technologies in other countries," warn the Beyond Boom and Bust authors, "where foreign governments offer greater policy support, putting the United States at a competitive disadvantage."
You can count on America's cleantech entrepreneurs to be booking tickets to Beijing, Shanghai or one of China's growing tech hubs, like Chengdu, Dalian, Hangzhou and Xian. And considering what's happening in the United States, who can blame them? China has been roundly beating America in the cleantech race. With clean energy investments hitting a remarkable $9 billion a month, the Middle Kingdom is set to be the world's leading solar and wind market by 2016.
In fact, the American cleantech brain drain is already underway. In November, Cleantech Group will be taking 10-15 cleantech companies—along with "a select few investors, corporate executives, and other key stakeholders"—on a whirlwind tour of cleantech hotspots in China, which includes "introductions with key leaders" in an effort to "provide the cleantech CEOs with an excellent taste of cleantech in China as it is today, as well as the opportunity to expose their companies to multiple China-based investors and partners interested in acquiring, investing in, and helping them 'go to China.'"
The late 20th-century Chinese philosopher and diplomat Hu Shih once observed, "India conquered and dominated China culturally for 20 centuries without ever having to send a single soldier across her border." In terms of cleantech, it looks like China will be doing something similar to the United States. But this time, there will be border crossings: American cleantech CEOs leaving U.S. shores. And unless America's lawmakers make it more lucrative—and predictable—for cleantech investors at home, those shores will be home to more dirty drilling platforms, not clean wind farms.
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Josh Freed and Mae Stevens. Nothing Ventured: The Crisis in Clean Tech Investment. The Clean Energy Program & The Capital Markets Initiative. Thirdway.org. November 2011. Accessed September 17, 2012.
Ted Nordhaus, Michael Shellenberger, Alex Trembath and Jesse Jenkins. Beyond Boom and Bust: Report Overview. Breakthrough Institute. April 17, 2012. Accessed September 17, 2012.
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Cleantech Group. Apply to Participate in the 2012 'Cleantech Goes to China' Tour. Cleantech.com. May 21, 2012. Accessed September 18, 2012.
image: Rooftops mounted with solar-powered water heaters in Tieshan, China. (credit: vmenkov, Wikimedia Commons)