Once thought of as a glamorous and most compelling of investment trends, cleantech has lost its sheen in recent years. In 2005, cleantech (primarily renewable energy) investing by VC firms measured in the hundreds of millions of dollars. By 2008, it had reached $4.1 billion according to the National Venture Capital Association. Between 2009 and 2011 the federal government followed the trend with a mix of loans, subsidies and tax breaks directing $44.5 billion into the sector.[1] By 2013, VC investing in cleantech had shrunk to $1.5 billion[2] and many of the federal programs were set to expire.
The Story
So what really happened to cleantech? Cleantech suffered the indignity of becoming first a darling of the public (particularly those obsessed with climate change), of politicians (Al Gore’s movie “An Inconvenient Truth” won two Oscars in 2007) and of the glitterati and then was largely abandoned when the gritty reality of managing investments in the space intersected with the financial crisis. It even tarnished the star of no less a VC imminence than John Doerr of Kleiner Perkins Caulfield & Byers.[3] When Solyndra (with its large investment of public money) failed, the politicians predictably engaged in a finger pointing exercise and calls for criminal investigations. Politicians did their best to deflect responsibility. The investing pros on the other hand understand that risk is an inherent part of ventures and simply moved on to investments like social media with its lower capital requirements and faster path to exit through successful sales/IPOs. Like today’s 24 hour news cycle, the public and the glitterati simply moved on.
The Details
The cleantech bubble burst on a rocky outcropping created by a confluence of factors that affected many cleantech companies, but in particular the solar energy industry, which was a proxy for the cleantech sector as a whole for the VC community.
- 2008 Financial Crisis/Recession – The 2008 financial crisis caused many sources of capital – from venture capital to project financing to IPOs and acquisitions – to dry up. This raised the cost of capital for cleantech firms that could find funding, or prompted bankruptcy for those that could not.
- Government Policy – Government policies helped spur the cleantech industry, but the fluctuating, short-term nature of the programs created a boom and bust business cycle. The PTC, a production-based tax credit provided to 12 different renewable energy sources, has expired four times over the last 15 years. The year after each expiration, new projects dropped by 75%-92%.[4]
- Natural Gas Prices – Most electricity markets in the U.S. use natural gas as the marginal fuel. So falling natural gas prices cause wholesale electricity prices to fall as well. The fracking revolution, lower demand due to the recession, and a mild 2012 winter caused natural gas prices to drop by 82%, from $10.79/mmbtu in July 2008 to $1.89/mmbtu in April 2012.[5]This gutted energy revenues for new renewable energy projects and hammered the cash flow of existing projects that sold on the spot electricity markets. Natural gas prices have somewhat recovered in the last two years, but remain range-bound around $4.00/mmbtu.
- Global Manufacturing Overcapacity – For the solar energy industry, as demand grew global manufacturing capacity grew even faster. Global PV solar manufacturing rose from 4,028 MW in 2007 to 38,750 MW in 2012 (with China providing 65% of the 2012 capacity), while global installations lagged this growth by 20%.[6]The resulting glut caused many solar cell manufacturing companies to experience severe losses.
- Development Cycle vs. VC Exit Timing– Renewable energy projects like most capital intensive projects have long development cycles, typically 2 – 5 years. Cleantech companies that want to develop a portfolio of these projects will need multiple years to assemble them, especially as the market has favored fully developed projects. VC funds typically have a 10 year life and look to exit their investments after 5 – 7 years. This makes it difficult for VC funds to successfully exit investments in cleantech companies.
The Imperative
Despite the challenges of the recent past, cleantech isn’t going away as the environmental emphasis in today’s society will continue to focus attention on its potential benefits. It’s just that the science and engineering investments required take longer to mature and are more time consuming to monetize than investments in areas like social media. There is clearly a place for cleantech but it requires innovative, disciplined and determined leaders who can develop projects with patient sources of capital to deliver commercially viable investments to the marketplace.
Cleantech Today
The result is that today cleantech investors know the nuances of the space much better and understand the risks attendant to investments in it more clearly. They are more targeted in their approach and investing at later stages of development when risks can be more easily identified. While many VC firms have moved on to sectors like social media, with its lower capital requirements and faster development cycle, those still focusing on cleantech are looking for target companies to bootstrap their way to revenues to validate the technology and market demand. More patient sources of capital, such as large family offices and insurance companies, have been attracted to the sector investing in the development stages as well as new take-out facilities such as YieldCos, which bundle portfolios of long-term contracted assets. Cleantech is still alive and will continue to attract attention from committed investors and environmentalists, but it is no longer the heady stuff of cocktail party conversations.
[1] “Why the Clean Tech Boom Went Bust” by Juliet Eilperin, Wired Magazine, January 20, 2012
[2] PWC Cleantech Money Tree Report: Q2 2014
[3] Insight: How cleantech tarnished Kleiner and VC star John Doerr by Sarah McBride and Nichola Groom, Reuters, Jan. 16, 2013
[4] US DOE, 2012 “Renewable Energy Data Book; AWEA PTC Fact Sheet, www.awea.org/Advocacy/Content.asp
[5] US Energy Information Administration
[6] GTM Research April 2014 PV Pulse