Stimulus and venture capital sow seeds for cleantech industry’s “revival”

Turns out that media reports of the death of the clean tech industry have been exaggerated (see “Global recession? Must be time for the media’s alternative-energy backlash”).

A recent Greenwire story (subs. req’d, excerpted below), “Stimulus seen sowing seeds for industry’s revival,” notes:

There are signs that the federal stimulus might be pumping a little life into the alternative-energy industry.

Financiers and law firms specializing in renewable energy say they see growing interest in reviving moribund projects and breaking ground on new deals. And while big banks that have braced the industry’s backbone are still on the fence, some hedge funds and private equity and venture capital firms are cautiously looking to take advantage of stimulus provisions that temporarily eliminate the need for tax equity financing, which has long been a mainstay for renewable energy projects.

“Whether it’s the stimulus package or the return of the banks, there is early evidence of a growing appetite for the types of small- to medium-sized projects that they sponsor,” said Tucker Twitmyer, managing partner at the venture capital firm EnerTech Capital.

The first thing to be said is that given how well much of the clean tech industry has been doing, the word “revival” is relative (see “U.S. wind energy grows by record 8,300 MW in 2008”).


Second, to believe the cleantech industry was going to suffer for long required believing that President Obama was not going to keep his many campaign commitments to boost funding and incentives for the industry (see “Progressives, Obama keep promise to jumpstart clean energy, economy”).

Third, the massive infusion of cleantech VC funding in 2008 always meant that many clean tech firms would have a great deal of money to survive if not thrive this year. I had previously noted among my “Top 10 things to be thankful for in 2008” that “Despite market downturn, cleantech venture investment hits record $2.6B in 3rd quarter.” Well, this year, the Cleantech group reported, “Clean technology venture investment reaches record $8.4 billion in 2008 despite credit crisis and broadening recession,” with these remarkable details:

In 2008, U.S. companies raised $5.8 billion in 241 disclosed rounds, up 56% from 2007. US companies accounted for 68% of the global total.

To put this in perspective, that $5.8 billion is about 10 times the comparable annual R&D budget in the Energy Department office I once ran, the Energy Efficiency and Renewable Energy (EERE) program, which did — and still does — the bulk of the federal government clean tech funding.

Companies typically pursue VCs for multi-year funding, since they don’t want to have to keep coming back for money and giving away more of their company in return. Yes, VC funding will probably be down this year, but it will still almost certainly reach levels never even dreamed of a few years ago. As recently as 2002, total global clean tech VC investment was under $1 billion! Even in 2005, it only hit $2 billion.

“As expected, clean technology venture investing slowed in 4Q08, but it’s important not to miss the forest for the trees,” said Nicholas Parker, Executive Chairman, Cleantech Group. “In 2008, there was a quantum leap in talent, resources and institutional appetite for clean technologies. Now, more than ever, clean technologies represent the biggest opportunities for job and wealth creation.”

Preliminary results for 4Q08 indicate venture investment commitments worldwide of $1.7 billion across 99 disclosed investments, the smallest quarterly total in 6 quarters. 4Q08 was down 35% from 3Q08, yet down only 4% from 4Q07 despite a much more difficult economy.

To repeat, VC funding for the last quarter of 2008 was almost identical to VC funding for the last quarter of 2007.

And the money is going right where it belongs — to the technologies that harvest the single biggest renewable source of power, the sun:

“2008 saw solar take a 40% share of clean technology venture investment dollars, led by mega-investment rounds in thin-film solar, concentrated solar thermal and solar service provider companies,” said Brian Fan, Senior Director of Research, Cleantech Group. “Investors also continued to migrate from first-generation ethanol and biodiesel technologies to next-generation biofuels technologies, led by algae and synthetic biology companies. Other sectors with healthy investor interest included smart grid companies, small-scale wind turbines, plastics recycling, green buildings and agriculture technologies.”

Also, whatever drop in VC funding there is this year will almost certainly be made up for by the doubling of clean energy R&D that Congress and the president have passed in the stimulus and the budget for this year.

Let me finish with some more excerpts from the Greenwire story:

The stock markets are still no place to raise cash, but if activity from many nontraditional sources of financing lifts the cleantech sector faster, as many experts predict, that may encourage banks to ease their strict lending requirements and again lift renewable energy finance if credit markets start to normalize.

“I’d say it’s a little bit like March in your garden,” said John Gulliver, a specialist in renewable energy financing at the law firm Pierce Atwood. “There are some shoots of green coming up out of the frozen ground in the snow, but they’re not ready to harvest yet.”

There is some dispute among insiders as to which sectors are seeing the most benefits. Some are confident that solar energy companies are enjoying a big lift from the stimulus, while others observe signs that wind power is seeing more gains. Most assume that energy efficiency provisions in the law will see home and building weatherization fill up much of the activity, but analysts see opportunities for photovoltaic companies here, too.

But what is clear is that parts of the American Reinvestment and Recovery Act that replace the need for tax credits are giving the industry its biggest boost.

Prior to the financial crash felt in the second half of 2008, most alternative energy projects owed their life to federal investment tax credits and production tax credits that allowed banks backing projects to offset tax liabilities against their investments in wind farms and solar plants.

The structure worked as long as the banks pulled profits, but with most financial institutions expected to post steep losses for 2009, tax credit finance has become all but obsolete….

Signs of life in cleantech are mostly due to Congress allowing companies to opt for Treasury grants in lieu of investment tax credits, experts say.

Biomass, geothermal, solar and wind power project developers can now elect to use the investment tax credit to get a federal rebate for the amount of the tax equity money that would have backed their projects.

The advantage, Hudson Clean Energy managing partner Neil Auerbach says, is that the new structure is much simpler and more affordable than the old periodic tax credit schemes favored by Congress in the past. The Treasury grants significantly lower the cost of financing, an important component given the high cost of capital in today’s economy.

“Instead of accessing the currency traders in the financial institutional community that charge tremendous transaction costs to access their tax capacity, instead you go to the federal government, specifically the Department of Treasury, and you hand in your tax credit and you get 100 cents on the dollar supposedly within 60 days of a satisfactory application,” Auerbach explained in a conference call hosted by the American Council on Renewable Energy (ACORE) on Wednesday.

Aside from the tax credit fix, new and better federal loan guarantees have considerably reduced the cost and risk of financing projects and are helping to lure jittery investors back into renewable energy.

Analysts expect that some of the $6 billion appropriated for loan guarantees will provide the foundation for at least $60 billion in new lending for clean energy projects over the next two years. The financial community is taking notice.

“I’m not saying they’ve jumped in, but we’ve gotten more phone calls, and there seems to be a greater degree of interest on the part of nontraditional equity investors, in which I would include things like hedge funds, private equity money, etc.,” said Phillip Spector, an attorney specializing in energy and renewables at Troutman Sanders.

A possible stabilization of the fossil-fuel energy markets could also boost optimism and encourage even more firms to take advantage of the new government carrots.

Crude oil prices are now hovering around $50 a barrel. While the market may still see some price swings, many energy analysts theorize that oil prices have probably found a floor and will either stabilize at the $40 to $50 range or steadily rise over that mark in the coming months.

“There may be a perception that oil has bottomed out, and I think that will help if people get confident that they’re not going to be competing in a $20 a barrel oil market but one that’s $40 to $50 or $60,” Gulliver said. “That changes the economics quite a bit.”

Anticipating a renewable mandate

Cleantech watchers are also crediting the stimulus for funding several previously authorized measures to lift renewable energy in the United States, in particular programs managed under the Department of Energy that have existed for years but never received funding when Republicans dominated Washington.

But most DOE projects have yet to take effect as stimulus money gets pumped into the economy in pulses. Analysts say it is too soon to tell what impact those appropriations will have on the now stirring alternative energy and clean technology industries.

Insiders also report that, while signs of fresh activity are promising, investors with the most money to spend on cleantech are holding out for indications that forthcoming energy and transportation bills will provide more solid regulatory support for the industry.

While the stimulus is helping to prime the marketplace, there is much hope and anticipation that the federal government will establish a national renewable portfolio standard, or RPS, a mandate that the country generate a specific proportion of its energy needs from wind, solar, geothermal and other such sources. That, along with rules that place a price on a ton of carbon dioxide and other greenhouse gas emissions, will do far more to stimulate cleantech than the law passed last month.

“Everybody is waiting for the next piece, which is the national RPS,” said Peter Fusaro, founder of Global Change Associates and organizer of the upcoming Wall Street Green Trading Summit. “The market is going to track legislation. And we’re going to get all that next month, hopefully.”

Fusaro also expects the industry to get another big lift should Washington adopt a national utility earnings “decoupling” program along the lines of a successful California initiative. Decoupling eliminates the paradox whereby utilities that promote greater energy efficiency see profits fall as demand for their power decreases, establishing structures that guarantee that energy generators can retain their expected earnings.Ultimately, banks are key

But experts say the renewable energy industry will only return to its heyday once the major banks final loosen up credit and re-enter the fray.

While an important part of the picture, venture capital and private equity investors have nowhere near the amount of capital needed to fuel the industry on the scale that the new leadership in Washington is hoping.

For the Obama administration to meet its goal of doubling renewable energy generation by 2011, Hudson Clean Energy estimates that about $134 billion in new capital investments will be required by then. To reach a 10 percent penetration of renewables in the nation’s energy mix by 2012, as President Obama has proposed, about $217 billion will be needed.

The most important remaining impediment to cleantech investing “is the banks not lending,” Fusaro said. “We need the capital markets moving again.”

The large-scale wind and solar projects of the sort that moved along before the economic crash can get a lift from nontraditional sources of finance, but they almost all still need heavy debt financing to help see them to completion.

While the renewed interest in renewables is promising, the industry won’t experience a real breath of life until the banks relax and open up their tight wallets again.

“It’s too early to call it spring with the daffodils and tulips up,” finance specialist Gulliver said, “but I think you can see signs of green poking up underneath the earth, so that’s good.”