planet-earthIn this post Peg summarizes a round-table discussion about cleantech financing in the global economy held at 5th Annual Babson Energy and Environmental Conference on Entrepreneurship for a Sustainable Future and chaired by Mark Donohue. The discussion covered some of the global aspects affecting cleantech financing and looked at various challenges and opportunities lying ahead.

by Peg Zokowski, Principal, Innovators Ink, LLC. Follow Peg on Twitter @InnovatorsInk; connect with Peg on LinkedIn

Born out of the political instability around the world and the enormous price shocks of the 1980s, which ultimately led to the IT Megatrend and its resulting communications, micronization and materials breakthroughs, Cleantech’s financial success seems to continue to fall victim to the vagaries of the economy and politics, even as the market opportunities rapidly expand globally. As Mark Donohue, Babson Clean Technology Entrepreneur-in-Residence, noted at last month’s 5th Annual Babson Energy and Environmental Conference on Entrepreneurship for a Sustainable Future, “Even Power Purchase Agreements are becoming increasingly more difficult to do because of the changing externalities, such as the price of natural gas.”

Joining Donohue to discuss cleantech financing strategies were Chuck McDermott Partner at Rockport Capital, and who helped launch the nation’s first independent bulk electric power trading company in 1984, Sheeraz Haji, CEO of Cleantech Group, Cary Bullock, President and CEO of ThermoEnergy Corp, and John Abe, vice president of business development at Nexamp. The panel provided an historical overview of cleantech, weaving in ecosystem trends and project financing from both the debt and equity side.

According to Donohue, “Cleantech financing exhibits unique characteristics setting it apart from other venture capital financing strategies because the go-to-market strategy is different than with a B2C product, or enterprise software product,” for example. Adoption curves and rate of growth, large equity and project financing debt components, customer financing requirements, big capital intensive projects, multiple parties, complicated contracts, and that ever looming “big stick in the sky” of politics add additional layers of risk to cleantech ventures.

And it is that last variable—politics—that has prevented a much needed national energy policy to create a consistent environment to support financial investment in cleantech. Without one, there was broad consensus among panelists and conference participants in general that U.S. innovation in cleantech risked sitting on the sidelines losing out to global competition.

“There is huge business being done and deployments being financed in Tianjin, China,” noted Sheeraz Haji. “Capital is not an issue; they just want to get things done quickly.” According to the NRDC, China spent $54B in 2010 alone. Haji believes there is big opportunity there, and noted that some companies are splitting time between their U.S. headquarters and an office in China to open up collaborations. He cautioned, however, that China can be difficult to navigate if you’re a first time entrepreneur without a wise venture capitalist by your side and understanding Asian manufacturing.

Chuck McDermott also believes that China offers enormous opportunities for cleantech. “China, China, China”—with three billion people, half of whom will be coming onto the grid, and the capacity to build 20 cities annually for the next 20 years of 1 million people or more. Looking beyond China, he added that, “Other emerging markets are the new markets and looking 10 years forward, we have to be surefooted in other emerging markets. Rockport is staying focused on this.”

Closer to home, McDermott sees investment opportunities among cleantech’s “low hanging fruit” including energy efficiency, lighting, and heating and cooling; with larger scale opportunities in transportation, and the Smart Grid alone is projected to generate about $1.2 trillion in business over next 30 years just in North America.

In our related post, “Ten Clean and Green Energy Stocks for 2011“, Tom Konrad, CFA shares his fourth annual list of cleantech and renewable energy companies that he expect to outperform in 2011.

While worldwide investment in cleantech ventures picked up in 2010—preliminary Q1 2011 results totaled $2.57 billion or 31 percent higher than the same period a year ago as reported by Cleantech Group—and the experiential quality of entrepreneurs at the helm of ventures has increased, the global recession in 2008-2009 created a number of issues the sector is still dealing with, according to the panel.

McDermott pointed out that financing for projects such as large scale solar module projects disappeared, “VCs had to do a lot to keep portfolios alive, and investors from other sectors also gave second thought to entering cleantech. Until the recent stimulus package, the political instability and enormous price shocks of the 1980s had stimulated the most massive response by government in terms of investment in energy. But ARRA funds are allocated and now what?”

Haji sees three headwinds particularly worth noting, beginning with the fact that “there is 50 percent less capital flowing into funds, and though the valley of death is getting better for early stage ventures VCs are looking to fund later stage companies.” Financing to break ground on first projects also remains a challenge. “Look at BrightSource and look at the list of investors—companies, financial houses, etc.—and the amount of work involved to get funding.” Finally, it is still difficult for businesses or customers to make capital investments in projects requiring that type of financial commitment.

Nexamp, a Massachusetts-based, turn-key provider of renewable power and comprehensive clean energy efficiency solutions, realized this two years ago. Although customers wanted what the company was offering, Nexamp business required customers to make large capital investments they didn’t want to make or couldn’t. The remedy: Nexamp developed a toolbox of financial solutions to offer customers. The tool box offers financing solutions ranging from solar renewable energy credits (SRECs) and Power Purchase Agreements (PPAs) to equity co-ownership and debt and equity financing.

In just five years Nexamp has completed 10 MW of projects in Massachusetts—6 of those megawatts installed in just the last two years since offering the toolbox.

Nexamp also benefitted from Commonwealth Solar (CommSolar)—a $68 million solar rebate program launched by Massachusetts in 2008 to install 250 MW of solar power statewide by 2017. At the time, Abe noted that “most projects sold in the State were funded by companies off their existing balance sheet. Occasionally, a business might tap an existing local lender relationship; the deal essentially secured by business assets or real estate owned.” PPAs gained a foothold in the residential market at the same time via affordable housing projects using a portfolio approach to aggregate residential customers and manage risk accordingly. Utility ratepayer-funded projects also made an entrance producing yet another source of funding. Between 2008 and 2010, Nexamp installed some of its biggest solar projects including 983 kW at National Grid’s New England Distribution Center, 1.58 MW at Pittsfield’s Wastewater Treatment Plant, and 170 kW for Ozzy Properties in Andover, which at time, was the largest privately-owned solar project in Massachusetts.

While momentum for CommSolar and ARRA-funded projects continued in 2010, Massachusetts also began transitioning to using solar renewable energy credits (SRECs). Although it doesn’t provide up front rebates for solar projects, it does provide a large incentive for each kilowatt hour the project generates. Since 2010, the program helped to install 30 MW has in the State as a result of the program. “If the trajectory continues there is the potential to install another 40 MW more in 2011,” said Abe.

But looking beyond first quarter 2011, Abe sees investor uncertainty in the Massachusetts solar market—partly due to regulatory uncertainty. Gone also is the generous rebate from the State, ARRA funds are spent, and the possible end of the tax grant. Despite this, financing and installation of hundred-kW scale rooftop projects continue to move forward and Abe believes Massachusetts could be a “Top 5” U.S. market for solar through 2015.

Haji also sees several encouraging signs to counter the tailwinds. In addition to China’s appetite and the business opportunities it presents, he says private equity entrants, such as Silver Lake, “have money and are looking to find cleantech opportunities where they can put big checks to work, and this is encouraging.” But at the moment, there is more capital chasing deals than there are deals.

Corporations are also increasingly saying they want to play here, says Haji. McDermott agrees, and said there is “much more reaching across the chasms” between startups and companies like GE, Intel and IBM “to find ways to work together as the rate of change and global opportunities increase. We’re seeing that we used to be closed source innovators and need to be open.” Haji also says it is important to understand what customers want and what they don’t care about. “That has been a bit of a challenge. For instance, in the home energy space there have been a number of investments where the value proposition was unclear. He also thinks there are opportunities for standardization and big investment opportunities created by open platforms between industries and customers.

“As challenging as some of this is,” said McDermott, “There is something exciting about how we take 6.8 billion people and house them, keep them comfortable, provide light, move them around, manufacture goods for them, and feed them. “These are stunningly huge embedded markets focused on the basics to stay alive and flourish day to day.” Accomplishing this will require vision, determination and leadership, and of course, enormous sums of capital and a national energy policy.

To read up on how to finance green businesses in the U.S. in terms of capital options and sources check out our related post “Financing Your Green Business“.

© 2011, Peg Zokowski. All rights reserved. Do not republish.

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Author: Peg Zokowski (2 Articles)

Peg Zokowski is a freelance writer who enjoys writing on cleantech issues and economic development. In 2009, she launched Innovators Ink, a strategic communications company working with cleantech entrepreneurs and innovators in business and higher education. Follow Peg on Twitter @InnovatorsInk; connect with Peg on LinkedIn

  • John Whitney AIA

    Excellent article. I was especially taken with this concise summary of the situation from Mark Donohue and Peg Zokowski:

    “’Cleantech financing exhibits unique characteristics setting it apart from other venture capital financing strategies because the go-to-market strategy is different than with a B2C product, or enterprise software product,’ for example. Adoption curves and rate of growth, large equity and project financing debt components, customer financing requirements, big capital intensive projects, multiple parties, complicated contracts, and that ever looming “big stick in the sky” of politics add additional layers of risk to cleantech ventures.”

    Big stick in the sky indeed! It seems to be all about opening up the short term political cycle decision-making process and the countering the influence of entrenched lobbyists. Do that and we have the opportunity to establish a rational and forward-thinking national energy policy.

  • Chris de Morsella

    John, unfortunately a rational and forward-thinking national energy policy (out of Washington D.C. at least) will continue to remain hostage to the deeply entrenched lobbies of the oil, gas, coal, and the nuclear sectors. I do not see how this can change, unless a massive national grassroots groundswell of concerted and unified demands by the collective citizenry imposes the popular will. I do not see this happening in our current money politics system.

    It is a pity, for all of us, because if we did have a rational and long term energy policy our nation would really benefit in so many ways and on so many different levels.

    The next best thing to a national energy policy is energy policy being set at the state level. For example California’s recent renewable mandate (increasing to 33% the renewable content of the energy mix)… though I expect that this will be challenged in federal courts by the well heeled carbon lobbies — for example from the Koch brothers who seem to be behind so much of the astroturf and think tank money politics. Hopefully enforcement of this new energy policy enacted by California will survive the challenges I expect to be raised (legal challenges raised on interstate commerce arguments for example)

    I don’t think Washington in its current climate so completely dominated by lobby money and the need to raise money… huge sums of money… is capable of much of anything except distributing the spoils to the cronies who have aptly been described as pigs at a trough.

    Though our national policy (or lack of it) is irrational and ill serves our national interest, unfortunately, it makes a lot of sense (and profit) for the beneficiaries of these “irrational” policies. This is the crux of the problem, IMO.

    Cleantech venture capital is going to have to continue to struggle with this and continue to operate in these opaque and far from ideal circumstances, until the grip on government (and court) policy making that the fossil carbon and the nuclear lobbies have is somehow weakened.

  • daniel maris

    How do you view the energy infrastructure?

    If you view it as something that needs to be fully recovered from the current income stream that gives you one answer.

    Or do you view it as something like say building your motorway/highway/autoroute system? That gives you a completely different answer.

    I think the German approach is correct whether they put tax payer’s money upfront to subsidise the green energy infrastructure.

    We are talking here about political choices, pure and simple.

    Those countries that build the green infrastructure will prosper I believe.

    • Chris de Morsella

      Daniel — I think you make a good point and one that is backed up by macro-economic data as well. Countries that invest in their futures, building out renewable energy infrastructures, smart grid infrastructure and perhaps most important work to increase their energy and resource use efficiency and to re-use and re-cycle as much as possible… these countries will be much better positioned for the future than those countries that continue to live under the siren song of the fossil carbon lobbies and do little or nothing to prepare themselves for a post carbon energy future.

      Just like a transportation infrastructure, much of which is a money losing proposition if looked at only in terms of what could be directly charged for access to some stretch of road, rail or improved waterway for example, but which in its aggregate ties our societies together and enables prosperity… so it is with our energy utilities.

      Energy and energy transmission and transport infrastructure underpins just about every aspect of modern society. As the re-curring cost structure of fossil and nuclear power, including currently externalized costs, such as global warming or long term nuclear waste handling begin to rise rapidly — as they will — those societies that have already achieved a measure of independence from these sunset energy systems will be much better positioned than those that remain woefully dependent on them.