GREEN GROWTH: FROM RELIGION TO REALITY - Sustainia

Chapter 5ration firm Solar Trust received a 2.1 billion dollar loanguarantee, the same year fellow solar generation firmSunpower received 1.18-billion loan guarantee. Overthe last few years further large DOE loan guarantees toCalifornia clean tech firms have included: 1.6 billion toBright Source Energy, 16 million to Nordic Wind Power,and 535 million to Solyndra (lpo.energy.gov).Federal funding has assisted in the initial developmentof clean tech, addressing investment gaps for basicresearch and possibly helping to overcome the otherwisepotentially crippling capital intensity required to scale upmany of these technologies. However, whether the DOEshould structure funding by picking winners, as it is currentlydoing, or consider other funding mechanisms remainsquestionable. Some of these programs may alsohave distorted markets and reduced the healthy competitiveenvironment essential to the long-term commercialsuccess of firms receiving VC funding (Kenney 2011).We discuss this issue further in Section 3.2.3 ChallengesDespite the perceived synergistic relationship betweenstate climate policy and business interests, the success ofthis new phase of green growth in California remains tobe seen.3.1 Policy stabilityCleantech, to a far greater degree than its IT predecessor,relies on policy and regulation for market creation,and thus finds itself at the whim of political climate.Changes in the policy environment can lead to collapseof investment, as seen with the first failure of renewableenergy policy in the 1980s (Kenney 2011). There may beexceptions – firms able to carve out a competitive nichemarket regardless of overall trends. Alternately, while renewablepolicy in the 1970s and early 80s tied to energysecurity concerns fell with the price of oil, current policytied to climate change concerns may prove more permanent,since the climate problem will not disappear in thenear future. However, the success of California’s currentphase of green growth depends on its ability to maintainpolitical will and positive feedback over time – and howthe current policy experiments will play out is difficultto predict. The defeat of Prop. 23, which would have suspendedAB32, is one positive sign."However, the success of California’s current phase ofgreen growth depends on its ability to maintain politicalwill and positive feedback over time – and how thecurrent policy experiments will play out is difficult topredict"3.2 Suitability of technology to funding modelsVenture capital generally works best when it enters marketsthat are large and rapidly growing, with technologythat is scalable, non-capital-intensive, and which provideslarge and rapid profits. With the exception perhaps of size(the energy market is large, at 5 trillion dollars), cleantechholds up to none of these characteristics. Energytechnology, particularly generation, tends to be slow growing,slow and expensive to scale, and capital-intensive,with long-term investment horizons and conservative buyers(Hargaddon and Kenney 2011; Lecar 2011).In light of this, the tendency of early VC investmentin clean tech to ignore these limitations, making majorinvestments in renewable energy technologies ill-suitedto the VC model, seems odd. One possible explanationis that the availability of federal funding and loan guaranteeshas had a distortive effect, encouraging VCs topursue investments that might otherwise not make sense(and which remain unsuited to VC’s strengths). Largeinfusions of federal funding into the clean-tech industrymay thus have temporarily overcome these obstacles, butthe VC model could prove incompatible with clean-techdevelopment in the long term if it continues to pursuetechnological pathways not well suited to its strengths.However, it appears that there is something of a shiftunderway. As results come in from early rounds of investment,VC is in a “period of reassessment;” many areshifting their focus to more scalable, less capital-intensive,more rapidly profitable technologies such as efficiencytechnologies (Prabhakar 2011). This kind of learningwill be critical to making VC-led green growth successfulin the long-term. Below, we discuss the creation of newinvestment strategies.3.3 Creating new models and success strategiesAs VCs have struggled with the long investment timelines,high capital intensity, policy dependence, and low,slow returns of clean tech, many of the more diversifiedgeneral VC firms have begun to pull out of clean tech.2008 saw a significant reduction in clean tech investmentsfrom more diversified firms compared with theperiod between 2003 and 2008 (Moore 2011). However,the same period saw an increase in activity from cleantech-specializedVCs. This trend has led some to labelthe current period “Stage Two” in clean tech investment.These clean-tech-specific firms are prepared for the investmenthorizons and capital investments of the sectorand in some cases have adopted new investment models(Moore 2011). Rather than following projects to completionin the more traditional VC model, these firms areinstead focused on capturing a part of the clean tech supplychain. These strategies include either work on earlystage development that is then bought out, or by functioningin a model similar to hedge funds and with a focuson later stage development (Redman 2011).The clean tech VC industry has also witnessed the entranceof a number of large corporate players and smallerfamily funds. Corporate players include Hewlett Packard,GE, Sony, Google, Intel, IBM, Chevron, and CocaCola (among others). These large companies may provebetter suited to handle the capital intensity and long investmenthorizons of clean tech. Some of these investments58