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Private Sector Investment in Renewable Energy -- a Good Business Decision?

Investments in renewable energy have received a great deal of attention in the last several months.  Between the media and political interest surrounding the Solyndra bankruptcy and the degree of support given to clean technologies by China's 12th Five Year Plan, investors in cleantech seem to be facing either a nuclear winter of uncertain duration or a pleasant spring in the East. 

Winter is often a good time for reflection and for building renewed energy for the upcoming spring. It is a time to contemplate the advice of Warren Buffet: "Be bold when others are fearful and fearful when others are bold." In that regard, now is a terrific time to be sitting on a pile of unused cash, as bargains are to be had and good times do lie ahead.

Those of us who invest in cleantech were originally motivated by one or more of the following: (i) concerns about climate change; (ii) concerns over secure access to energy resources; (iii) concerns about ongoing industrialization and GDP growth and that growth's impact on finite resources; and (iv) the natural need and desire to modernize the technologies involved in bringing us energy, water and valuable materials.

World events in the recent past have brought continuous support for every one of those motivations.  Between the oil disaster in the Gulf; the tsunami and nuclear disaster in Japan; the unrest in northern Africa; and the limitations on nuclear usage in Germany, Switzerland, Italy and Japan world events have borne out the validity of the concerns driving the cleantech agenda. Hedge fund investor Jeremy Grantham published a report outlining a fundamental paradigm shift in the availability and cost of critical resources and ever-mounting evidence of climate change. In fact, absent one major reality, cleantech investors could not have hoped for a better global climate for their companies.

Unfortunately, that one other reality is a big one: ongoing economic woes in the U.S. and Europe. The result was as if at least the G8 countries collectively said: "We'll get back to you about energy, water and materials, just as soon as we figure out a way to save ourselves out of our collective budget crises." 

The result has been a very significant cutback in government support for solar, wind and other forms of renewable energy both in Europe and in the U.S. These cutbacks came at almost the same time as China dramatically increased its lending for factories to build solar, wind and other renewables. This, in turn, resulted in dramatic price drops in solar panels and in the stock prices of almost all renewable energy generating businesses. So, while the first half of 2011 certainly looked hopeful with a number of successful renewable energy IPOs, the second half has more than given back those gains and introduced a decidedly nuclear-winter-like investment outlook, at least in the United States.

Those of us who make a living investing in the innovation economy have been here before. Investments in biotechnology took an almost five-year tailspin in the early 1990s (leading a number of investment entities to walk away from the sector), before turning the corner into a continuing 15-year upward trend. Similarly, investors caught up in the late 90s boom of internet and data communications stocks were handed their lunches in 2001 and 2002, only to see those sectors rebound continuously to the point where we are wondering if the lessons of the 2001 crash were really learned at all, at least with regard to some internet stocks. Even renewable energy has its prior periods of boom, bust and revival, look at the wind sector in the late 1980s, its downturn in the 1990s (leading to bankruptcies and massive consolidation) and its return to health post 2000.

In 2000, less than 1% of innovation finance went into energy, water, and materials-related investments. Today, more than 15% of venture capital goes into cleantech startups, and more than $40 billion of private venture capital has been invested in cleantech since 2002. The total dollars invested per year dipped after the 2008 financial crisis, but the cleantech deal count has climbed every year since 2002. As with prior new investment sectors, one can legitimately ask: has this been too much money too soon?

This - too much money too soon question - is one we ask at about this stage of virtually every wave of technological innovation. I, for one, see it differently: without an outpouring of creativity, entrepreneurial zeal and capital, little happens anywhere. Just because the early returns aren't good, doesn't mean that many of those early failures weren't a critical part of getting to real success, and that real success will ultimately more than compensate for the early failures (the rewards may, however, land in disparate hands). The collective degree of innovation that has taken place can no longer be reversed. Even though some now want to declare cleantech investing a failure, many of its inventions are beginning to take hold, from rooftop solar, to electric vehicles, to LED lighting, to the smart grid, to industrial biotechnology. Some, if not many, of cleantech's pioneering companies will one day be as much household words as Apple, Microsoft, Cisco, Google and Facebook.

It is important to recognize that cleantech is a long-term investment theme that is still in its teen (if not infant) years and is likely to play out in successive waves over the next 30-50 years. Any look at cleantech today should be juxtaposed against information technology in 1985 or biotechnology in 1990, a mere ten years into active venture financing of those respective technologies, and prior to their most active "investment heydays".

A straight index of all cleantech investments, if measured in aggregate today at the 10-year mark, would likely not have produced attractive returns to date. However, the majority of private venture capital investment in cleantech has taken place during just the last five years. There is also a wide range of experience and expertise among those who have made private cleantech investments to date. In some cases early investors have assessed technology poorly or have under-estimated capital intensity and scaling timelines; these investors have traded near-term returns for learning experiences.

Using a baseball analogy, for private cleantech investment thus far, there have been some hits, some strikeouts, and some runs scored, but it is far too early to "call the game." For the most part, we still don't even know what a real home run in cleantech looks like. We are still fairly early in the process of growing the first set of major global cleantech powerhouses, which serve some of the biggest industries on the planet. We have seen the birth and growth of some very meaningful companies in the wind, solar, and biofuels sectors, and yet these companies have by no means reached the zenith of their growth potential.

One need only look to the biofuels and renewable chemicals space to see the danger of "calling the game" too soon in cleantech markets. Just a few years ago, biofuels were seen by many as a failed sector within cleantech - a black hole of sunk cost that was unlikely to generate interesting returns. But leading chemical producers and other industrial product companies have become increasingly focused on their need to find renewable substitutes in order to avoid the price volatility of petrochemical inputs, driving significant interest in renewable chemical companies. The future for biofuels is also growing brighter and brighter, with policy shifts in both the United States and Europe putting in place greater support for renewable fuels (in addition to the support of regions like Brazil). We have seen a recent crop of successful public exit activity in both renewable chemicals and fuels - e.g. Amyris, Codexis, Gevo, Kior, Solazyme. These companies are still growing and for those investors who had the fortitude to keep investing past the supposed death of cellulosic fuels should find their way to attractive outcomes.

The last decade saw a period of increasing bullishness about all sorts of investment in cleantech, and recent events justify that a greater sense of fearfulness might have been wise. Equally true, however, is that history teaches us that now is the time when the masses are highly fearful and the last ten years of investing are beginning to mature, when the bold can make their fortunes by picking up bargains being left behind by the suddenly fearful masses. One can only hope that it is more than China's ruling elite that sees this reality and seizes upon it, for they surely have already signaled that move.

Stephan Dolezalek is a Managing Director and CleanTech Group Leader at VantagePoint Capital Partners. He has led VantagePoint's CleanTech investment group since its inception in 2002. VantagePoint manages more than $4 billion, with more than $1 billion dedicated to energy innovation and efficiency.


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