Who will win when it comes to developing clean energy technology?

VC-Investment-Factors.png

A series of high profile failures and strategic changes by cleantech companies raise questions about the whole sector.

Acquion energy, a maker of battery systems filed for bankruptcy in March 2017 after raising nearly $200 million from investors including Bill Gates.

Lightsail Energy, a startup co-founded by a charismatic prodigy, Danielle Fong, raised funds to develop compressed air storage energy systems, but is now changing tack to sell its containers to gas markets.

Solyandra a manufacturer of thin film solar cells, filed for bankruptcy in 2011, leaving the US Federal government liable for half a billion in a taxpayer funded loan.

An MIT study in 2016 found that more than half of the $25 billion invested in clean energy startups from 2006 to 2011 was lost, effectively result in a drying up of capital and investment to the sector.

What is going on here?

Many companies have still not figured out the economics of energy. The ones that will survive from now on will have to get their heads around some key factors.

1. Money

Cleantech companies often create new technologies, materials or processes.

These require investment in research and testing facilities, demonstration units and development installations or a track record in order to be accepted by consumers.

This means that they need a lot of money to invest in their infrastructure.

Many companies ran out of money before they created a sustainable income stream.

2. Time

Bringing a new cleantech product to market can takes months and years rather than days and weeks.

End user products such as battery packs have to go through rigorous testing, product certification and safety checks before they can be sold to the public.

The returns on individual technology projects for a customer are also likely to have paybacks that are longer than the typical corporate will accept: 5-6 years rather than 2 years.

As a result, the rates of return to investors in cleantech have been less than in other sectors traditionally backed by private / venture capital.

3: Competition

Electricity is a commodity. Makers of cleantech selling a system that creates electricity cannot control the price of the power from their systems.

They are, instead, forced to compete with existing alternatives in a commodity market.

Even in a cleantech market such as that for solar panels, new technologies struggle to compete against silicon panels.

This is not because the new technologies are not better. It’s just that the massive investment in silicon fabrication facilities worldwide has made the cost of silicon panels fall much faster than alternatives.

4: Policy

A huge amount of momentum in cleantech is driven by government policy.

Over several years, clean energy in Europe and the UK has been driven by subsidies.

In the US, tax treatment for energy from wind has resulted in large-scale developments by the likes of MidAmerican energy.

As we go forward, however, the new Trump administration wants a renaissance in oil and coal and will change policy to support those industries.

5: Buyers

Buyers and investors in cleantech companies are more likely to be existing utilities now rather than VC investors.

This is because the incumbents can add new technologies to their portfolio of existing assets rather than having to depend entirely on the new technology for income.

The energy sector has been around for a long time and change is slow. You need deep pockets to hang around

Summary

In summary, cleantech companies that have a core proposition built around a technology or process may struggle to create a sustainable income stream.

Larger systems are more economic. Scale succeeds.

TEsla has succeeded by going big fast, and its latest thing is to build the world’s biggest battery facility.

The sector will continue to need a supportive policy environment to move ahead, and we will need to wait and see what happens.

This is especially important in the US, given its size and innovative capacity.

Ultimately, the energy sector will be driven by large scale projects and policy – much like it has always been.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

w

Connecting to %s