The Risks of Venture Capital in Cleantech

We talk a lot about new energy opportunities and technology breakthroughs here on Earth2Tech, and less about the high risks involved in developing new cleantech markets and commercializing unproven technologies. But at the Berkeley-Stanford CleanTech Conference this week, there was a lot of discussion over the tensions between venture capitalists backing new technologies and the utilities, regulatory and industry groups in charge of bringing the clean power to the people.

Sue Kateley, executive director of the solar industry group California Solar Energy Industries Association, said she was concerned about venture capitalists flushing money into companies that promise to offer and install solar for free (no up-front costs) to consumers. “The free reckless solar thing can kill the industry,” Kately said, explaining that she saw similar business models that went under in the energy boom decades ago.

Utilities’ motivations can come into conflict with those of venture capitalists when it comes to the price of contracts for utility-scale renewable deals like solar thermal power plants. Roy Kuga, VP in the energy supply division of California utility PG&E, said that while the company would like to deliver the most competitive price for customers, venture-backed startups are looking for higher-priced contracts in order to deliver the kind of financial returns that venture firms want (startups Ausra, BrightSource, eSolar and Infinia are all venture-backed).

There are ways to negotiate these deals, Kuga said. He proposed that if a utility agrees to pay more for an early, risky clean technology, they should get some kind of financial benefit — perhaps a future contract at cheaper than the going market rate, or even royalties from deployment of the technology.

While complaining about the slow moves of utilities is a common theme, there are actually a lot of risks involved for utilities signing up early technologies, which could either prove to be obsolete in several years, or even worse, turn out not to be viable in terms of large-scale, long-term installation. PG&E, for example, already invested in some smart-metering, smart-grid technology, and is now reinvesting in newer, next-generation technology to upgrade the system.

Kuga said PG&E has talked to some 50 different solar companies, and finds it really hard to say who’s who in the market, and which companies will succeed and which ones won’t. “The guy with little backing might have the home-run technology,” he said.

It’s hard for utilities to tell which companies will make it big; it’s also hard for the venture capitalists. VC firms work off a different business model; they’ll invest in a dozen risky companies in the hopes that one of them will end up a hit. And when that happens, the rest of the portfolio can fall by the wayside. That means there’s going to be a lot of companies that don’t make it that are still trying to get utility-sized deals.

Joe Kastner, VP of solar implementation and operations at MMA Renewable Ventures, a wholly-owned subsidiary of MuniMae, said he’s seen a lot of VC-backed firms get into the business of solar financing through the power purchase agreement model (PPA), which sells fixed power rates amid rising energy costs. Kastner says he’s seen several PPA contracts done from venture-backed firms that are “borderline financeable.”

While risk is inevitable when it comes to cutting-edge technology, bad bets can cause problems for an emerging market. But when a market is as important as saving the planet from global warming, risk isn’t something that should be taken lightly.