Crossing the Cleantech Divide: Key Takeaways

On April 8-9, 2010, Silicon Valley Bank brought together 104 experts from the entrepreneurial, venture capital, energy,academic and policy worlds to discuss critical issues affecting the long term growth of the energy generation, storage and efficiency markets. Read more about our key takeaways from this set of invigorating, closed door discussions.

Meaningful innovation is occurring, and those involved are optimistic about the role technology can play in transforming our energy sector.

• Cleantech constituted a larger share of total venture investing in 2009 than in 2007
• Angel and seed investors are stepping up at the early stage
• Companies are innovating in terms of both technologies and business models
• Domestic deployment is critical to promote continued technological innovation and leadership

Capital flows are recovering from the downturn, but still are not sufficient to fund transformative change. 

• Investors see a market opportunity, but are wary of technology, regulatory, execution and competitive risks
• Investments increasingly are going into efficiency and storage, rather than generation 

• Debt financing — particularly for large-scale first commercial projects — remains scarce
• Liquidity outcomes have not yet come to the sector, which affects the flow of capital

While venture capital will play an important role in energy innovation, cleantech will not mirror other technology markets

• Public policy plays a significantly greater role, adding uncertainty, complexity and non-market based dynamics
• Market characteristics — capital intensity, long product lives, small customer base, the reliability imperative, the requirement to deliver at scale, product development and sales cycles, and incentive structures for incumbents (which are not conducive to innovation)  — look more like telecom than more successful venture-backed sectors
• In many sectors, cost-competitiveness and the ability to operate at scale may trump intellectual property as the primary differentiator
• No other venture-backed sector has faced such intense foreign competition so early in its development
• The reliability imperative will shape regulators’ and utilities’ openness to change and, hence, constrain the rate and scope of change
• Innovators are experimenting with new models to reduce capital intensity and address scale challenges, which should allow the role of venture to evolve over time
• Investors’ objectives will shape their targets and, hence, the pattern of privately funded innovation

Technologies, regulatory models and business models are in the early stages of development

• Smart metering is a cornerstone for the future energy marketplace, but in order to see broad scale consumer adoption, we’ll need to see significant advances in consumer appliance automation and a model in which usage does not lead to higher utility bills
• The need for affordable bulk electricity storage is becoming glaringly evident, but until we better understand the applications, technical requirements and value proposition it will be premature for regulators to structure incentives and tariffs 
• While VCs are optimistic about the prospect of “building a better mousetrap,” utility and industry experts are pessimistic about the prospects for widespread renewable energy deployment without impairing basic grid operations

While there is broad-based agreement that government needs to play a role in promoting cleantech innovation, the innovation sector is ambivalent about the role government can and should play.

• Current investment by the U.S. government and the utility sector does not reflect the energy sector’s size and importance
• Policy decisions shape utility decisions; change will begin with regulatory incentive structures
• Policies must create incentives to deploy new infrastructure. Without infrastructure, RPS investments will not meet future electricity demand in a meaningful way
• Meaningful energy sector evolution requires transformative, systemic change; unlike IT systems the grid is not “plug and play”
• The current political environment is not conducive to transformative policymaking
• Investors and entrepreneurs need clear policies that are stable over the time horizons of their investments, as current policies are too short-term and too subject to change
• While R&D funding is up, there is still a gap preventing innovations in the lab from moving into the marketplace
• Demand stimulation should be market-based and short-term to avoid creating a non-competitive U.S. industry
• It will be difficult for government to be effective in providing capital unless we can overcome the gap between political risks/imperatives and market needs
• Government shouldn’t pick winners and losers … a truism that’s much easier to say than do
• Policymakers and advocates need to be clearer about priorities and objectives:  different priorities (energy independence, economic growth, near term job creation, long term job creation, or climate change) dictate different decisions
• Policymakers must confront the delicate tension between fostering new clean energy resources while maintaining an essential public service, and give utilities incentives to do both
• As we move beyond the stimulus, government should not focus on near term job creation; doing so will prioritize incremental improvements over transformative changes
• Government can be most effective by funding R&D (directly or through tax credits), placing a price on carbon, providing appropriately structured capital where private sector sources are unavailable or inadequate, promoting demand and creating appropriate regulatory incentives and structures for energy generation, distribution, storage and efficiency
• Cleantech policies must build on the fundamentals of U.S. leadership: education (particularly math and science), immigration reform (to allow us to attract and keep the best non-U.S. workers), and financial markets reform (to reward real innovation)