Is the Gulf Oil Spill The Break That Cleantech Needs?

The disastrous BP Deepwater Horizon oil spill, with its rampant and inestimable destruction of ecosystems and livelihoods, would seem to be the kind of cultural and political event that would push clean technologies into the big leagues. Unfortunately – and strangely – the industry seems to have received only a mild bump.

“I think it… impacts people’s perception on offshore drilling, and has had a positive view on people’s enthusiasm for renewables,” said Sheeraz Haji, president of industry association The CleanTech Group. “I’m not sure that it’s this radical shift by any means.”

The most attention cleantech got since the spill was when President Obama spoke at VC-backed solar company Solyndra, saying that alternative energy would be a great thing to have. Advocates might have hoped for a stronger Administration push – and more importantly, more concrete financial support – of the giant industry, which is working on creating alternatives to the biofuels that have bought America’s energy industry and its political system.

But Obama’s choice to appear at Solyndra highlights why the cleantech industry still seems too green for its closeup: Too many technologies, expensive start-up costs and intense difficulties getting late-stage financing. Solyndra itself has had some trouble pulling together a $300 million IPO. Other solar companies planning IPOs, including Jinka Solar and Dinqo, have had similarly rough luck.

Haji noted that renewable energy has had the steepest drop in venture capital financing of any cleantech verticals. In Q3 2008, renewable energy took in 65% of all the venture capital investment in clean technology. According to the most recent numbers CleanTech Group aggregated in partnership with Deloitte, investment in renewable energy is down to only 35% of the total, even though overall cleantech investment jumped 83% in the first quarter of this year.

There are reasons that the renewable energy sector took the biggest hit in VC funding: It’s expensive, and results are not always dependable.

“I think you’ve had a flood of dollars, and pretty mixed results, in solar and biofuels where technologies were not ready. Some investors got burned in the past. Investors have absolutely underestimated the time and dollars required to mature these technologies and get them ticking,” Haji explained.

Entire renewable energy subsectors have failed. One notable example is ethanol, which was boosted by government subsidies but turned out to be impossible to actually make cost-effective as a substitute for fuel. (One problem: the high cost of delivery. Ethanol actually corroded the many of the pipes created to transport it).

Fragmentation is another issue. Clean technology is a vast sector, encompassing everything from wind to solar to algae to ethanol, and there are minute differences among the vast universe of companies that create and distribute the technologies. As far back as 2006, investment banks including Goldman Sachs, Morgan Stanley and Lehman Brothers invested their own money in various cleantech companies; the joke of the whole enterprise, however, was that it was so impossible to tell which companies would be the winners that the investment banks threw money at masses of them and then sat back to see where the dollars would stick.

Renewable energy is, in short, still in its startup phase although it has been around for over a decade. Moreover, these are the kinds of startups that have the capital-intensive needs of mature companies: They require both equity and debt financing.

Add to that the fact that markets tend to be unsupportive of relatively young companies that carry a lot of debt, no matter how pure their corporate mission or societal benefit. It’s a lesson that was notably drilled home in the February IPO of A123 systems, a maker of electric-car battery packs that had backing from both General Electric and Warren Buffett. After a big 50% pop in shares on the first day, A123’s shares feel steeply over the next four months as investors came to grip with the company’s long history of losses. “These are fairly high-risk ventures,” Haji said.

The outlook is not completely bleak, however. Some renewable energy technologies are further along than others: Haji says the wind sector, for instance, is the closest to getting off the ground (no pun intended), partly because of significant state and federal government incentives.

And while renewable energy investment has been hit by the recession, some cleantech sectors that focus on traditional industries appear to be doing well. According to Cleantech Group, the biggest investments went to electric car-related companies, including one giant investment in Better Place. Another area that has been popular is energy efficiency, or finding ways to cut energy costs of existing companies. Energy efficiency brings the fastest return on investment in cleantech, earning back its cost in just over a year, according to Haji.

Another cause for optimism about the industry’s financing future: Haji notes that private equity funds are now getting in the game. There may a silver lining around that oil spill yet.