Saturday, October 30, 2010

"The Herd Mentality: Uncertain Returns Raise Questions About the Payback for Cleantech Investment"

"The honest politician is one who when he is bought,
will stay bought."
Our Hero
Simon Cameron

The first recipient (April, 2007) of the prestigious "Climateer: Our Hero" award,
Sen. Simon Cameron, Republican and Democrat of Pennsylvania.

Just making the point that if your business model depends on politicians, you'd best bet on dependable politicians. Or stock up on Depends.

From Knowledge@Wharton:
Using tax credits, low-interest loans and grants, the Obama Administration plans to invest more than $50 billion in electric vehicles, renewable energy and other clean technology -- or "cleantech" -- ventures by the end of next year, reports Bloomberg BusinessWeek magazine. Such huge, unprecedented government spending is also encouraging private capital to continue flowing into the sector, not least because many federal programs -- which include rebates, grants and loan guarantees -- require private matching funds. The most recent example of investor interest was Google's announcement last week that it will spend $200 million on a transmission project to harvest electricity from wind farms off the mid-Atlantic coast. The project is expected to cost $5 billion overall.

As a result, total cleantech venture investment in North America, Europe, India and China between January and September this year was $5.7 billion, slightly up from the $5.6 billion invested in all of 2009, according to the Cleantech Group, a research and networking company.

But to what extent is today's fast-paced investment in cleantech a victim of irrational exuberance and the herd mentality often associated with venture capitalism? Quite a lot, say experts at Wharton and in the larger investment community, who also warn that the flurry of activity is no guarantee that cleantech investment will pay off as handsomely as some predict. "There's a danger of 'faddishness' as people chase what they perceive to be the next big thing," says Eric Orts, Wharton professor of legal studies and business ethics. "There could be a lot of money chasing not as many good ideas."

This isn't just a concern in the U.S. China, for example, is also "priming the pump" with a host of subsidies of its own, he says. These include $15 billion for a number of electric car pilot projects, and various rebates to individual consumers when they make green purchases. According to New York Times columnist Thomas Friedman, "China Inc. just named its dream team of 16 state-owned enterprises to move China off oil and into the next industrial growth engine: electric cars." As other countries hop on the bandwagon, Orts -- who is also director of Wharton's Initiative for Global Environmental Leadership -- wonders about the relative strength of the business cases underpinning all the new cleantech investments.

'The Dirty Stuff'
Experts also note that subsidies shouldn't be the only way governments can support cleantech. For instance, given the widespread outrage over the Gulf of Mexico oil spill, the timing could be right for legislators to increase taxes on oil and coal. "You tax the dirty stuff so the clean stuff has an automatic pricing advantage," says Orts. But he acknowledges the Herculean task of getting such legislation approved given upcoming mid-term elections and potentially heavy lobbying on Capitol Hill.

That doesn't mean discussions should stop there, however, notes Lise Dondy, president of the Connecticut Clean Energy Fund, which promotes clean energy development on behalf of state utility rate payers. "This country has not taken a stand on carbon, and unless you can put a price on carbon in some way, renewables end up dependent on those subsidies," she says. "It's anathema to investors not to have a consistent policy over the long term."

What's more, she points out, "subsidies come and go." A case in point: the federal income tax credit (of up to $2,000) that applies to 50% of an electric car charger purchase, which expires December 31. With lame-duck House and Senate sessions starting in November, it is unlikely that the tax break will be renewed, which could potentially be a heavy blow to the country's nascent electric vehicles development.
Raffi Amit, Wharton professor of entrepreneurship, makes the point that cleantech startups -- unlike, say, new Internet ventures -- "require large amounts of capital before they yield a return for investors.... When fixed costs are very high, it presents a different level of risk." Nonetheless, cleantech investments are tantalizing, he says, because "the return is enormous if some of these investments pan out. There is no doubt that we'll be making a gradual change from fossil fuels to wind, sun and water."

Earth, Wind, No Fire
Last year, 10% of electricity consumed in the U.S. was generated by renewable sources. The U.S. Energy Information Administration (EIA) of the Department of Energy projects that the amount will increase to 17% in the next 25 years. It also forecasts a 41% increase in U.S. non-hydro renewable electricity generation between 2008 and 2035, while installed wind energy capacity grows rapidly, more than doubling between 2008 and 2013, to around 50 gigawatts. Meanwhile, the American Solar Energy Society says that grid-connected solar power -- having grown 40%, to 435 megawatts, in 2009 from the previous year -- could increase between 50% and 100% this year alone....MORE