What’s the best way to finance new energy technologies?

[USA] As diplomats from 200 nations gather this week in Marrakesh, Morocco, for U.N.-sponsored global climate talks, one likely topic of discussion will be better, cleaner and lower-cost energy technologies.

Raising financial support for new energy technologies is a major roadblock, particularly as private funding has declined. U.S. venture-capital equity financing for new energy and other clean technologies has fallen to $2.2 billion this year through September, from $5.7 billion in 2011, according to Dow Jones VentureSource.

To explore the challenge of financing new energy technologies, we spoke with Severin Borenstein, E.T. Grether chair in business administration and public policy at the University of California at Berkeley’s Haas School of Business; Jim Rogers, former chairman and chief executive of Duke Energy Corp.; and Jesse Pichel, managing director at Roth Capital Partners in New York. Here are edited excerpts.

MR. BORENSTEIN: The good news has been the great technological progress in solar photovoltaic cells, wind power and storage, which has brought renewable costs way down. But the bad news for renewables has been the fracking revolution that has lowered natural-gas and oil prices to less than half the consensus forecasts of a decade ago. Innovative approaches to financing are important, but they can’t overcome the tide of fundamentals.

MR. ROGERS: Venture-capital and private-equity investment of clean-tech startups is diminished. There are multiple approaches emerging to take their place. Some are similar to Bill Gates’s bold approach of putting billions of dollars into looking for big solutions. There is another approach, in which organizations or investment groups focus more on helping startups scale their technology. As a consequence of scaling it, it attracts new investment. Broadscale Group [an investment firm working with energy and industrial companies and strategic partners] is an example of this.

MR. PICHEL: Most VCs who got into the clean-tech sector early had poor performance, which for all practical purposes forced them out of the sector. Or they have become much more discerning, which means the clean-tech companies they will look at fall into a very small universe.

Now, we have seen the VC marketplace mature with certain VC clean-tech specialists rising to the top. There are a dozen VCs that have cut teeth in the sector and have developed an expertise. They are shortlisted for any new investment in the sector. Again, these groups are much more discerning and there are fewer of them, which means fewer companies can get VC funding.

We have seen the advent of strategic VCs that are backed by utility, fossil-fuel or energy-equipment global conglomerates. Some of these strategic VCs in the advanced-energy sector are backed by multiple strategic limited partners. This has two advantages: The strategic VC can leverage the expertise of the limited partners to gain confidence around an investment. And the limited partners can become early-adoption customers or partners for the company.

Also, we are seeing more socially responsible investing, or SRI, impact investing and green initiatives. We have seen numerous billionaires start SRI/green funds. Many of these executives are from the technology, industrial and fossil-fuel arenas. These investors do not require the high rates of return witnessed from traditional VCs. These investors are often motivated by the challenge and impact from such investment, and not the short-term gain in value. These are often the best investors a startup company can have.

Finally, many of the new strategic investors are from China, who are increasingly putting money to work, especially if there is an application in China.

Natural gas

WSJ: Are cheap oil and gas making it difficult to finance new, cleaner energy technologies?

MR. ROGERS: With cheap, available gas, the power industry has switched from coal to gas. From 2005-2015 the power sector reduced its carbon emissions by 20% primarily due to this shift. Would there have been a similar switch so soon, with any of the clean technologies on the horizon today? Gas made electricity cleaner and cheaper, and did it really fast.

MR. BORENSTEIN: Cheap natural gas has lowered electricity prices and has been the primary driver of reduced coal consumption. That has probably reduced GHG emissions, though the most recent research on fugitive emissions [leaking natural gas] suggests the gains may be significantly smaller than we have been thinking.

In any case, the role of natural gas is limited when it comes to reducing world-wide GHG emissions. We need to move to low- or zero-GHG energy sources rapidly, which could mean wind and solar, but eventually could also mean next-generation nuclear power, some tidal/wave power technologies that are still in their infancy, and carbon capture and sequestration, which could be combined with coal or natural-gas power plants to vastly reduce their emissions.

Energy mandates?

WSJ: Should the government intervene with financial help or mandates for energy companies to adopt new technologies? California is requiring its three largest utilities to buy or contract for 1,325 megawatts of grid energy storage by 2020, and other states are considering similar measures.

MR. BORENSTEIN: We should subsidize new energy sources and in some cases even mandate certain sources, along with pricing greenhouse gases. Those are not conflicting policies, they are complementary policies.

We need to create cost-effective, low-carbon energy, and that means experimenting. We should support new technologies with the goal of their spreading to the developing world. Any technology we subsidize should be subject to that test: Is this something that the developing world is plausibly going to follow?

I would argue that rooftop solar does not meet that test. The panels have gotten much cheaper, but it’s hard to see how the developing world is ever going to find it cost-effective to put solar panels on individual homes.

MR. ROGERS: There needs to be an increase in government research-and-development spending, but there are limits, given the low-growth environment we’re in. You can’t expect much there. You could see increased R&D from universities, but even there, it’s limited by the amount of grants that are made to universities from the government, foundations or high-net-worth families. We talk about climate change, but we’re not investing to reduce the carbon footprint of our electricity sector or our transportation sector. Nature could provide 30% to 40% of the solution to the carbon emissions in our environment, through things such as reforestation.

There is no great sense of urgency to develop new technologies that produce low-carbon electricity to consumers that’s affordable and drives our economy.

MR. PICHEL: The fossil industry has enjoyed favorable government policy and subsidies for decades, and that continues today. Renewables are still not competing on a level playing field in terms of policy support. In addition, fossils emit carbon pollution, and their extraction methods have a negative environmental profile, thus fossils have a cost to society that is not properly reflected. A renewable electron is pollution-free, sustainable, anti-inflationary and is inherently worth more than a fossil electron, and that should be priced correctly in U.S. policy.

Given the steep cost-reduction curves of renewables and the strategic national benefit of having a lower-cost, sustainable, more diversified, and distributed power complex, it would behoove the U.S. to support the industry with R&D and deployment mandates. It’s in our national interest.

MR. BORENSTEIN: When you run experiments, at some point, some of those experiments have to be declared failures. You can’t just keep pouring money into a technology that isn’t going to work. We’re supporting carbon capture and storage right now, and we should be giving it a try. At some point, if it doesn’t make progress, you pull the plug.

Likewise, with second-generation biofuels. There are lots of approaches there: algae grown indoors, algae grown outdoors. All of those technologies deserve experimentation. Some of those are not going to work out and when they don’t, we have to have the willingness to step up and pull the plug.

These can’t be blank checks, because there isn’t enough money for that. When you run experiments, you have to recognize that some of them will fail. It’s a tough call, knowing when to invest and when to pull the plug.

MR. PICHEL: The German model [of subsidizing renewable energy] seemed to work, and it brought down the level of subsidy as the cost came out. Once industry volumes reached a certain level, the subsidies ratcheted down. The idea was to efficiently subsidize the industry.

America gives a straight 30% off [in the form of a federal investment-tax credit], and that really did not bring down the costs as quickly as in other countries. The tax equity has a cost, and the accounting treatment is also complex. You haven’t really seen as many corporations invest in renewable energy through tax credits as I would have hoped because it’s complicated and there’s impact to the balance sheet and income statement for the companies that do it.

If it were simpler to invest in clean energy, there would be more investment.


Photo: For new energy technologies, financing has become a major roadblock. PHOTO: CHRIS BOSWELL/GETTY IMAGES

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