Private firms hesitate over clean tech investments

As federal stimulus dollars for investment in renewable energy begin to dry up, will the private sector rush in to fill the void?

Maybe not.

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Venture capital investments in what the industry calls “clean tech” companies fell to $1.1 billion in the second quarter this year, a 44 percent decline from the second quarter of 2010, according to an analysis by the firm Ernst & Young. The number of deals involving clean-tech firms dropped 12 percent during the same period, according to a new analysis by the center-left think tank Third Way.

“The decline in funding for clean tech firms means there are fewer opportunities to create new technologies that are born in the United States,” said Joshua Freed, who directs the clean energy program at Third Way. Freed said “we risk losing out on” a global “clean energy market” that he thinks will eventually total $2.3 trillion.

Part of this drop stems from broader financial trends. Overall U.S. venture capital investment rebounded last year from 2009’s slump, but still totaled $22 billion, 26 percent below the 2007 level. That has translated into less funding for the nation’s start-up companies in general.

Some venture capital experts warn that trends in clean-tech investment are difficult to discern. “Investment flows are pretty choppy,” said Tim Carey, practice leader for U.S. clean tech at PricewaterhouseCoopers. Because biofuels and solar projects are capital intensive, he said, “quarterly trends in investment could vary pretty widely, just based on timing.”

Indeed, Third Way’s figure for clean-tech venture capital in the second quarter this year was still one of the four or five highest figures ever for venture capital investments in clean tech energy projects.

“Five, six years ago, there was a wave of VC investments coming into clean tech,” said Tim Newell, senior adviser to US Renewables Group, which has made 23 investments in renewable power and biofuel projects. “It was a wave of not only new capital but new investors. . . . Sectors get hot. That shakes out over time.”

But Freed worries that the level of venture capital investment in clean tech will worsen as the federal spigot for renewable-energy funding dries up, and with the recent flap over the now-bankrupt Solyndra — a solar manufacturer that had $535 million in federal loan guarantees — the spigot isn’t likely to be turned back on.

The loan guarantee program that provided backing to renewable energy projects expired Sept. 30. Part of the 2009 American Recovery and Reinvestment Act, it provided a little more than $16 billion of loan guarantees to 28 projects. The terms of those loan guarantees included demands for equity from private investors, which Freed said created a temporary spike in investment in the first two quarters of 2010.

The stimulus bill also provided $7.7 billion in cash under a tax credit provision to 15,125 renewable projects, which created 11.6 gigawatts of new capacity.

Even before the stimulus bill poured money into renewable energy grants and loan guarantees, there was a relatively modest amount of money devoted to what is broadly known as “clean technology” investments, industry experts say. Now, an abundance of cheap natural gas extracted from shale, the death of climate legislation and fierce competition between existing renewable energy companies have combined to make venture capital investors hesitate even more.