Cleantech VCs wait for fog to lift after 'chilling effect' of Solyndra

The National Venture Capital Association and Thomson Reuters this month reported that the last quarter marked the lowest amount of venture capital raised in the US since Q3 of 2003.

Cleantech and life sciences lost out to a surge of investments in the software sector, which enjoyed its strongest quarter in almost 10 years, according to the MoneyTree report. The software industry received $2bn while the cleantech sector saw a 13% drop in dollars to $891m in Q3 from the second quarter when $1bn was invested. The number of deals completed in the third quarter also declined.

Another 13 of the 17 sectors monitored by MoneyTree have all been affected by market volatility: telecommunications; semiconductors; media and entertainment all suffered. But cleantech is likely to take a further hit as seed stage funding – critical in maintaining the momentum in R&D — also fell 56%, with $179 million invested across 89 deals in Q3.

More established cleantech companies fared better, with thin film solar manufacturer Heliovolt, based in Austin, Texas, raising $85m - the 4th largest US VC investment in Q3. And a shift of focus to energy storage benefited fuel cell manufacturer ClearEdge Power with $73.5m in later stage funding from Kohlberg Ventures and other undisclosed investors.

Stephan Dolezalek from VantagePoint said that although Q3 2011 was an improvement on last year, there were three macro factors driving the slowdown in cleantech investments: closure of the IPO window, solar panel prices and the "chilling effect" of Solyndra's collapse.

"On a broader view there are really three macro factors that are affecting cleantech investors. The first would be the closing of the IPO window and some concern that that window might not reopen before 2012 elections depending on what happens to budget issues in Europe and the US. So that window opening or not is of significant concern to investors.

"Number two, we’ve had a very obvious and ongoing drop in panel prices that’s based in large part on the strong levels of support that the Chinese government is giving their solar and wind industries. But obviously that wreaks some havoc with the trading multiples of companies both here in the US and Europe.

"Finally, we’ve had the chilling effect of the political battle over Solyndra. When you take all of those combined into account, I would argue that if you put enough fog on the road investors in cleantech have largely slowed down to try to see what happens when the fog lifts."

He suggested that the current political climate in the US was not helping either, with industries in China and the EU better able to whether the economic storms because of long-term national and regional targets.

"Despite the European financial crisis, clean tech everywhere but the US seems to be strong. In Europe it is supported by both the liberal and conservative parties it doesn’t have quite the same Republican/Democratic split that we see here in the US. And from China’s 12th five-year plan, we obviously see that they are supporting clean tech in an extraordinary way and we’re also seeing strong support in Brazil, Australia and India. So the US is probably the one market in which we have a fair amount of pull back."

US military on frontline of energy strategy to save money and lives

President Barack Obama may be losing his argument for clean energy in Congress, but he has already won hearts and minds in the US military which is rapidly reducing its carbon bootprint from the barracks to the battlefield.

Major General Anthony Jackson spoke earlier this month of the importance of removing "the vice-like grip of oil from our necks" at a Pew Charitable Trusts forum to promote its new report on energy security at Stanford University.

The Department of Defense is the world's largest single consumer of energy, guzzling 300,000 barrels of oil a day. The US military consumed as much energy as Nigeria, according to this Post-Carbon Institute Energy Bulletin from 2007.

But in the past four years, DoD clean energy investments in biofuels, solar technology and advanced batteries have increased 200%, from $400m to $1.2bn. And the military is likely to clean up its operations even further.

Last year the DoD launched Energy for the Warfighter: Operational Energy Strategy "to ensure that the armed forces will have the energy resources they require to meet 21st century challenges". 

“Lightening the load” for those with boots on the ground, reducing energy demand and dependence on foreign oil are they key goals.

Batteries account for around 20% of the weight of a soldier's pack and a typical infantry battalion uses $150,000 worth of batteries a year, says the Warfighter report.

On the podium at Stanford, Maj Gen Jackson unfolded a sheet of PV panels that packs down to the size of a slim laptop case and can be used to recharge equipment.

Meanwhile, reducing energy costs are critical. In 2010, the DoD consumed nearly 5 billion gallons of petroleum in military operations, at a cost of $13.2bn an increase of 255% over 1997 prices.

But more importantly was the cost to lives at the frontline, said Maj Gen Jackson

In 2007 in Iraq and Afghanistan, a total of more than 3,000 Army personnel and contractors were wounded or killed in action from attacks on fuel and water resupply convoys.

He said: "I know the cost of [oil]. I know it up close and personal if you have never seen the mixture of blood and sand it's a harsh purple on the desert floor.

"There is an urgent need for our nation to lead the world in renewables and conservation and getting a grip on the strategic vice that one three letter word has around our neck. For every 50 trucks we put on the road someone is killed or loses a limb."

US Navy secretary Ray Mabus said something similar at the National Clean Energy Conference in August.

"We buy too much fossil fuel energy from potentially or already volatile places on earth. We give those countries a say on whether those aircraft fly or ships sail or round vehicle operate. There are great strategic reasons for moving away from fossil fuels.

"Every time the cost of a barrel of oil goes up by a dollar it costs the US navy $31m in extra fuel costs. When the Libya crisis began the navy faced a fuel bill increase of over $1.5bn.

"We import gas and water into Afghanistan more than anything. For every 50 convoys of gas we lose one marine – that is too high a price to pay for fuel."

He said that the Navy aimed to cut its dependence on oil for its aircraft and seacraft by 50% by investing in advanced biofuels, of the sort that cleantech startups like Solazyme produce. The US Navy's fleet of aircraft now all been tested with biofuels dropped in.

Despite the military's plans to develop "greener" tanks with BAE Systems, Jackson admitted that he would still drive his Corvette, because "compared to an Abrams tank which does .8mpg, I don't feel too bad."

Jackson, who commands marine installations on the western United States, said energy demand had already been cut by 37% in response to a 50% target by 2030. "We'll be there by 2015. It's not going to be anything for us," he said.

A metering pilot showed soldiers on base how much electricity they were using - if they used more than their neighbours, they'd get a bill, if they used less they'd get a cheque. This reduced energy demand by 30-40%, he said.

He also mentioned that one civilian employee had started to sell tin, aluminim cardboard on a commodities exchange - the proceeds of which now covers the costs of libraries and other facilities.

The Wounded Warrior Barracks at Camp Pendleton in California was the first LEED Platinum Certified building.

The Marine Corps had also installed solar panels and a 1.5MW wind turbine that provides 40% - 50% of the electricity at a barracks in Barstow, southern California, said Jackson. He wants to put another 1.5MW wind turbine at Barstow, but Southern California Edison hadn't worked out a way to "absorb" excess electricity into the grid.

"The utility companies have not yet learned to absorb what we're doing in renewables so I have to hold off until Southern California Edison figures [it]. It will not only cover the needs of the base but it will put back into the grid. We're ready to make this base net zero so we're negotiating."

Maybe Jackson would like to join the battle with the California Public Utilities Commission and utilities over decent feed in tariffs. Reading this UC Berkeley study on the economic (energy security?) benefits, should get Jackson off to a good start.

Jackson and Mabus may be acting on orders from their commander in chief, but they have certainly taken up this mission with great enthusiasm. Jackson said that when he once testified in front of the California Senate select committee for energy and security he was asked how he got people to meet the clean energy targets. "It's pretty easy senator I just tell them," he said. "Everyone in my command knows my intent."

If only Congress were that easy to command and control for the president. But the president's military powers are impossible to replicate politically. But it's one of the smarter differences between the UK and US political systems.

While Republicans bicker between themselves and with Democrats over spending cuts and the budget deficit, real progress continues by stealth where it can. Aside from Republican assaults on the EPA, powerful binding regulations on CAFE standards were agreed with automakers earlier this year. And in California, the Air Resources Board has exemplified stakeholder rule making and participatory democracy at its best with the development of the state's cap and trade regulations.

Jackson's clean energy mission seems to sit well with him. He said: "We like it when the president comes in and lays it out. We know this is important to the current administration.

But the ripple effect goes beyond what the Obama administration wants. Jackson's wife was not under orders when she insisted on buying a Prius and installing solar PV at home.

There may be an even more powerful effect of the military's campaign to reduce energy demand and dependence on foreign imports.

The impact of the DoD procurement clout on the growth of the semiconductor industry is well documented, and the internet was developed from the military's Arpanet funded by Defense Advanced Research Projects Agency (DARPA) in the late 1960s.

Today, the DoD's Environmental Security Technology Certification Program aims to demonstrate innovative energy technology and the military appears to be partially filling the void in the absence of policy or direct subsidies such as European-style feed in tariffs to create a sustainable renewable energy industry.

Solazyme already has large contracts with the US military worth $8bn to deliver algal biofuels. Bob Florence, VP of marketing and business development at Solazyme said: "The Navy's investment has been very helpful in scaling us. Thanks to these investments we're moving from an R&D company to a commercial entity. What we're making for the Navy is diesel fuel [like] you'd buy at a commercial pump. The good news is [they] don't see any difference when they run their ships on our fuel. We want to drop in to the existing structure, we don't want to reinvent the whole entire global fuel supply."

Skyline Solar from Mountain View, California, has a $1.58m contract with the DoD to demonstrate its high-gain solar plants at military bases in the south-west.

Lee Burrows, managing director at VantagePoint venture capital fund national energy policy was essential aligning policy with technology goals: "What the military can do is look at a timeframe for tech that is 10 or 15 years out. Elected officials typically have two to four years and corporations have the next earnings call as their timeframe. The critical part here for DoD and DOE is that they are enabling the technology of the future to help the country gain its long-term goals. We need to have a goal set that we can aim at."

While the US military fights a clean energy war, the question remains whether civilians in Congress can deploy an effective strategy to ensure energy security into the future - and to unshackle the "vice" of oil imports from the necks of US consumers and American soldiers on the frontline.

California cap and trade will 'attract lion's share of cleantech investment'

Mary Nichols yesterday made much ado about the impact that California's cap and trade scheme would have on the development of clean technology.

The chairwoman of the California Air Resources Board yesterday said in her opening remarks: "The programme sends a clear signal to the global investment community that an investment in California's clean technology and clean energy industries will be rewarded, maintaining our status as a magnet for cleantech investment.

"Cap and trade sends a policy signal to the market and guarantees that California will continue to attract the lion's share of investment in clean technology."

Unlike last December's meeting, when there were less than a handful of opposing voices, opponents of cap and trade from steel unions and oil refineries attended in great numbers.

BP America and the Western States Petroleum Association were among those who lined up for their 3 minutes in front of the board to complain about the "10% haircut" for oil refineries because the benchmarking gives free allocation for only up to 90% of emissions.

Carb has this year introduced a best in class benchmarking system so that at least one installation in each sector will be allocated 100% allowances. While examples where given for the cement and glass sectors, perhaps many of California's refineries fear they will flunk the class, even though as Carb staff pointed out the benchmarking in the EU system had been set at a more "ambitious level".

Chris Riley, who described himself as a "concerned citizen employed by Valero" which attempted to spike the cap and trade scheme last year through the ballot box with prop 23.

"I'm concerned about how these emission taxes and in general this will have impacts on our families and higher energy costs that will be incurred consequently what will happen to our jobs."

Lisa Bowman, a ConocoPhillips employee, made an impassioned testimony about how her company had allowed her as a single mother to bring up her children without government support. She asked Carb for "leeway" to meet the regulations on behalf of her employer.

Enough individual ConocoPhillips employees followed to repeat their concerns about job losses to suggest their presence was not a spontaneous response.

As Carb's charts for mandatory GHG reporting clearly show, refineries are the biggest polluters in the state. California's stringent regulations on refineries makes building a new installation prohibitively expensive, while the refineries themselves claim that they are already working to optimal levels of efficiency. But refineries run a double accounting system for carbon emissions by producing transportation fuels, thereby being involved in the first and second highest source of emissions in the state and reductions are not going to be easy, the refiners say.

Mike Wang, of the Western States Petroleum Association, said: "Our facilities are the cleanest in the world and they produce the cleanest products. What you are hearing from us is can we choose alternatives to the 10% reductions in allocations. Can we achieve the goals of AB32 more easily?"

So far, Carb's rules have been subject to legal challenges from environmentalists, not industry. But that may change once implementation approaches and it will be interesting to see how Californian oil refineries respond to mandates designed to force innovation.

In the EU, the Emissions Trading System is also designed to be a principal driver of the deployment of low carbon technology. The NER300 assists with large-scale demonstration of low carbon energy technologies in Europe and bridging finance also comes from the European Economic Recovery Programme, the Strategic Energy Technology Plan and the Global Energy Efficiency and Renewable Energy Fund.

A report published soon after the EU ETS began showed that anticipation of mandatory emission limits can drive innovation. The report included a case study at the Shell Pernis Refinery in Rotterdam, Europe's largest refinery, where engineers have been capturing 170,000 tonnes of CO2 a year since 2005. The CO2 waste is converted into fertilizer, avoiding the need to import and burn natural gas to generate fertilizer. It's a double accounting benefit from fossil fuel industry.

But Europe's power sector is the great polluter not refineries, and account for 60% of EU ETS emissions. Electricity generation in California produces 20% emissions in the state which mostly burns natural gas to produce electricity.

California is clearly a leader in many market segments of the broad category of cleantech. It already appears to dominate the solar market in the US. Some of this success can be attributed to the state's Renewable Portfolio Standard - the most aggressive (and mandated) target in the US. But it means the state's the power sector is primed for innovation in energy efficiency and cleaner generation.

And the transportation sector could also flourish as the low-carbon automotive industry has followed the money to the west coast where the bulk of VC capital has come from to fund Tesla and Fisker (it also helps that VCs are a perfect test market for the upmarket electric vehicles).

The California Global Warming Solutions Act of 2006 acknowledged its position and potential as a cleantech leader and ordered the Economic and Technology Advancement Advisory Committee was created under to advise Carb on "identifying new technologies… that will assist in the reduction of greenhouse gas emissions."

But yesterday it took 79 testimonies and seven hours to return to the subject of stimulating cleantech when board member, Daniel Sperling, asked whether it would be a good idea for Carb to employ a chief technology officer who could monitor whether the scheme was incentivising innovations in energy efficiency and clean tech. Presumably this person would sit alongside ETAAC's chairman, Alan Lloyd.

Carb staff agreed to look into this "interesting issue" raised by Sperling.

But a report from the Fraunhofer Institute in Germany last year indicated that the connection between cleantech development and climate policies such as carbon trading is not so clear cut.

The authors found that: "the innovation impact of the EU ETS has remained limited so far because of the scheme’s initial lack in stringency and predictability and the relatively greater importance of context factors. … Our analysis suggests that the EU ETS by itself may not provide sufficient incentives for fundamental changes in corporate climate innovation activities at a level adequate for reaching political long-term targets."

Recent low carbon prices of around €10 have hardly helped to stimulate behaviour change and innovation in the EU.

Metrics will be vital to California's scheme but carbon reductions shouldn't be the only thing Carb measures - progress in cleantech innovation and job creation will be vital too.

But new and unforeseen opportunities would inevitably arise from the cap and trade scheme - along with the unintended negative consequences, Nichols said yesterday.

"When the nation is ready to address the growing danger of climate change as I believe it must and it will California's climate programme will serve as the model for a national programme. We believe that if we implement a cap and trade programme in California other states, the federal government and other nations will join with us."