Everything is relative. In the realm of financial matters, this extends to poverty – for some, poverty is equated to starvation. For others, it constitutes an inability to live a certain lifestyle. But poverty can exist beyond the simple realm of people and money, extending to corporations and finite resources. And within the cleantech industry, increasing the access to capital of one is associated with reducing energy poverty within another.
Access to funding for clean technology firms, in this case focusing on clean energy technology developers and providers, has gone through peaks and valleys in the 21st century. A venture-capital darling as recently as 2006, clean energy attracted $1.75B USD in the first year of it’s gold rush, fueled by rising fossil fuel prices and increased awareness of environmental concerns. But within five years, investment into clean energy had taken a steep nosedive, with over half of the $25B USD in investment accrued in investment having been lost. As with any investment darling, clean energy fell victim of a shifting climate where, amongst other factors, natural gas prices plunged and the cheap credit available before the 2008 crash dried up.
But an argument can be made that clean energy was never an appropriate investment vehicle for venture capital in the first place. Venture capital firms do not specialize in technologies with high capital requirements, long lead times for development and that are generally non-competitive in large-scale commodity markets when deployed at current scale – all of which readily describe firms within clean energy technology sector. VC should instead focus on investment into other cleantech avenues, such as software solutions or medical innovations.
So what does this mean for investment into clean energy? Surely the entire industry charged with saving the world from the smog of a fossil fuel future cannot be written off as a low-grade investment. The reality is that alternative funding models do exist; public sector capital does not possess the time or capital constraints imposed upon VCs, and may be better suited for patience as development occurs.
Venture capital firms may also fail to provide the additional supports required by any start-up; building capacity and providing access to resources is just as crucial to effective commercialization and scaling as access to cheap capital, and corporations who purchase individual firms and their proprietary technologies can provide both access to capital and capacity-development services. Outright acquisition does undermine the notion of the start-up, though not of developing the clean energy technology sector as a whole; a trade-off that may be acceptable for some.
A final model is for governments to collaboratively partner with private-sector firms, or provide supporting services that create more attractive investment vehicles for VCs. Lead time for technology development can be shrunk through capacity-building and investment directed into research, much the same as high-capital requirements can be leveraged into development projects that increase valuations and draw additional attention from investors.
Much like the energy system itself, any solution developed will require a mix of partners to supply capital and push to generate the sought-after demand. Otherwise, if relegated to the governance of the market, the clean energy sector may find itself in the same trap as it is attempting to solve: one where poverty is exacerbated by poor policy management. And it is unlikely that the degree to which that poverty is relative will matter to those involved.
Reference: Gaddy, Sivaram & O’Sullivan, 2016. Venture Capital and Cleantech: The Wrong Model for Clean Energy Innovation. MIT Energy Initiative. Cambridge, MA. Massachusetts Institute of Technology.