Global ChangeIntersection of Nature and Culture

What are green energy investors waiting for?

Tuesday, November 17th, 2009

If Al Gore and others are correct that we already have available the kinds of renewable energy technology needed to decarbonize the economy, why is it taking so long?  As we saw in an earlier post, part of the answer is carbon lock in resulting from our modern political economy.

Another way to examine this problem is to ask what motivates the investment community, particularly venture capitalists.  What kinds of policies will entice these folks to plow $ billions into clean energy, and which ones will keep them on the sidelines?

In the current issue^1,2 of Energy Policy, Mary Jean Buerer and Rolf Wuestenhagen examine this question by interviewing 60 senior fund managers around the world. They distinguished between policies that incentivized (1) “technology push”—forces like government funded research and development to increase the supply of renewable energy technology and (2) “technology pull”—things that increase the demand for green energy and the ability for businesses to provide it.

What did they find?

They asked the venture capital fund managers to rank the effectiveness of policies in terms of their ability to stimulate investment:  from 1 (very ineffective) to 5 (very effective).  Here’s what they found for each category, ranked from highest to lowest effectiveness.

I. Technology push options (average score in parenthesis):

Better than average:

• Government demonstration grants (3.75)
• Public R&D (3.39)
• Subsidies for manufacturing facilities (3.21)
• Investment subsidies (3.21)
• Private R&D
• Tax breaks for entrepreneurs (3.05)

Worse than average:

• Tax breaks for investors (2.75)
• Incubators (2.71)
• Government investment on private venture capital (2.67)
• Soft support measures (e.g., training entrepreneurs how to gain access to venture capital) (2.33)
• Government-run venture capital funds (2.29)

II. Technology pull options (average score in parenthesis):

Better than average:

• Feed-in tariffs (4.16) (explained more below)
• Reduction of fossil fuel subsidies (3.56)
• Technology performance standards (3.54)
• Residential and commercial tax credits (3.52)
• Renewable fuel standards (3.44)
• CO₂ trading (3.38)
• Public procurement (3.38)
• Production tax credit (3.35)
• CO₂ tax (3.35)
• Renewable portfolio standards (3.27)
• Renewable certificate trading (3.22)
• Clean development mechanism (3.00)

A feed-in tariff is when the government mandates that utility (e.g., electricity) companies purchase a fraction of their power as clean energy.  Because renewables have traditionally cost more than conventional fossil fuels (so-called above market rates), this means utilities are forced to pay a premium negotiated by the government. The utilities, in turn, pass this cost to all of their customers in the form of higher monthly bills.  The end result is that a utility must supply, say, 20-30% renewable energy, and electric bills go up a little bit for each customer.

This is the favorite choice of venture capitalists because it is well tested in Europe, and it gets renewable energy demand and supply up and running. And because the cost imposed on consumers is relatively benign, there’s not a lot of political backlash.

As you can see, the venture capitalists preferred technology pull approaches that spur demand for green energy.  All of these options were rated more effective than average and are therefore more likely to spur the flow of money needed to make it happen.  The most effective technology push policies were demonstration grants (e.g., proof of concept) and government investment in public research and development.

In contrast, they tended to dislike tax breaks for investors as well as government management of venture capital.

Also, when asked to rank what they viewed to be the main drivers spurring development of the clean energy industry, fund managers said this:

1. competitive advantage (most important)
2. security of energy supply
3. climate change
4. air pollution (least important)

Venture capitalists also stressed the importance of policy consistency—one of the largest hangups with how the U.S. government has dealt with renewable energy.  Renewable energy funding often lasts for a few years and then expires, requiring congressional reauthorization.  This makes renewable energy subject to the attack of fossil fuel industry, deficit hawks, and other political whims.  What’s needed is a strong signal from the federal government that funding will be significant and lasting for a decade or more.

Bottom line:

Climate communication makes another appearance: Note that the issue of economics is most salient to venture capitalists (duh), which helps with messaging and framing the problem.  You don’t pitch climate change to venture capitalists—you help them see that companies (or countries like China) who corner the market on new technologies stand to make a killing.  Like T. Boone Pickens, you appeal to energy security in America. And if you’re a politician, you develop a marketing strategy that includes the policy options above ranked more effective than average.

Related posts:

• Why don’t people engage climate change?  Problem 2: Communication
• Why don’t people engage climate change?  Problem 4: Political-economic context

¹Buerer and Wuestenhagen (2009) Which renewable energy policy is a venture capitalist’s best friend? Empirical evidence from a survey of international cleantech investors. Energy Policy 37: 4997-5006.

²Bowdoin people can access the article here.
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Photo credit:  http://www.flickr.com/photos/smb_flickr/ / CC BY-NC-ND 2.0