Working in the field of clean technologies and renewable energy with all of the popular press coverage I often get asked "wow, things must be really looking up for you!" While I do stay busy enough to keep out of trouble there is a structural issue with the larger industry that concerns me.
In the '90s there was a fabulous book called "Crossing the Chasm" devoted to an analysis of how new technologies (especially software) get started and either thrive, stagnate or altogether die. It is a must read for entrepreneurs and technology marketers of nearly every stripe. The author, Geoffrey Moore, describes the first to buy as "innovators" and those that soon follow are "early adopters." The next stage of buying is by the "early majority" and this is where many products fail. The few who have a high degree of pain have already bought the product. Where the innovators and early adopters are separated by "cracks" in the bell curve of adoption, the early adopters and early majority are separated by a "chasm."
While the structural reasons for the chasm are different for cleantech, ours is no less deep or wide. Sharp entrepreneurs with good ideas can raise funds to prove them out (usually from venture capitalists). Innovative technologies on the benchtop can also usually find the funds to build a small pilot plant to begin to examine the commercial promise therein.
When the firms begins to look for money to build that first fully commercial plant, that is when they fall into the chasm. Consider how long have we all read about the promise of cellulosic ethanol yet how few commercial plants have been built. In this case the chasm isn't a challenge of product marketing, but one of finance.
I often (all too often) find myself telling a client that his technology looks great and that banks will line up to loan him money to build the 2nd, 3rd or 4th plant in the series. "But why not the first?' they ask. "If the banks won't give us the money, can't we just go to the venture capitalists and get it?"
These questions form the crux of our dilemma.
A cursory examination of renewable energy news will quickly reveal word of big banks both domestic and especially European who are lending hundreds of millions of dollars to build wind or solar power projects. The difference between the deals you read about and that of our erstwhile entrepreneur boils down to confidence and familiarity.
The manufacturers of the panels or turbines in the deals we read about are large companies. They can and do offer performance or availability guarantees. Those companies are big enough to make good on their guarantees if needed. Just as important, these deals are not novel. Banks don't have to ask themselves "Is this going to work?" Instead the questions are much more in the vein of comparison. "Does this deal look enough like the others that we've seen that we should feel OK making the loan?"
The reason that banks look at the problem this way is that their upside is their interest payments. Their downside risk is default. If the project is in default, they must try to sell it to recoup their principal. If the plant went into default due to some unforeseen technical problem, who would want to buy it? In short, for new technologies the banks have the risk exposure of a venture capitalist with much more limited prospects for reward.
Well what about building the plant with all equity from venture capitalists? While VCs are much more familiar with taking on the higher risks, very few cleantech projects offer the "home run" big return possibilities that are the mainstay of the VC industry.
For an energy project to have such returns (depending on capital costs), you might have to make power at $.02-.03/kWh and sell it at $.10/kWh. There just aren't very many opportunities like that out there (but if you've got one, please contact me ASAP!).
That leaves us with the cleantech financing chasm-projects that are too novel to attract debt financing but don't offer the stupendous returns that attract venture capital. What's a developer to do? Next time I'll weigh in on some ideas to solve this problem.
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