Financing the Future

Josh Green has an interesting article in the Atlantic this month about green energy and how it’s thoroughly taken over the geek culture of Silicon Valley:

Last year, cleantech was the third-largest recipient of venture funding, after IT and biotechnology, with investments of $5.8 billion. But that statistic doesn’t begin to convey its psychic significance. It’s all anyone wants to talk about.

Exhilaration over clean energy has so thoroughly swept Silicon Valley that it has transformed the local culture. Conspicuous consumption has given way to conspicuous conservation. The favored status symbol is no longer the giant yacht or the sprawling mansion but the home designed to be so ruthlessly energy-efficient that it generates its own power and produces a surplus that can be selflessly fed back into the grid.

….The excitement extends to President Obama’s early emphasis on renewable energy, which has convinced Silicon Valley’s leading minds that here, at last, is a president who understands. “California is the new Texas,” [Mike] Danaher exulted. “There’s a mind-set [in the White House] that innovation and entrepreneurship really can change things.”

This ties into what I was talking about yesterday: although conservation and increased efficiency are key (probably the key) components of any effort to curb global warming, to get all the way there we’re going to need both the invention of new green technologies and far more widespread deployment of existing green technologies.

That takes money.  Way more money than Silicon Valley venture capitalists can provide.  And that in turn means we need policies that provide incentives to invest in this stuff — incentives that get to the right place at the right time and don’t come and go with every change in congressional mood.

The rest of Green’s piece is an interesting look at how not to do that.  Turns out that ever since Jimmy Carter tried to get us started on this stuff, the incentive of choice has been tax credits.  These are a problem for two reasons.  First, Congress and state legislatures have to renew them periodically, and when they don’t (which is often) suddenly a bunch of promising projects go poof.  Second, tax credits only work if you owe taxes, and startups don’t usually owe taxes.  To take advantage of them, then, requires you to team up with someone big who does.  Unfortunately, it turns out that there are only a very few candidates for that role:

Investment banks and hedge funds stepped in to fill the void, engineering tax-equity vehicles with suspiciously complicated-sounding names, like “partnership flip structure” and “inverted passthrough lease,” to exploit the tax benefits….For renewable-energy companies, tax-equity deals meant life or death: the combination of credits could offset two-thirds of the capital cost of a project.

….Just as Wall Street bankers bet that housing prices could never fall and got wiped out when proved wrong, Congress seems never to have imagined that Wall Street might someday have no profits and need no tax equity. Early last year, the multibillion-dollar tax-equity universe consisted of 18 providers. After September’s record carnage, the number dropped to four. Credit froze, and most projects ground to a halt. All of a sudden, not just a few start-ups but the entire renewable-energy industry was staring into the Valley of Death.

Tax credits still have their place, but the Obama administration is already supplementing them with other incentives (direct grants, loan guarantees, and direct investment by the Department of Energy, courtesy of February’s stimulus bill) and planning to supplement them still further with others (chief among them tightening renewable energy standards and increasing the price of carbon via cap-and-trade).  Read the whole thing for more.  It’s a good primer on how critical it is to get the financing piece of the puzzle right if we want to make serious progress on climate change.


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