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  • Dusan Mijailovic

Investment in Clean-Tech won't be just a bubble this time around

In the United States, green energy investment is once again a hot topic. To some, the new boom will bring back memories of the clean-tech bust that followed a decade of euphoria. However, there are reasons to think that the current trend is not a mirage or a bubble.

In the late 2000s and early 2010s, there was a surge in investment in clean technology, including renewable energy and other carbon-reduction technologies. Initially, venture capitalists provided the majority of the funds, but the federal government intervened and began offering low-interest loans and subsidies. Then, in 2011, the solar company Solyndra failed, resulting in a massive political backlash. And that was just the most noticeable failure; the sector's collapse cost investors about $25 billion in total. Money was quickly depleted. For years, the phrase "clean tech" was frowned upon by venture capitalists.

But the worm has turned, and clean technology is making a comeback.

Bill Gates, the billionaire philanthropist, is leading a venture fund that is investing billions of dollars. The amount of money invested in battery and electric-vehicle industries has shot through the roof. Solar and wind energy investment outnumbers all else.

While some fear that history might repeat itself others are more optimistic.

The most basic rationale is that the underlying technology has advanced in ways that it had not a decade ago. Solar photovoltaic electricity cost $359 per megawatt-hour in 2009, more than four times as much as electricity produced by a natural gas plant. Solar PV had dropped in price to $40 per megawatt-hour by 2019, making it 28 percent cheaper than gas. That's an 89 percent drop in ten years, with more cost reductions on the way. Lithium-ion batteries, meanwhile, have seen a comparable price drop.

The enormous cost reduction makes all the difference. To begin with, this implies that solar and wind are not risky new technologies. Solyndra failed because it attempted to market an innovative new type of solar cell that proved to be too costly when the tried-and-true design became more affordable. Future solar investments would not require any tricky technological breakthroughs. Batteries, on the other hand, may be a different story; large sums of money are being poured into startups attempting to develop solid-state batteries, which would be a true breakthrough. However, Tesla Inc. is doing well with the old kind, so that industry is likely to do well as well. When venture capitalists don't have to bet on "hard tech," which is no longer the case, they do well, and much of clean tech is no longer hard.

Second, decreasing clean energy costs mean that success is no longer contingent on government intervention. For capital-intensive energy companies to thrive during the previous boom, government subsidies were often required. Despite President Joe Biden's plans for a major push into clean-energy investment, the market is already investing heavily in renewables.

Finally, it's likely that investors have learned their lesson.

Clean energy has never been a good fit for venture. It requires a lot of capital because solar panels and wind turbines are expensive up front; venture capital tends to concentrate on low-cost, small-scale investments. And, unlike in software, where businesses create highly differentiated goods and new markets, clean energy companies are essentially all attempting to deliver the same commodified product.

This time, VCs are transferring solar and wind development to larger investors, and instead focusing on niches where low-cost, differentiated startups can add value, such as solar services and funding, lab-grown meat, and electric cars. Some of those bets would undoubtedly fail, but that is the nature of private equity. Tesla's achievement shows the time-honoured concept that a few big hits can compensate for a lot of small failures, with a market cap of nearly $700 billion, or 28 times the amount lost in the clean-tech bust.

In other words, clean tech is coming towards the end of the Gartner Hype Cycle, a pattern that reflects the evolution of emerging technologies and business models, beginning with an innovation that sees expectations increase and then crash before rising again to sustained efficiency.

Much like dot-com bust in 2000, the clean-tech bust was caused by investor excitement for a new technology outstripping the technology itself. But, just as few people today doubt the value of businesses like Google and Facebook, which rose to prominence during a period of low investor interest, the value of clean technology will eventually be recognized. We've gotten through the Trough of Disillusionment and are now climbing the Slope of Enlightenment, according to Gartner.

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Nov 15, 2021

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