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An issue near and dear to Silicon Valley — financing for high-risk clean energy projects in the midst of a recession — took center stage on Capitol Hill this morning, as the Senate Committee on Natural Resources delved into the nitty gritty of proposed changes to […]

An issue near and dear to Silicon Valley — financing for high-risk clean energy projects in the midst of a recession — took center stage on Capitol Hill this morning, as the Senate Committee on Natural Resources delved into the nitty gritty of proposed changes to the Department of Energy loan guarantee program. The short version of what went down in the Committee’s hearing this morning goes like this: Venture capitalists are gladly funding clean energy technologies to pilot stage but not to commercial production, so hundreds of billions of government dollars would be a good thing to bridge that gap, often called the “valley of death.” But as always, the devil’s in the details — two of them in particular: What should the government get in return for taking these risks? And how much cash should be set aside as a buffer against potential losses?
death-valley

This morning’s hearing focused on a new entity called the Clean Energy Deployment Administration, or CEDA, which would provide loans, loan guarantees and other “credit enhancements” to help lure private capital “off the sidelines,” as the DOE’s Matt Rogers put it, when it comes to scaling up clean energy technology from the pilot stage to deployment at commercial scale. CEDA is proposed in the 21st Century Clean Energy Technology Deployment Act — a piece of legislation Committee Chairman Ed Markey said he hopes to introduce later this week.

Appropriately, the tech and startup community had some representatives there including Dan Reicher, director of Climate Change & Energy Initiatives for Google.org, and Kleiner Perkins partner John Denniston (“regular testifiers,” as Markey noted). The two joined the panel of witnesses and praised the Committee’s efforts to help bring to fruition the breakthrough, high-risk clean energy technologies that banks and venture capitalists are unwilling or unable to finance — with some caveats. Reicher said he wanted to see CEDA involve private financiers more directly than the current discussion draft proposes — possibly by running an annual finance conference to solicit feedback from the private sector, or by pre-arranging financing for the third or fourth clean energy plants, for example, based on government-funded preliminary plants meeting set performance criteria.

dan-reicher-04281Reicher also suggested that CEDA be allowed to take equity positions in funded companies, and to acquire rights to invest in future projects on favorable terms. This could make the program start to look a lot like a government-backed green VC — probably not the smartest use of government funds, as we’ve explained before. Not surprisingly, Denniston would rather see incentives put in place to encourage the private market — e.g., his firm — to “come forward with that equity capital.”

john-denniston-0428Reicher and Denniston disagreed about what percentage of capital the agency should keep as a buffer against potential losses, or the “loan loss reserve.” It might seem like an obscure bit of policy, but depending on where Congress sets that buffer, it could mean the difference of tens of billions of dollars available for clean energy projects. “This is important,” Reicher said in his prepared testimony, “because the lower the loan loss reserve the more loans CEDA can make for the same amount of appropriation.” For example, if Congress gives the program $10 billion and requires a 10 percent reserve, as proposed in the current draft, that would provide about $100 billion in loans ($10 billion is 10 percent of $100 billion). With a 5 percent reserve, Reicher said, the same $10 billion appropriation would allow about $200 billion in loans.

So where do Reicher, the Googler and former DOE adminstrator, and Denniston, the venture capitalist, disagree? Reicher is OK with the 10 percent reserve, for now, but he wants the CEDA administrator to have the authority and flexibility to change it later on. Denniston wants a higher reserve. As you increase the loan loss reserve (the government’s taking greater risk) you increase the incentive/participation for private investors. He said, “I’d rather see a 25 percent loan loss reserve,” which would let the government take on more risk, thereby boosting the incentive for private investors to join in.

Denniston also urged the senators to add more financial and business experts, in addition to scientists on the CEDA advisory team, and to let startups volunteer for a “quadruple-Z” credit rating, avoiding the credit rating agency review process that costs hundreds of thousands of dollars and inevitably finds that the fledgling company has not established good credit.

Denniston and Reicher agreed, emphatically, on at least one thing: “Overall,” Reicher said, “the bill takes the absolutely right approach to taking critical technology across the valley of death” — a place that the financial crisis, Denniston said, “has made even drier.”

Death Valley photo courtesy Flickr user mandj98

  1. Kevin Christy Tuesday, April 28, 2009

    Plenty of technologies have bridged the funding gap. They’ve simply chosen to do it more deliberately, by building pilot projects and gathering sufficient operational data to provide comfort to financiers. I can’t sympathize much with VCs that are looking to the government to accelerate their all-or-nothing, swing for the fences CSP business plans by subsidizing project finance risk. This gap only exists due to their impatience and relatively short time horizons for investment.

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  2. [...] Natural Resources Committee hearing on proposed changes to the guarantee program, suggesting (as we wrote last month) that startups be allowed to volunteer for a “quadruple-Z” credit rating, avoiding the credit [...]

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  3. [...] testified before the Senate Committee on Natural Resources about Google’s support of CEDA back in April, and Reicher suggested then that CEDA be allowed to take equity positions in funded companies, and [...]

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