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Summary:

The cries declaring a cleantech armageddon are coming keep on getting louder. But I don’t think cleantech is headed for a sharp crash. It’s been going through consolidation for some time now, and the cleantech sector is inherently cyclical and is heading into a down cycle.

armeggedon

The cries declaring that cleantech is headed for an apocalypse keep on getting louder. The latest is an article this month in Foreign Affairs on The Crisis in Clean Energy, which is getting attention from the blogosphere like this post on The Coming Cleantech Crash. A couple of months ago, I addressed some of my own concerns over a growing depression around cleantech investing and sectors.

I don’t think cleantech is headed for a sharp crash, given it’s been going through consolidation and a downward coasting for some time now. The cleantech sector is inherently cyclical — tied to international, domestic and local politics, oil prices, the economy and public sentiment — and is clearly facing a down cycle right now. Ask any cleantech-focused investor and they’ll tell you how they’ve ridden the cleantech seesaw up and down, and then up and now down again.

A few things are contributing to this slow downward trend. The traditional venture capital model of investing hasn’t been working as well as many investors had expected and a variety of firms have pulled back on investments or cut cleantech investing completely. Not many firms will admit it, but it’s still happening. And yes, there has been a series of cleantech IPOs this year, but as Rob Day points out, many of these IPOs are being done out of necessity for fund-raising, and are also piggybacking on summer of social media IPOs.

The potential drop in government support from both the U.S. and European countries, will contribute to the downward trend. The Department of Energy’s budget is facing the knife, and the markets that carried the solar industry — Germany, Spain, Italy — are pulling back. As we’ll see at Intersolar this week, solar firms are desperately seeking new markets to enter. The few-year term cycles for politicians also contribute to the up and down nature of government support.

The big problem, which the Foreign Affairs article points out, is how to invest in innovation for energy technologies — which takes a long time and a lot of money to produce — in the face of a drop in overall spending on it. Innovation breakthroughs come from basic science research, which takes money, but as Bill Gates has pointed out, his call for boosting energy R&D funding won’t likely be even remotely possible for several more years.

Trending back up

So, you proactive folks are probably wondering: If this is a down cycle, when will it start cycling back up? The good news (at least for cleantech companies), is there isn’t any avoiding moving to a low-carbon future, as fossil fuel dependence is creating immediate problems for national security and climate change.

Will public opinion turn the tide? I think the more digital documentation of extreme weather, the more people will be demand from their legislators that this change happen.

For more investors to get back in (or newly enter) the space, investors need more proof that certain kinds of greentech investments will make them money. Those are both the low-risk small returns of solar, or the high-risk large returns for new greentech innovation. The latter hasn’t happened yet, and everyone’s still waiting for a Google of cleantech. There could be some blockbuster greentech firms on the horizon — there’s been enough investment that likely something will appear — whether that’s via some of the new funds like Silver Lake’s Kraftwerk fund, or the next generation of funds from VantagePoint Venture Partners or Vinod Khosla.

Ultimately if the economy recovers more, government support could potentially rise again. And then there’s China, which is the world’s largest investor in clean energy, and which will be creating its own massive market for green technologies, regardless of what the U.S. does. In the same way that developing countries skipped over installing land line phones and went straight to cell phones, the developing world and China will install the next-generation of energy technology (including clean power and the smart grid) to meet its growing demand for power.

Clearly parts of the cleantech sector are moving into a consolidated, and depressed state, but I’m confident the cycle will trend back up at some point. The harder question is: When?

Image courtesy of Petroleum Jelliffe.

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  1. “The harder question, is when.”

    YUP.

    Well, when will Natural gas next hit $8-10/mmbtu again? That might be one way of answering the question.

    I agree, it is somewhat cyclic, but if we have 10 years of nat gas at between $4-6/mmbtu ahead of us, it might be a pretty long wait.

    I don’t think we’re going to see any INCREASE in government subsidies either, so solar needs to get significantly cheaper or alternative energy sources have to fundamentally increase in price (in a depressed economy?).

    So, I’ll SWAG no sooner than 2020, and we should call it the Solar ICE AGE, since things will just be postponed till the fundamentals ‘thaw out’.

  2. Katie Fehrenbacher Monday, July 11, 2011

    @tesla_x, I don’t think it will be that long. If it takes the U.S. and Europe that long, it will be sewn up by China by 2020.

  3. Nick Milne-Home, President of 1E Tuesday, July 12, 2011

    This was an extremely insightful article. I completely agree that cleantech is by no means on its deathbed and think that it will be on the upswing again in the near future. While policies and funding may be in flux, society has made it clear that its focus on environmental stewardship will continue to grow. However, I would caution that cleantech is not the only way to create a more sustainable society. Regardless of whether the energy is “clean” or “dirty” there are ways to become more efficient now by monitoring and reducing power consumption, and the financial benefits can be significant. At the end of the day, its all about economics.

  4. It does not matter what What the US is doing, Greentech is now being driven internationally, China and other developing countries are now taking the initiative, and the prices are only going to get cheaper as Solar is already at grid parity in most of these countries with cheap labor for installation and Lower panel prices. We should see prices fall > 50% in the next two years from economies of scale, Increased competition, Incremental Manufacturing efficiencies and disruptive technologies.

    http://thinkprogress.org/romm/2011/07/06/261550/solar-pv-system-cost-reductions/#more-261550

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