California: The accidental cleantech capital?

With one of the 10 largest economies in the world and a long history at the forefront of environmental movements, it’s probably no shocker that the state of California is a national leader in green business, whether that means encouraging the state’s “cleantech clusters,” which produce a large portion of the nation’s cleantech intellectual property, or allocating incentives that can help green businesses grow.

California Gov. Arnold Schwarzenegger (R), certainly wants to highlight that image. When in May of this year the Environmental Defense Fund issued a report praising California for products and practices that increase energy efficiency and provide savings for businesses, Schwarzenegger responded: “I love it when California is No. 1, and it is a big thrill to see business in our state lead the way.”

So how is California supporting such businesses on local, city and state levels? And more importantly, is the state doing a good job of maintaining that reputation? Some of California’s cleantech players are concerned that other states are aggressively offering packages to lure away green industries, particularly when companies transition from young startups to large corporations that can provide local jobs. And the state finished dead last for cost of doing business in Forbes’ “Best Places to Do Business” rankings. But given California’s vast 160,000-square-mile geography, diverse industries and population of over 36 million, there are inevitably areas in which the state is doing an excellent job of promoting green business, and some areas in which the state is falling short.

Cleantech clusters The most valuable assets in California’s green economy may be the multiple cleantech clusters that have emerged over the last decade. While the key ingredients that make a place attractive for green startups to set up shop are hard to define, researchers at media company SustainLane say a cleantech cluster requires access to investors, academic or federal research lab collaboration and state or local government participation.

California’s got these in spades, and clusters have emerged in San Jose, San Francisco, Los Angeles, Berkeley and Davis. The value of the cleantech cluster isn’t just about creating an ecosystem of greener business; the clusters drive valuable innovation and intellectual property. According to researchers at nonprofit research group Next10, California patents account for 44 percent of all U.S. patents for solar and 37 percent of all U.S. patents for wind.

A big factor in California’s cleantech cluster success is access to the venture capitalists and investors in Silicon Valley. Investors on Sand Hill Road have increasingly turned their eye to cleantech, often investing a good one-third of their hundred-million dollar funds into all things green.

University research is a key ingredient of California's cleantech appeal. Courtesy EECL.

Of the $5.18 billion of global venture capital injected into cleantech startups in 2007, “companies based in California received the majority of financing representing $966 million, a 38 percent increase over 2006 levels,” according to the Cleantech Group. Venture capitalists have long preferred to invest in companies close by (though this is changing in an international world), and companies often set up shop here to be closer to funders.

The second key to a cluster is to have major universities with bright young minds that are tinkering in the labs to produce technology that will fight climate change [see “Profits and professors,” SI, April 2008]. Students at UC Berkeley, UC Davis, the California Institute of Technology and Stanford are all working on cutting-edge technologies that could produce more-efficient solar panels, and more-effective biofuels.

Private industry is also collaborating and injecting money into the programs; oil giant BP has ponied up $500 million over 10 years to fund a program at UC Berkeley and Lawrence Berkeley National Laboratories aimed at the development of next-generation biofuels.

Despite its “natural” appeal to cleantech businesses, the state hasn’t focused on many initiatives that would directly encourage such companies to grow in California. According to Paul Feist, a spokesman for California’s Labor and Workforce Development Agency, the state is constantly working to improve the overall business climate for biotech and life sciences, but has yet to focus specifically on cleantech as a category. Colin O’Mara, San Jose’s clean technology policy strategist, echoes this point. “There really are no state incentives to directly encourage cleantech,” he says.

Cities lead the way
Government incentives are a crucial part of building a cluster and encouraging companies to stay in the state. Cities such as San Jose and San Francisco have been proactive about creating opportunities for startups and compete with each other over which city can attract more companies [see “Silo valley,” SI, May 2008]. San Jose mayor Chuck Reed convinced a business competition called the California Cleantech Open to relocate from San Francisco to San Jose this year to promote his plan to add 25,000 cleantech jobs, reduce the city’s electricity consumption by 50 percent and eventually supply 100 percent of the city’s electricity from renewable sources.

O’Mara says San Jose was able to offer Nanosolar, one of the first thin-film solar companies to start production, a nice package to keep a manufacturing plant in the city. The city promised Nanosolar $1.5 million in reimbursements over several years, as well as government-funded training for workers, to stay local. Nanosolar started production in December 2007, and its plant will offer 200 to 300 local jobs.

San Jose has taken an aggressive approach to courting cleantech companies and events, leveraging its high-tech history and venture capital firms to attract both startups and seasoned businesses.Courtesy City of San Jose.

San Francisco has its own city initiatives to bring in green companies, including Mayor Gavin Newsom’s Solar Energy Rebate Incentive Program that proposes to distribute some $3 million in rebates to solar customers and potentially cut the cost of solar to consumers by nearly 20 percent. The plan’s promises have already encouraged solar installation startups such as SolarCity, Akeena Solar and Borrego Solar to focus on selling the city’s residents solar to take advantage of those rebates. Borrego Solar also opened an office in San Francisco in anticipation of the city’s solar rebate program.

As of press time, however, the incentives have been put on hold and are waiting to move through the next layer of city bureaucracy, which Borrego’s president, Mike Hall, says is bad for businesses like his.

“Why would anyone sign a contract now when they think they can wait a month and get a $4,000 rebate?” he asks. “Even though the program will supply retroactive payments, that’s a difficult point to get across to people.”

East Bay city Oakland has also been aggressive when it comes to educating workers capable of filling jobs like installing solar panels on rooftops for companies such as Borrego. In 2007, the Oakland City Council funded the Green Jobs Corps to provide life-skills and workforce training in sustainable industry jobs for low-income people in the city. The effort is expected to graduate between 50 and 60 “green” skilled workers in its first year. The city also provides low-interest loans to companies using recycled materials to manufacture value-added products, according to Steve Lautze, who works on green business projects in Oakland’s Economic Development Division.

State mandates
While California doesn’t have its cleantech support strategy clearly defined yet, it does have a variety of mandates that are excellent at driving the demand for green businesses. To date, California’s efforts to attract sustainable businesses have relied largely on its aggressive renewable portfolio standard (RPS), which requires the state’s utilities to supply 20 percent of energy using renewable sources by 2010. Creating a market for emerging green technologies—in this case utility demand— is a key way to promote the ecosystem.

Through the RPS, California has become home to a groundswell of startups planning to build solar power plants in the Mojave desert and sell the clean power to the states’ utilities. Ausra, BrightSource, SolarReserve, and eSolar are just a few of the California-based startups that have started building and selling technology to harness the heat of the sun to produce utility-scale power. In April of this year PG&E (NYSE: PGC) and BrightSource Energy announced one of the largest solar thermal contracts to date; PG&E plans to purchase 900 MW of power from five large solar thermal plants built by Oakland-based BrightSource.

Ausra's concentrating solar power plan uses flat mirrors to focus sunlight, generating high-pressure steam to drive turbines.Courtesy Ausra

Then there’s Gov. Schwarzenegger’s Million Solar Roofs Initiative, which aims to install enough solar panels in the state to create 3,000 MW of solar electricity by 2017. This could boost solar manufacturing and installation in the state, and help bring down the cost of solar. One study found that the bill is expected to generate 89,000 new jobs and increase the state’s gross domestic product by $74 billion by 2020. When utility Southern California Edison announced that it would be installing one of the most ambitious solar rooftop projects in the world, promising 2 square miles of solar panels in Southern California, it cited the state’s Solar Initiative as a key incentive.

Another boost is the state’s push for a Low Carbon Fuel Standard that would require fuel providers to reduce the carbon intensity of fuel sold in California. The mandate could boost the state’s biofuel producers and electric vehicle makers. According to E2’s Cleantech Report from 2007, the Low Carbon Fuel Standard is expected to triple the size of California’s renewable fuels market. And last but not least is California’s AB32, which created a program to measure and regulate the greenhouse gas emissions of the state’s industry. The legislation uses mandatory caps on emissions combined with market-based mechanisms to reduce its emissions to 1990 levels by 2020. According to the E2 report, this will create a “tremendous market” for goods and services that will help companies meet greenhouse gas mandates.

The Natural Resources Defense Council (NRDC) published a report in 2007 looking at California’s response to global warming, and called AB32 “a clear signal to the market that California is open for business to clean technology companies.” The same report found that meeting AB32’s mandates will provide tens of thousands of new jobs for Californians. Though to date there has been some backlash from business groups concerned the regulations will hurt them economically, the bill has a “safety valve” to suspend emissions caps for up to a year if there is significant economic harm.

Is the state neglecting its cleantech clusters?
While the state has been a leader in creating a demand for clean technologies, those in the cleantech industry say the state has neglected to offer better incentives for companies to stay in the state. “AB32 is phenomenal,” San Jose’s O’Mara says. “But we’d like to see a bill as equally strong when it comes to green jobs.” O’Mara also points out that California’s assets are exceptional at bringing companies to the state in the research and development and investment phase, but California can lose out to other states when it comes to the large-scale manufacturing stage.

Joel Makower, founder of GreenBiz.com and a well-known consultant in the green business arena, agrees that the state has fallen short when it comes to encouraging these companies to remain here. “Other states are starting to eat California’s lunch” in this realm, he says.

Back in 2004, NRDC issued a report that said “There has not been a concerted, coordinated effort to encourage development of cleantech clusters [in California]. As a result, the state has not yet realized the full benefit of the cleantech opportunity.” A more recent report from the NRDC in 2007 both praises the state’s newer important green business incentives but also notes that the state “must now actively nurture the clean technology industry to ensure that the state becomes a net producer and nexus of clean technologies.”

Tesla raced out of California, fueled by a package deal from New Mexico, when it came time to set up a manufacturing operations. Courtesy Tesla Motors

One thing California doesn’t do often is offer packages to keep specific cleantech companies in the state—other states such as New Mexico, Arizona and Massachusetts are much more aggressive on this front. Tesla Motors, the San Carlos, Calif.–based electric-car startup, decided to build its manufacturing plant in New Mexico, partly because the state offered it a package that effectively promised to help stimulate the state’s market for green vehicles.

New Mexico Gov. Bill Richardson promised to include Tesla execs in the legislative planning process that could boost green car buying in the state. In return, Tesla’s automobile assembly facility in Albuquerque was built to bring 400 high-wage jobs and a total capital investment of $35 million. According to a former employee of Gov. Schwarzenegger’s office, Tesla actively sought out a package deal from the state of California, but got a better deal with New Mexico.

Tesla refused to comment on whether or not the company sought a deal to remain in the state, or to discuss locations of other manufacturing facilities. Given that California has such an easy time attracting companies with its cleantech clusters, the state seems to have fallen behind other states on using its budget to add such extra incentives. That could also be because the state’s budget hasn’t been exactly robust recently—pundits see a potential shortfall of $17 billion for the end of this year and the next fiscal year combined if the state does nothing to avert it.

The state’s green biz future
Through a culmination of its universities, technology industry, investor ecosystem and long history of being at the forefront of the eco-movement, California has naturally developed an ecosystem for greener businesses. City and state regulations have also been enacted to help kickstart green business. But it’s becoming clear that the state needs to do more to incentivize cleantech clusters and establish financial rewards for greener businesses in general.

In much the same way as cities within California have been going head-to-head to attract green businesses to their communities, California has to see the competition from other states as a motivator to stimulate better offers and package deals. With each presidential candidate positioning himself as “greener” than his competitor and looking to offer federal incentives for green business, more and more states will start to see the potential, and California will need to take action to maintain this position.

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Katie Fehrenbacher is the Editor of Earth2Tech.com