VC's green gamble

The days of building $733 million solar panel factories like Solyndra's Silicon Valley plant may be waning. Photo: Solyndra

If there’s a monument to the glory days of green tech investing, it’s Solyndra’s sleek solar panel manufacturing complex in Silicon Valley. The startup raised more than $1 billion from venture capitalists and secured a half-billion-dollar federal loan guarantee to build a state-of-the-art factory, where driverless carts and automated cranes shuttle photovoltaic parts to orange robots that feed them into large machines to create cutting-edge solar panels.

But six weeks after Solyndra flipped the switch on the plant last September, it announced it would close an older factory and delay plans to expand the new $733 million facility in the face of intense competition from low-cost Chinese manufacturers.

“I don’t see another Solyndra being done,” says Anup Jacob, a partner at Virgin Green Fund, Richard Branson’s private equity firm, who serves on the solar company’s board of directors. “It’s very difficult to show a business plan to investors and say, ‘I need hundreds of millions to a billion dollars to get to scale.’ ”

In other words, 2011 will be a much different world than 2009 or 2010 when it comes to venture investing in green technology. Analysts expect venture capitalists to return to investing in early-stage startups, especially those focusing on energy efficiency.

The rapid rise of Chinese green tech companies that increasingly compete in U.S. markets has turned on its head the traditional Silicon Valley model – invent advanced technology in California, export it to the world and watch the cash roll in.

Meanwhile, the prospects for continued government support for renewable energy are looking increasingly shaky. A federal program that gave cash grants to cover 30 percent of the cost of multibillion-dollar solar and wind energy projects has been extended but only until the end of the year.

Developers will still be able to take a 30 percent investment tax credit through 2016, but since most have no profits to offset they must sell the tax credit to so-called tax equity investors in exchange for cash to build their projects. Problem is, the tax equity market largely collapsed during the Great Recession. A report from GTM Research estimates there will only be $3 billion to $4 billion in tax equity investment available for all renewable energy projects in 2011. That sounds like a lot of money, but given that a single large solar power plant can cost more than $2 billion to build, it won’t go far.

And the federal loan guarantees that have been crucial to getting large projects built is set to sunset in September. Besides Solyndra, other West Coast beneficiaries of the loan guarantees have been BrightSource Energy, the Oakland, Calif., solar power plant builder, and electric carmaker Tesla Motors – startups that would have had a hard time securing financing from risk-adverse lenders for technologies unproven in mass production.

“We’re going to see a return to early stage venture capital investing in clean tech in 2011,” says Dallas Kachan, managing director of Kachan & Co., a San Francisco research and consulting firm. “Investors are no longer piggybacking on U.S. government investment, which had skewed investment into more mature clean tech companies.  Those funds are now largely allocated.”

Kachan pegs energy efficiency as the “rock star” of 2011.

“We expect continued massive investment and corporate activity, which just really got underway in 2010, for example in GE’s many efficiency announcements, investments and acquisitions,” he says.

In November, for example, General Electric created a new home energy management division to consolidate various products and services and develop new technologies. The global conglomerate has also become something of a venture capitalist itself. Its $200 million Ecomagination Challenge has invested in startups developing technology for green building and the smart grid.

Among the winners: Silicon Valley’s Soladigm, which manufactures windows that incorporate electronics that allow them to darken. That helps keep buildings cool during sunny summer months and warm in the winter when they lighten to trap the sun’s heat.

Federal mortgage regulators have stymied a program called Property Assessed Clean Energy, or PACE, that was expected to drive hundreds of millions of dollars in home energy efficiency retrofits and rooftop solar arrays by allowing homeowners to pay back the cost of the work through a 20-year surcharge on their property tax bills.  (See “Retrofits pick up the pace,” page 22.)

But cities, counties and states on the West Coast are barreling ahead with alternatives to let homeowners finance retrofits through charges on their utility bills, for example. In Davis, Calif., the city council has given its blessing to a community solar power plant that plans to let residents buy a plot of photovoltaic panels and the electricity they generate – through a surcharge on their water bills.

If oil prices continue to spike, Kachan expects venture capitalists to revive their interest in advanced biofuels.

“In 2011, venture investment in clean tech will return to what it does best: seeking out emerging early stage technologies and teams that promise good multiples, in the absence of governments putting large amounts of capital to work themselves,” he says.

And what of that rock star of years past, solar?

The photovoltaic market will boom in 2011, according to analysts, but Jacob of Virgin Green Fund says U.S. solar startups that hope to compete against low-cost Chinese competitors need to develop cutting edge technology and then find a market to dominate.

“If you come to us and show us the ability to go where no one has gone before and the niche is big enough, that’s still very interesting to us,” he says.