By Jigar Shah, co-founder and President, Generate Capital
In clean energy investing, there has been a widespread push around the need for “game changing” innovation to solve climate change. From Bill Gates to Silicon Valley’s richest, we hear about how incremental improvements won’t work and that we need the “next big thing.” Most recently, folks have been pitching 70% efficient solar panels, new chemistries to replace Lithium-Ion batteries for electric cars, floating wind turbines that also desalinate water, wind turbines in the form of kites, and even space-based solar power.
Many ideas like this receive large venture investments. However, in order for them to succeed, project finance providers like Generate Capital have to be willing to fund these technologies no later than five years after the first VC investment. That’s a tough thing to do because we are looking for “leading edge” technologies—not “bleeding edge” ones. To meet the needs of our investors, we need to focus not on technologies spilling over from the cutting edge of research, but on those that generally have over ten years of data from the field.
Contrary to conventional wisdom, this is actually much easier than we think. There were massive investments made in innovation out of the oil crises of the 1970s. Many of those innovations have been deployed, but they stopped short of reaching real scale. Examples of these include solar PV, lithium-ion batteries, anaerobic digesters, combined heat and power, geothermal, heat pumps, fuel cells, lightweight materials, and many others. In fact, teams from leading research institutions in sixteen of the world’s largest greenhouse gas emitting countries have identified existing technologies that are ready to be scaled up in the Deep Decarbonization Pathways Project. In order to unlock the trillions of dollars necessary to achieve this vision, banks want technologies whose reliability has been tested and proven.
As entrepreneurs, we need to focus on near-term revenues and profits by increasing deployment and efficiency of leading edge technologies. As clean energy investors, we need to redirect our resources into these technologies, helping entrepreneurs overcome distribution challenges with innovative new business models—not ones that will bleed out after all the hype.
Why not bleeding edge technologies?
Although exciting, bleeding edge technologies have typically only worked in small controlled trials. However, what works in one location often doesn’t work at full scale or in multiple places. As a general rule, new technologies need at least 100,000 hours in the field before the risks and reliability of the technology are uncovered and achieve maturity. Scaling these technologies before adequate field data risks cost overruns, subpar performance, and premature failures.
It is important to note that these technologies are worth pursuing—with the right type of capital. Generally, this means government or non-profit capital sources. In the defense industry, many of the new technologies discovered by the Defense Advanced Project Research Agency (DARPA) are trialed and scaled by the US Department of Defense. The analog in energy could be the Advanced Project Research Agency-Energy (ARPA-E), which would deploy initial units through the government’s General Services Administration (GSA). It is worth noting that the US Government is the largest user of electricity, fuel, and other resources in the country.
One solution promoted within academic circles is loan guarantees. While the government can effectively use loan guarantees to entice investors, many of these technologies need more seasoning—not just lower interest rates. Take Google’s investment in Makani—very interesting technology that could revolutionize the way island nations power their countries. Makani was founded in 2006 with great fanfare. Today in 2016, the technology has been tested extensively and may have a real commercial product in another five years. You see this pattern time and time again, when an inventor in the resource efficiency space declares their groundbreaking product is ready for full commercialization, they are actually at least another five years away.
Even success stories like electric vehicles have followed the same pattern. The modern EV wasn’t created from scratch by Tesla, but instead by General Motors in response to the 1990s California mandate for EVs. Investment for that mandate created many of the companies and technologies that were finally ready for commercialization by 2008.
While some bleeding edge technologies will eventually reach commercial viability, the initial private investors almost always lose their investments when they fail to meet aggressive targets.
Why focus on leading edge technologies?
Leading edge technologies are reliable and proven but have often been forgotten by all but a small niche of passionate entrepreneurs. These entrepreneurs have created a lab and field-tested track record to make their version of the technology “bankable”—technologies with enough data to meet strict bank debt requirements.
These technologies often still need scale, deployment and financing to reduce costs further and increase use. Money invested in these technologies certainly doesn’t guarantee success, but it has a much more reliable track record of profitable deployment. Most failures here don’t come from technology challenges, but rather from weak developer and maintenance providers.
The focus of these companies is not on improving the technologies but reducing “soft costs,” which include the non-hardware costs involved with building clean energy projects. There is a lot of space for entrepreneurs to innovate on sales and customer management, product distribution, system design and optimization, operations and maintenance, asset management and finance.
My own experience here comes from SunEdison, where we made 30 year-old solar technology accessible for large segments of the marketplace through a financing innovation, which in turn greatly reduced sales costs. In addition, because we worked with so many retail chains, we were also able to standardize engineering and permitting costs. After selling SunEdison, I invested in companies that used similar innovation models like Nextility in the solar hot water space; Brightfarms in the hydroponics space; and STEMin the battery storage space. Lowering soft costs for leading edge technologies makes clean energy more cost-competitive with fossil fuels, leading to the inevitable growth of clean energy as consumers take advantage of cheaper electricity costs.
Bleeding edge technologies are critical to reaching government goals, but they are difficult to invest in—especially because there are literally hundreds of leading edge technologies for private capital to focus on. We can always appreciate technology that is cheaper and better than what we have today, but as investors, we have returns to achieve now. By achieving those returns, we can achieve the Trillion dollar scale necessary to rebuild our infrastructure, reduce operating costs, hire millions of workers, and make real near-term progress to avoid the worst impacts of climate change.
This post was originally published here.
Jigar Shah is the co-founder and President of Generate Capital and the author of Creating Climate Wealth: Unlocking the Impact Economy. He founded SunEdison, the world’s largest solar services company, and was the founding CEO of the Carbon War Room.