Stimulus money coming soon, say cleantech investors

Cleantech entrepreneurs and investors, whose optimism has been tempered this past year by the financial crisis and an absence of lucrative exits, can expect a near-term boost for the sector as the federal government steps up the pace of energy-focused stimulus funding.

Though a sizeable chunk of the federal government’s $787 billion stimulus package is targeted to energy sector projects, little has been allocated to date.

Over the next two to three years, however, panelists at last week’s Financing the Cleantech Vision conference in Palo Alto, Calif., said they’re expecting to see upwards of $200 billion going into the space.

Ventures focused on renewable energy and energy efficiency will soon start seeing more of that money soon, said panelists at the conference, which was hosted by Venture Capital Journal, an affiliated publication to PE Week.

“If you think you missed the stimulus, it’s not over. It’s only just beginning,” said John Mizroch, an advisor to Wilson Sonsini Goodrich & Rosati and former Acting Assistant Secretary at the U.S. Department of Energy’s Office of Energy Efficiency and Renewable Energy. “This administration wants to fundamentally change the energy infrastructure in the U.S.”

Big bucks are available for startups in several cleantech sectors, including smart grid technology, which is slated to receive $11 billion in federal funding; energy efficiency for federal buildings, which was allocated $4.5 billion; and wind and solar, which received $6 billion for new loan guarantees.

But while there’s immediate opportunity for money, Mizroch and other speakers noted that in order to get it, entrepreneurs and venture capital investors can expect to deal with plenty of government red tape. That’s causing many firms to reconsider how they work with the Washington, D.C., establishment.

“If they feel they have a technology or business plan that is harmonious with what’s in the stimulus bill, we’ve recommended that our portfolio companies get Washington representation,” said Chuck McDermott, general partner at Rockport Capital, a cleantech venture investor with offices in Boston and Menlo Park, Calif.

Certainly there have been signs that federal cleantech taps are opening up. The Department of Energy’s first $535 million loan guarantee went to venture-backed, Fremont, Calif.-based Solyndra, which plans to use the money expand its photovoltaic manufacturing capacity. A large portion of funding will also be coming from state agencies, especially for weatherization and energy efficiency-related projects, said Mark Kalpin, co-chair of the emerging energy technology group at WilmerHale.

But panelists noted that revising regulations may be just as or more important than funding in paving the way for certain technologies to take off. That’s particularly true for smart grid applications, said McDermott, who noted that the issue of upgrading the electrical grid gained substantial traction during the presidential election last year.

Smart grid technology also received $11 billion under the February stimulus bill, though McDermott questioned how effective it will be on its own.

“The biggest thing that is going to unlock the potential of the smart grid is regulatory reform,” he said. “It’s a hairball that has to be unwound.”

Kevin Skillern, managing director at GE Energy Financial Services, said he sees increased government support as one of the positive factors underpinning a broader outlook for the cleantech sector that he describes as cautiously optimistic.

In addition to more government funding, Skillern said that other positive factors for cleantech include a slow return of the IPO market, more realistic valuations, growth in the “BRIC” economies of Brazil, Russia, India and China, and the expectation that shakeout in some overcrowded sub-sector will thin out the playing field.

But Skillern also pointed to several reasons for caution. One is that the economics of renewables is threatened by lower natural gas prices and higher capital costs. Other concerns he cited were constraints on capital expenditures due to the economic slowdown and greater obstacles in raising project finance in the wake of the credit crisis.