If Wall Street’s implosion can feel remote on the West Coast, where green tech startups largely rely on Silicon Valley venture capital, there may be no escaping the fallout from the credit crunch.
Still, even those renewable energy companies tapping East Coast cash have powered ahead amid the chaos on the Street. Take SolarReserve, a Santa Monica, Calif.-based solar power plant developer. A day after Lehman Brothers filed for bankruptcy last week, the stealth startup announced a $140 million round of funding from investors that included Citigroup (C) and Credit Suisse (CS).
Lehman does hold small stakes in wind turbine maker Clipper Windpower of Carpinteria, Calif., and Ormat Technologies, a Reno, Nev., geothermal developer. “Lehman’s exit from wind is not good news, but it’s not the end of the world,” says Ethan Zindler, head of North American research for New Energy Finance, a London-based research firm. And while Lehman holds stock lent to it from solar cell companies like SunPower (SPWR) and Evergreen Solar – potentially diluting their earnings per share if the stock is not returned – Lehman is not a big player in solar.
That’s not the case with Goldman Sachs (GS) and Morgan Stanley (MS). Both are major solar and wind investors and both were forced this week to reorganize themselves into bank holding companies to stave off shotgun marriages with other institutions. Spokespeople for Goldman and Morgan Stanley told Green Wombat that the firms’ transformation into more conventional commercial banks – at least a two-year process- will not change their green investing strategies.
But if there appears to be little immediate collateral damage from the financial crisis for green tech startups, there are longer-term consequences. Solar power plants, wind farms and other large-scale renewable energy projects require billions of dollars in bank financing.
“Credit is just going to get more expensive,” says Zindler. “We’ve already seen some pull-back for some big solar and wind deals. Bigger developers who have solid balance sheets will be OK but the smaller guys could be in trouble.”
Says Bill Gross, chairman of solar power plant developer eSolar: “I think if you’re going to get project financing, you’re just going to have to show higher returns to get people to take the money out of the mattress.”
But Gross, the founder of Pasadena, Calif.-based startup incubator Idealab, argues that given soaring electricity demand and fossil fuel prices, large-scale renewable energy projects will be an attractive investment, paricularly since utilities typically sign 20-year contracts for the power they produce. eSolar, which is backed by Google and other investors, has a long-term contract to supply Southern California Edison with 245 megawatts of green electricity. Gross says eSolar has a pipeline of other projects and interest in the company remains high, particularly overseas.
“If you can make projects that can compete with fossil fuels on a parity basis, those projects are going to be financed,” he says, “because they’re safe returns for 20 years and I think money is going to flow to them.”
Rob Lamkin, CEO of solar power plant startup Cool Earth, echoed that sentiment. “The credit crisis does give me pause,” says Lamkin, whose Livermore, Calif.-company has raised $21 million in venture funding and is developing “solar balloons” that use air pressure to concentrate sunlight on solar cells. “But the energy problem is so big that I don’t see problems raising project financing.”
The key for developers of utility-scale projects – particularly solar power plants – will be keeping their costs under control; not an easy thing when deploying new technologies amid a commodities boom.
Dita Bronicki, CEO of geothermal power plant developer Ormat Technologies (ORA), does not anticipate trouble obtaining project financing. “I think the cost of money is going to go up, but a company like Ormat with an operating fleet and operating cash flow will not be as affected,” Bronicki says. “Small companies will find that lenders will be more picky in what they will invest.”
Green entrepreneurs tend to be an optimistic bunch, so it’s not surprising they still think the future looks bright. But they had reason to be sunny this week – amid Wall Street’s meltdown, the U.S. Senate on Tuesday passed, at long last, extensions of crucial renewable energy investment tax credits and other goodies to goose green tech, such as a tax credit worth up to $7,500 for buyers of plug-in electric cars. The Senate action now must be reconciled with similar legislation in the House of Representatives.
Solar projects, for instance, would qualify for a 30% investment tax credit through 2016.
“That is one thing that will help project finance,” says Gross. “So many people are sitting on the sidelines right now and if the investment tax credit passes that will help get these projects financed.”