Solving Financing Difficulties faced by Cleantech Companies

As reported recently by GreentechMedia, venture capitals (VCs) are getting less interested about investing in cleantech companies, possibly due to previous renewable projects’ unimpressive returns and bad reputations among investors. 

Such situation, combined with plumping oil price since last summer, signals gathering clouds over green entrepreneurs’ balance sheet.

Traditionally, VCs are regarded as the most cleantech-friendly provider of funding, due to their flexible and forward looking investment guidance. VCs are looking for successful businesses for tomorrow, and this is exactly what cleantech companies are hoping to be. However, after many clean start-ups failed to show promising financial returns within the investment horizon of VCs and gone out of business due to management failures, this natural alliance between the two started to fall apart. Many start-ups are now looking for strategic collaborations with large corporations, Makani airborne wind turbine (above graph) company under Google is a good example. Strategics normally have longer investment time periods than VCs, and they can well understand operational issues risen from start-ups’ daily running. But financing from large corporations has a major drawback due to uncertainties from the management, namely, if a highly ranked officer is very interested in the project, collaboration procedure could proceed very quickly, otherwise it may take ages.

The issue of financing has already become a major concern for many green entrepreneurs and started to limit growth of the cleantech industry, so what kind of policy options can be applied to improve the situation, apart from letting government giving out more money in the form of subsidy?

The first point should be addressed by new policies is the low competitiveness of cleantech firms compared with other investment opportunities, mainly due to high perceived risks and therefore high discount rates, which are generally more than 10%, much higher than conventional energies, and not to mention other long-term financial instruments available in the capital market, whose rates rarely exceed 5% (UK long-term investable grade corporate bonds). This high discount rate makes renewable technologies highly disadvantaged compared with other investment options, and it is a key issue to discourage investment in the industry. However, the seemingly difficult problem has a straight forward and low cost solution, government could reduce the discount rate significantly by simply reducing policy uncertainties. This can be achieved by explicitly stating lifespan of renewable policies and altering financial supports to cleantech businesses to contract type. To reduce risks further, additional cash flow support oriented to up-front capital investment could be useful to attract more investors.

Apart from reducing risks associated with renewable investments, more and specifically focused investment instruments and institutions are needed to channel financial resources to entrepreneurs. Government sponsored cleantech investment banks should be established at international and national level, to reinvest money from international decarbonising funds and national carbon tax revenues. A financial exchange specifically focused on cleantech companies and projects could also be established to attract investments, the liquidity and facility created by the exchange will make cleantech investment more appealing to short-term investors, who play the major role of the current short-termism financial market. These two options could also be combined to create synergies, by clearly defining role of the investment bank as a financial resource channel and allowing it to acquire additional funds from stock markets.

In addition, more flexibility should be given to funding acquirement, for instance, via community funding, which mean communities collectively fund small scale renewable plants for their own use. This method of financing provides benefits for both cleantech companies (provide business opportunities and clients) and local households (cheaper energy and better environment). This beneficial approach is what many organisations around the world like The Transition Network are taking now, and based on information from the director of the Transition Network, country like Germany has already got around 50% of its renewable energy capacity owned by communities, whereas the UK only has less than 10%. This significant difference between two countries represents huge business opportunities and decarbonisation potentials, and UK government could exploit them at a very low cost by simply promoting the model to local governments.

Therefore, as discussed above, apart from government funding and subsidies, I believe there are many cheaper approaches to bolster growth of the cleantech industry, and new institutions are key to facilitate and encourage inflow of financial resources.