When people think of energy innovation, solar cells and wind turbines may leap to mind. But according to Michael Holman and Michel DiCapua, two of the top analysts in the business of financing innovative energy products, the future of innovation is less about the gadgets, and more about finding new ways to fund the research and development needed to create those gadgets.
Countries once considered mere factories and consumers of sustainable energy innovations, from China to Uganda, will become innovators in their own right, Holman said during a panel on innovation in energy, part of the 2012 Columbia University Energy Symposium. Even as uncertainty continues in the U.S. over the fate of renewable energy tax credits, America’s financial services industry may soon invent the investment vehicles needed to bring real liquidity to renewable energy, said DiCapua, head of North American Analysis for Bloomberg New Energy Finance.
The result: Drastically lowered costs for equity and credit, and dramatically increased investment opportunities.
“In addition to being an important time for innovation in energy, I think it’s also an incredibly fertile time,” said Holman, research director at Lux Research.
Perhaps the greatest challenge, and the greatest opportunity, is the growing realization that venture capital cannot afford the risks inherent in the sector, because “the time to market and the amount of capital needed to bring a lot of these technologies to market are often beyond what fits neatly in that model,” Holman said.
Here’s what all this means for investors in sustainable energy:
- In the near-term, tax credit uncertainty tax credits will force risk-averse pension funds to avoid renewable energy, Holman said. Instead, family trusts, private investors, and private equity funds including Good Energies Capital will play a larger role, funding projects that previously may have seemed too risky.
- In the mid-term, it’s all about liquidity. Adapting tools including securitization and REIT’s for renewable energy will reduce the cost of investing, and fund a new generation of projects. “It’s a different way to think about innovation – the innovation of business models,” said DiCapua.
- Innovation abroad. China’s latest Five-Year Plan includes $250 billion in electricity infrastructure spending, including renewables and smart grid. That will speed the country’s transition from a low-cost solar cell manufacturer into innovator in its own right, Holman said. Similar innovations will occur in countries including India, Brazil and Tanzania, as rapidly urbanizing populations respond to natural resource constrictions.
- Don’t forget the government. Despite the controversy over subsidies, the U.S. government still supports opportunities for investment through the Department of Energy’s ARPA-E program, Holman said. And the military’s Cold War legacy of technology transfer will continue to produce private sector spinoffs, said Stephen Marlin, another panel participant, who is manager of advanced technology at General Motors. “One of the biggest groups that does vehicle research and alternative energy storage, it’s the military,” Marlin said.