Why is the Council on Foreign Relations so smitten with Bill Gates' "Energy Miracles"

I just read an interesting article from Ben Gaddy and Varun Sivaram in the Financial Times -- both are good folks that I largely agree with.  This particular article seemed to skew the data and its conclusions the wrong way as it pertains to breakthrough climate change technology.  I attempt to respond to their article with my interpretation of their facts.

It has been about 10 years since Silicon Valley made a big bet on clean-energy technology. Instead of large profits, most were compelled by a need to “do well by doing good”, VC investors scoured the landscape looking for technology and business models that could scale and achieve VC like returns. By 2009, they had invested over $1bn in over 100 new clean-energy companies.

But, these investments have underperformed. With some exceptions, most investors have found the cleantech difficult and disappointing. What went wrong? With very few exceptions, the companies they invested in competed in commodity markets achieving gross margins of less than 30%. At those gross margins, hypergrowth requires continued fundraising. Only when growth levels off does the insatiable need for equity give way to positive cash flows. This is similar to construction companies – infrastructure companies. This is a place for working capital, construction finance, and growth capital. To become a big company usually takes ten years or more, much too long a time line for VC investors.

So where should cleantech go from here? In short, private sector capital should focus on the deployment of infrastructure – construction to be exact. The good news is that Government R&D funding has led to the invention of hundreds of technologies since the 1970s, their continued funding ensures a full pipeline for decades to come.  There is a fairly reliable track record of these technologies being ready for the private sector to scale them up twenty years after they are invented.  These technologies are ready to be scaled up at gigaton scale. This has been studied by the Deep Decarbonization Project, the International Energy Agency, Rocky Mountain Institute, PWC, Greenpeace, and many others. Yes, new technologies are desperately needed to meet the 2050 climate change goals. But, as a cleantech VC boom and bust cycle has shown us, private sector capital’s role is really best suited for deployment of existing technologies – not revolutionary technologies or Bill Gates' "Energy Miracles".

The good for finance firms is that construction companies need tremendous amounts of capital. The US solar and wind industries alone will attract over $60 billion in project finance capital in 2016. Energy efficiency, battery storage, electric vehicles, waste to energy, and other categories add even more capital. VCs have shifted their strategy from breakthroughs to support technologies that improve the returns of project finance investors. Finance Tech makes deploying project finance capital faster, big data tools make building management more effective, tracking technology allows solar technologies to generate more production, and so on. This strategy allows VCs with a fixed timescale, they ability to achieve solid returns within five years to pay back investors. This model has been perfected by VCs like SJF Ventures which invested $25m into NextTracker in December 2014 and sold the company to Flex ten months later for $330m.

Sadly, in my experience, investing in "cleantech" always seems to mean venture capital when the speaker should really be talking about project finance. There are very few things that both Presidential candidates agree on, private sector investment into infrastructure is one of them. As the solar and wind industries have shown us, deployment leads to massive learning, that leads to incremental R&D, predictable cost reduction, VC returns, Government focus, and tremendous political support.  This cycle can be replicated within electric vehicles, green buildings, combined heat and power, fuel cells, anaerobic digesters, battery storage, solar hot water, and many other sectors.

Last year, Bill Gates and 27 other billionaires framed the problem around the need for energy miracles because today's solutions simply weren't up to the task.  To seize the moment in Paris they called a quick press conference with the 20 Governments around the world to reclassify their existing investments into their curiosities in breakthrough cleantech ventures as part of the Breakthrough Energy Coalition.  After the press conference, they did not agree to hire professional help, alas they haven’t even created a website by which hungry entrepreneurs can contact them. Instead, they simply left the impression that today's technologies will not meet the goal without “Energy Miracles”. They can clearly spend their money as they wish, but they have to be careful not to join Bjorn Lomborg as "deniers".  Not traditional climate change deniers, but almost as bad...folks that deny that scaling up current technologies can be relevant.

More importantly, Governments are important to the work of deployment at scale.  This is a serious role that is often undermined by the "R&D first" mantra.  Governments love to satiate the public's desire for change with future talk around R&D instead of doing the tedious work to unlock today’s solutions now. The US Government has shown that it can play an important role on scaling up solar deployment through the SunShot program. But after intense lobbying, the US Department of Energy has deliberately not tried to replicate this best practice to any other industry sector -- preferring instead to focus on more pilot projects and R&D.  In fact, the US Government already has the funding to deploy $80b of climate change solutions under the guise of saving tax payer money – but under the Obama administration less than $5b of that money has actually been prioritized. Yes, the Government is really the only group that can invest in R&D at scale, but they can also be a shining example of deployment at scale within its own infrastructure.

We all love a good story of cleantech VCs and resulting billionaires, but that is simply not the story of cleantech infrastructure.  Cleantech infrastructure is a story of thousands of well run companies worth less then ten million dollars that have been started since 2003 that have hired 1 out of every 80 people since the 2008 recession at wages exceeding $21/hour.  Cleantech VCs have adjusted their ambitions to support the deployment of existing technologies and business model innovation where they can make reliable five year returns.  I applaud Ben and Varun for their effort, but simply missed the point.  VCs will never get the rewards for breakthrough energy innovations because the commercialization timeline and total capital required is just too great.  They are asking capitalists to invest into breakthrough technologies for which they will never be compensated fairly.  This is a job solely for Government and maybe charitable foundations of the uber wealthy -- not for the VCs that have to make compelling returns for their pension fund investors.