The Exchange

Clean Energy Is Still a Sound Investment

The Exchange

By Dan Adler, Neil Auerbach, Martin Lagod and Dennis McGinn

A costly misunderstanding has arisen in the debate over America's energy future. That misunderstanding rests on the erroneous idea that the private sector has decided that investment in clean energy — solar, wind and related technologies — isn't worth the risk. As often happens in an election year, our political leaders have picked up on the theme, and the issue has been featured in campaign ads, banner headlines and convention speeches alike.

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Fortunately, investors have a very different perspective on clean energy. We take risks for a living, and we understand that there is always a chance of failure. Clean energy is no different: it is a risky venture. However, we recognize that the clean energy sector has huge upside, and that is why we are deeply invested in it.

This is a sector with over $1.4 trillion invested globally over the past eight years. It is the fastest growing segment of the global energy industry. In 2011, according to Bloomberg New Energy Finance, more capital was invested in new clean power infrastructure than in traditional fossil energy infrastructure.

This is why we are comfortable taking some risks. We collectively represent over $1.4 billion in institutional, venture and private equity capital invested in clean and renewable energy. Our firms, along with most major banks and dozens of VCs and private equity firms, have spent the past decade investing heavily in this sector. We believe in the ability of private capital to drive innovation and create jobs. We write now to assure our elected leaders that the private sector is the driving force behind the renewable energy industry.

There's Still Money in Clean Energy

The numbers tell the story best. In just the past few months, Credit Suisse (CS) announced $300 million in new funding for solar rooftop installers SunRun and Solar City; Capital Dynamics raised $282 million to fund U.S. commercial solar projects; JPMorgan (JPM) led a group of investors to announce $220 million in tax-equity financing for an Oklahoma wind farm; and Berkshire Hathaway (BRK-A) subsidiary MidAmerican Energy Holdings Company issued a massively oversubscribed $850 million in solar bonds to fund a utility-scale solar photovoltaic facility. Meanwhile, banks like Credit Suisse and Citigroup (C) are about to monetize rooftop solar through the sale of bonds that could net up to $4.6 billion next year.

All of this is on top of Wells Fargo's (WFC) $30 billion clean tech investment commitment, Goldman Sachs' (GS) $40 billion commitment and Bank of America's (BAC) $50 billion commitment.

That is not the profile of an industry that the private sector is rejecting.

The larger trend of investment in U.S. clean energy bears this out.  The sector saw a 42% increase in invested capital from 2010 to 2011, to the tune of $48.1 billion, according to Bloomberg New Energy Finance. Cleantech recently was ranked the top category for venture capital dollars by CleanEdge — with $6.6 billion invested last year (compare that to cleantech representing just 1.2% of U.S. VC investments ten years ago). That may be why the U.S. ranked #1 in the world for investment in this space last year — overtaking China and Europe.

[For more on the clean energy debate, check out this recent episode of The Daily Ticker, below.]

Failures Are Normal

We do not want renewable energy to rely — to any extent — on government policy forever. At the same time, however, high-profile bankruptcies like Solyndra, which received significant private investment, occurred due to global market dynamics — not to any fundamental flaw in those policies. In fact, Solyndra raised $1.2 billion in private capital — more than two and a quarter times the funding provided by the federal loan guarantee that has been so widely criticized. Even with two-thirds of its capital from private investors, Solyndra still went under, because the global market for solar shifted. It was an economic issue, not a political one. That reality needs to be acknowledged.

Any industry that grows exponentially while costs are dropping dramatically — as they have in the solar industry — is bound to see some failed businesses. In these cases, private capital is primarily at risk, and private capital gains by picking winners and suffers when a crop of losers are cast aside as the industry consolidates and grows stronger. This is a familiar part of any rapidly maturing industry — and, in fact, any capitalist endeavor — and we are surprised by the lack of awareness in Washington of this reality.

The failure of a few companies should not be used as a blanket to cover up the thousands of companies, large and small, that are creating billions in return on investment — not to mention jobs all over the country — with support from both public and private capital. As long as the political debate continues to ignore the investment reality and historical backdrop, the debate won't be taken seriously by Wall Street, by global investors or by major firms with billions in cash they are looking to invest.

Here's the bottom line: the story of clean energy is a positive one, even if the politics of the moment are trying to discount it. Americans have never been cowed by competition and we are recognized everywhere for our entrepreneurial spirit and drive to innovate. America's investors are going to keep doing what we're doing. Hopefully Washington will catch up.

Dan Adler is President of the California Clean Energy Fund. Neil Auerbach is founder and Managing Partner of Hudson Clean Energy Partners. Martin Lagod is Managing Director and co-founder of Firelake Capital Management. VADM (Ret.) Dennis McGinn is President of the American Council On Renewable Energy (ACORE).

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