Green tech can't shake the bubble question

BOSTON--In green-tech investing, expect mini bubbles and endless discussion of what role government should play in energy.

A panel of big thinkers and investors at the AlwaysOn GoingGreen East conference here on Wednesday found little agreement on the ongoing financial bubble question, with most of the talk focused on the role of government policies.

Since the dot-com boom, there have been recurring questions of whether new sectors, such as clean-energy technologies, are in danger of overinvestment. As the green-tech category has attracted billions of money in venture capital over the past decade, there's concern that money will be lost, particularly since there are so many relatively new investors in energy technology.

If there was consensus among panelists, it was that there have already been "mini bubbles," driven either by overzealous investors or government subsidies. The most recent examples are solar, where dozens of companies were formed over the past few years, and corn ethanol, an industry which grew rapidly based on supportive government polices.

The standard assumption is that people should avoid speculative investment bubbles, since they're bound to lose money. But Ethernet inventor Bob Metcalfe, who is now a venture capitalist at Polaris Ventures, argues that bubbles and even "boondoggles" are an important "source of innovation."

Metcalfe, who has given a talk on the parallels between the Internet and the energy industry over the past two years many times, thinks that entrepreneurs should continue trying to innovate in energy despite mini bubbles.

The role of government is central to the discussion of investment bubbles in energy because power and fuel markets are far more regulated than the Internet. Also, governments around the world, in general, seek policies that encourage domestic and clean sources of energy.

Solar power, for example, is more expensive than generating electricity from burning coal. But the cost per kilowatt hour does not figure in what economists call "externalities," or costs not directly attached to a price, said David O'Connor, a partner at ML Strategies, a government relations consulting company. Some externalities associated with importing oil or burning coal could be negative health effects, increasing global warming, and the military costs to the U.S.

O'Connor believes that there is a bubble in clean energy and clean tech fueled in part by government policies, but the idea behind those subsidies is to figure in the cost of externalities.

"What's important is that those policies are trying to capture costs that are real...but are not captured in the price of gasoline or our current energy sources," he said. "Whether the externalities are environmental, social, or energy security--all of these are real costs. Young Americans dying in the Middle East is a relevant cost when thinking about national energy costs."

Government policies to remove air pollutants that cause acid rain is an example in the past where governments set up a system to put a price on environmental costs, noted Jurgen Weiss, the principal of the consulting company the Brattle Group.

George Gilder, the chairman of Gilder Technology Publishing, dismissed the importance of government policies with regards to making energy cleaner, saying that government subsidies are not likely to yield more than their costs. He said that the dot-com boom was not a bubble because it created valuable companies and vastly expanded wireless and telecom bandwidth.

Upstream or downstream investment?
Governments around the world are now more actively encouraging domestic and low-carbon energy sources. The challenge for entrepreneurs and investors in energy is handicapping which policies will be persistent, said O'Connor. For example, at the moment it's unclear what regulations could be to cap carbon dioxide emissions. Policies to promote energy efficiency, by contrast, seem more durable, he said.

Many green-tech companies are formed around a technology with a potential to undercut existing energy generation sources, such as solar power that is cheaper than coal. As such, they aren't counting on subsidies.

Many venture capitalists, Metcalfe said, argue that their companies don't need subsidies, and that's part of their "sales pitch." But in fact, they often do, he said.

In the U.S., policies designed to promote clean-energy technologies are often in the form of a tax credit, noted Weiss. But an alternative is to focus subsidies "upstream" in the form of government-sponsored research and development.

None of the panelists offered specific suggestions on how to promote energy innovation. But all agreed that the government does a poor job of picking specific technologies and funding them, such as the FutureGen carbon capture and sequestration project that was suspended in 2008.

One area where the private sector falls short in funding green technologies is construction of expensive energy equipment, such as power plants or refineriesto make second-generation biofuels, said Weiss. In general, venture capitalists don't have the hundreds of millions or billions of dollars needed. And bankers and private equity companies shy away from projects with technology risk.

Because of the high capital costs associated with solar power and biofuels, many investors have turned to smart-grid technologies but that, too, may be getting oversaturated. "The smart grid is overhyped but in a sense it's not as bad because the incremental investments are smaller than building a nuclear plant," said Weiss.