Green tech still withering in the 'Valley of Death'

The bankruptcies of Solyndra and now Beacon Power show that green-technology startups are still struggling to find ways to cross the dreaded "Valley of Death" into mass commercialization.

Flywheel storage company Beacon Power filed for bankruptcy protection Sunday after running out of options to raise money and fund operations. "The current economic and political climate, the financing terms mandated by DOE, and Beacon's recent delisting notice from Nasdaq have together severely restricted Beacon's access to additional investments through the equity markets," CEO William Capp said in bankruptcy papers, according to reports.

There are significant differences between Beacon Power and Solyndra, but both companies received loan guarantees from the same Department of Energy program. After receiving $528 million in loans from the federal government, Solyndra shut down in late August, causing a political firestorm and investigation into the loan guarantee program.

Although it's difficult to forecast with accuracy, the loan guarantee program could well see more business failures, potentially in the area of electric vehicles and batteries where future product demand is uncertain.

That's obviously bad news for taxpayers and the companies involved. But those failures also point to the persistence of a major problem for clean tech: the challenge of scaling up clean-energy technologies, the very issue federal loan guarantees were intended to address when the program was created in 2007.

To some, loan guarantees for specific companies are fraught with problems. The political fallout from any failed venture tarnishes the notion of using government financing to advance green technologies, clean-tech venture capitalist David Gold argued last week.

"Even if, by some miracle, the government could make good business decisions void of political influence, such programs are still doomed to failure because the public and media won't allow for even one loan or investment to fail," he wrote in a column.

Project financing
Some investors said the bankruptcy of Beacon Power is indicative of the poor business models pursued by "first-generation" clean-tech companies. That may or may not be true. What's clear, though, is that many energy-related companies need to secure a lot of capital to try out unproven technologies or to make products at scale, presenting a difficult gap in the financing chain.

Like others, both Solyndra and Beacon Power applied for DOE loan guarantees because they had relatively new technology that banks and other traditional financial institutions were wary of backing. Yet while the two startups shared a common need for loans to cross the so-called Valley of Death between product development and commercialization, they differ in other significant respects.

Solyndra tapped nearly all of the money from a $535 million loan guarantee to build a factory for producing its solar collectors in Fremont, Calif.--a facility the company now hopes to sell in bankruptcy court.

The size of Beacon Power's loan guarantee was much smaller--$34 million--and the 20-megawatt energy storage plant it built in Stephentown, N.Y., could continue to make money while benefiting from a rule change as to how power providers are paid for so-called frequency regulation services, according to the DOE.

Also, the federal government will be the first to be paid back for the $39 million it had loaned out already to the project. In the case of Solyndra, a controversial refinancing earlier this year put private investors first in line, ahead of the federal government.

EV crash ahead?
The bulk of the loan guarantees provided through the two-year stimulus program are in large-scale wind or solar, which are less risky because those projects sign contracts with utilities to buy the power they produce.

By contrast, SoloPower and Abound Solar received $197 million and $400 million loan guarantees respectively to build their first large-scale factories. But the brutal pricing environment of the global solar industry, where Chinese panel makers have been accused of dumping, makes it difficult for any newcomer.

"The odds are stacked against these startups coming into a highly competitive market with new technologies," solar analyst Paul Clegg of Mizuho Securities told Bloomberg last month. "One of these guys might succeed, but the amount of money needed to reach scale is huge and is often underestimated."

The Advanced Technology Vehicles Manufacturing program (ATVM), meanwhile, has provided loan guarantees for automakers, including Nissan, Ford Motor, and electric vehicle start-ups Fisker Automotive and Tesla Motors.

To bring the costs of electric vehicles lower, battery manufacturers are producing at higher volumes. But it's still unclear how far sales of electric vehicles will extend beyond a small niche of EV enthusiasts unless there is a major spike in the price of gasoline.

Some auto and battery industry observers are already saying that some of the recipients will not be able to repay the loans because prices for products will remain too high. Echoing that sentiment, Lux Research in July said the overcapacity of battery manufacturing will make it "impossible for all these companies to survive."

Lithium ion company Ener1, which received $119 million in Department of Energy aid to advance battery manufacturing, was delisted from Nasdaq on Friday and is drawing scrutiny from lawmakers. Ener1 was an investor in and supplier for electric carmaker Think, which declared bankruptcy and was purchased by a Russian investor.

The bigger question surrounding the specific cases of EV suppliers, Solyndra, or Beacon Power is how clean-energy technologies get a commercial foothold. Even before the political backlash from Solyndra started, smaller companies faced not only a poor financing environment on the public markets, but competition from deeply entrenched fossil fuel industries.

The Valley of Death problem doesn't have a clear-cut solution, and overselling the job gains of clean-energy technologies is certainly a danger. The big question now is whether failed clean-energy companies can offer valuable clues for making the U.S. more internationally competitive in energy--or if they'll simply become political footballs.