They got their green-tech bill. So now what?

San Jose Mayor Chuck Reed doesn't need reminders about what happened in his backyard during the last economic downturn. Some 220,000 jobs disappeared from Silicon Valley after the Internet bubble burst in the early part of this decade.

These days, Reed must be wondering whether he's experiencing deja vu. Like a lot of big-city mayors these days, he faces increases in home foreclosures and unemployment--approaching 8.6 percent as of December in San Jose--due to the economic recession.

Screen capture by Martin LaMonica/CNET

President Barack Obama signs the American
Recovery and Reinvestment Act in Denver.

So last month, he joined counterparts from San Diego and Los Angeles on a trip to Washington, D.C. The mission: lobby Congressional legislators to pass the Obama administration's proposed stimulus plan, a spending package that would free up billions of dollars for investment in green-technology companies.

It was a tough sell. Just three Senate Republicans signed on. But now that it has passed, Reed says he expects the American Recovery and Reinvestment Act to provide "a huge shot in the arm."

"There still are people in Congress who think of this as some sort of phantom-technology or vaporware or Internet boom, based on products that don't exist," Reed said. "They don't understand that we're talking about real companies with real products and real jobs. It's very simple for me because I am just looking at my backyard, at companies and their products."

San Jose arguably can claim to be the geographic heart of the high-tech boom, and the emergence of green tech has partly cushioned the recession's toll on computer hardware and software companies. At last count, there were at least 40 solar-tech companies in San Jose, with another 40 operating elsewhere in Silicon Valley.

The number of green-tech jobs (PDF) in the region rose 23 percent between 2005 and 2007. While venture capital investment in other areas of technology have dropped off, VCs continue to put money into green tech. (Investments in Silicon Valley's green-tech companies soared 94 percent in 2008.) But as the economy began to sputter last year, even green-technology job growth had begun to slow.

Government as green-tech VC
Now, with a stroke of the pen, the U.S. government has become the largest global investor in green technology and is about to reignite the industry. "And that is a different ball game because it's going to be bringing in tens of billions of dollars in capital as a single investor to this market," said Tim Newell of Merriman Curhan Ford, an investment bank in San Francisco that specializes in green tech.

So what will $80 billion or so (depending on how you make the calculations) do for green technology? Here are some of the highlights:

• Tax incentives and credits galore for wind, solar, and other renewable power sources. The production tax credit's 30 percent tax credits now extend to developers of wind, geothermal, biomass, and other eligible technologies.

• Modernization of the nation's electric grid while also generating more power from renewable sources.

• A big push behind energy efficiency, with investment to weatherize homes and public buildings.

The hope is that the combination of government spending, and changes in the production and investment tax credit terms, also will generate more green-tech investment from private investors.

"This opens up the (investment) flow," Newell of Merriman Curhan Ford said. "It's a very important step."

Watching from the sidelines, green-tech start-ups agree with that notion, saying the funds--some of which are expected to be in the form of use-it-or-lose-it grants--will stimulate job growth. At the same time, they also believe that the billions of dollars in new investment capital are arriving at a very tricky moment. And amid a faltering economy, there is not much time to get the money into the right hands.

"The most interesting green-tech companies are the ones that don't have a lot of access to capital," said Michael Weaver, the CEO of Bionavitas, which has discovered a way to bring more light to algae to stimulate growth and thus improve the economics of algae farming. He added that "a lot of great technologies may be dropping off in the next few months because they can't get capital, and they aren't big enough to write a perfect grant proposal."

According to Weaver, "there definitely needs to be a different method for transferring the (stimulus) money to the marketplace that takes consideration of the size of a company and its history. The great thing about the Obama administration is that they are taking nonstandard tracks for doing a lot of things. My question is whether they are going to do the same for this as well."

Les Fritzemeier, CEO of Wakonda Technologies, which is designing low-cost manufacturing machinery for very efficient solar cells, also is optimistic about what happens next. After spending 25 years in government contracting at Rockwell International, he is also waiting on the details.

"I don't see pumping money into the industry as a bad thing. It's just a question of how it gets out and where it goes," he said. "I think it would be great to get a bit more nondilutive funding. We're only 10 people, and companies like ours can probably hire and put that money to use a lot faster than a big company could. Give me $150,000, and that's a new employee."

The earmark question mark
How the stimulus funding earmarked for green tech gets distributed is inevitably going to become part of the bill's story line on Capitol Hill. Winning the legislative battle may be easier than what comes next: how to manage the disbursement of the funds without waste or scandal.

"One obvious tension is to get this stuff out fast, in order to create jobs--and I'm sure there is pressure to do that," according to Tim Peckinpaugh, who specializes in energy and natural-resource legislative issues at the Washington, D.C., offices of the law firm K&L Gates.

Peckinpaugh, who spent five years as an aide on the House Science Committee to former U.S. Congressman Sid Morrison (R-Wash.), knows how score keeping in the nation's capital works.

"The conflicting tension is, they don't want to create a boondoggle or have it come out that money is going to favored supporters," he said. "Obviously, they don't want to make mistakes, but it's not clear to me how they going to find the middle ground to meet those two competing tensions. The Republicans are going to be looking for an 'aha, we told you so' kind of story."

Suddenly, Nobel Prize-winning physicist Steven Chu, head of the U.S. Department of Energy, becomes that much more influential. Last month, the Energy Department said it intends to distribute 70 percent of its funds from the bill by the end of next year. Skeptics, however, are already voicing concerns about what happens if the department gets put into the position of selecting green tech's winners and losers.

Perceptions matter, especially in a new administration. Chu brought in former McKinsey senior partner Matt Rogers to help manage the project. Rogers is supposed to vet projects, provide coordination, and make sure that various parts of the Energy Department are talking to each other so they don't goof up. He'll also have to ensure that companies with the best lobbyists, rather than the best technology, wind up winning contracts.

"That's all possible. But even with 50 years of (picking winners and losers), the system has produced the world's most advanced submarines, rockets, and jet fighters," said Branko Terzic, a former member of the Federal Energy Regulatory Commission who is now an energy regulation expert at Deloitte Services.

Terzic's is at least the glass-half-full view. But leaving these decisions up to government bureaucracies such as the Pentagon's also has resulted in projects that busted their budgets, as well as boondoggles like the development of the V-22 Osprey helicopter.

While there are obvious risks of establishing something akin to a government partnership, Terzic said the onus is on regulators to create appropriate checks and balances. For the moment, however, it's still unclear what process companies will have to follow in order to reserve a spot on the gravy train.

Small fish, big pond
The excitement about the amount being budgeted for green tech is tempered by the realization that smaller, entrepreneurial start-ups may have a tougher time getting noticed by the big federal bureaucracies charged with writing the checks.

"We certainly have a game plan, but it's quite unclear how that funding will end up in the hands of small businesses like ours," said Bionavitas' Weaver, whose company invented a way to improve the economics of algae farming. "There's a well-known track for getting money from government into industry, but unfortunately, that track usually means it goes to the largest players."

Weaver and other green-tech start-ups say they are wary of the recent history of Energy Department grants, fearing that if past is prologue, the bigger companies will be able to take advantage of years-long relationships with the government to make sure they are first in line to get stimulus monies.

"Frankly, that's my concern," said David Grieger, the CEO of VU1, a company that has invented an energy-efficient lightbulb that doesn't use mercury. "They have made a lot of statements that, in order to get the money out the door quickly, they will have to get it into existing organizations. If that's the case, that can't be good news for the companies that don't have a pre-existing relationship (with the government)."

Unfortunately, there still remain more questions than answers about how the process will work. Department of Energy Press Secretary Stephanie Mueller said the agency is "still working out details" but that it expects to make specific funding-related announcements within the next couple of weeks.

Considering the massive ambition, as well as the massive amount of money about to get put into the green-tech pipeline, asking the federal bureaucracy to be ready to move so soon after the congressional passage of the stimulus is indeed asking a lot. Analysts watching the process say the government is anxious to avoid a situation in which the lion's share of the money winds up being shoveled toward big companies and utilities, leaving start-ups out in the cold.

"The program is focused on innovative technology," said investor Newell, who was a technology adviser on the White House staff of President Bill Clinton. "The program is intended to foster the deployment of innovative technologies to meet environmental and energy goals. However, I think that what you're seeing now is a (pause) to re-examine how that program should work, given the amount of capital that's going to be put to work."

This may be a learning lesson for all concerned. Certainly, companies are going to have to come to understand how to work with government; in particular, they are going to have to become experts at marketing to the Treasury and Energy departments, because they're now the bank.

All the same, policy watchers expect a bit of improvisation as the different projects get funded. The fact is that Washington has not tried something on this scale since the Great Depression.

Cameron Brooks, a green-energy consultant who consulted with the Obama transition team, said the absence of a master plan speaks to the uncharted nature of the undertaking.

"I don't think many people know how it's going to happen, and that is consistent with the idea that this is unprecedented," Brooks said. "If you look at the levels of funding going to states, or things like weatherization or monies projected to go to the smart grid--all those budgets are going up 20 or 30 times. The expectation that there will be a timeline for how this money is supposed to move out within 60 days--at one level, it's unprecedented, at another level, it's ridiculous."