The Cleantech Pillars: Policy

Government influence is fundamental in Cleantech 

Public Policy has multiple direct and enabling influences in virtually all Cleantech sectors. 

So What? 

Where Cleantech is inextricably bound to Policy, the Information Age saw strong opposition to government subsidies and industry support. TJ Rodgers, CEO of Cypress Semiconductor, for example, provided the following 1993 Congressional testimony on proposed industry subsidies: 

“I am here to say that such subsidies will hurt my company and our industry. Why? Because they represent tax-and-spend economics–a brand of economics that is a known failure. I do not want handouts. The men and women of our company do not want handouts. And if Congress wants to help American high technology, handouts are the wrong way to go” 

Like other solar companies, of course, Cypress spinoff SunPower has benefitted greatly from Government subsidies and favorable legislation. The solar industry, for one, would arguably barely exist today without the broad Governmental support that it has received. 

Cleantech inextricably bound to Government Policy 

The Policy cross-roads of regulation and public funding can provide a strong nurturing environment for new clean technologies. Nothing is ever simple with Government, though, and even these Policy vectors of regulation and public funding are only part of a much larger puzzle. 

When Michael Porter created his infamous Five Forces model for Competitive Analysis (Competitors, Buyers, Suppliers, Substitutes, Potential Entrants), he side-lined government as an overriding factor – not a factor unto itself. In the case of Cleantech, however, the government can be inseparable from or overwhelm any or all competitive factors.  

In Cleantech, Porter’s industry competition could arguably even be replaced with Governmental competition. Different governmental policy has yielded different industry results. This was well summarized in coverage of US Energy Secretary Steven Chu’s recent activities and comments which observed:  

Chu noted in particular the contrast between China’s long-term incentives and the on-again, off-again nature of clean energy support in the U.S. While the Department of Energy has directed tens of billions of dollars of green tech stimulus support, China’s support can be measured in the hundreds of billions of dollars. To ensure confidence for investors, U.S. policy should guarantee support not for one-to-two year increments, said Chu, but “at least 10 years, and possibly 20 years.”  

In the ‘age of infrastructure’, many of the leading Cleantech sectors are directly related to public and regulated infrastructure such as energy and water.  Governments can create large markets, in arguably less time than the Biblical week, through regulation or incentive structures such as grid Feed-In-Tariffs and Investment Tax Credits. Where would innovations like the catalytic converter be, for example, without US EPA regulations?  

The Policy overlays of regulation and public funding can compound the impact of government vested interests. Government program structures can dramatically override classic industry competitive discrimination.  Ontario’s Green Energy Act, a frequent d-bits subject, is currently providing a test-tube environment where the distorting impact of Government Policy on industry competitive behavior can be observed. Moreover, changes in policy – even in a single country or region – can dramatically impact global industry viability.  

Policy directly influences other core Cleantech Pillars. The large Plant investments in Cleantech, for example, create a business model that can be strongly influenced by tax treatment such as depreciation allowances and capital investment credits.  

The Government is everywhere  

We thus have a massive Venn diagram of Government funding, regulation and ownership. The Government acts as market creator, regulator, incentive provider, customer, financial backer, business partner, and even technology developer, owner and partner. All of the original patents at Cleantech pioneer Ballard Power, for example, were originally owned by Her Majesty the Queen.  

Not only does this make Cleantech opportunities fundamentally enabled by Government Policy, but also ultimately beholden to the consistency of that Policy. The effects of Policy consistency can be amplified by the structure of nascent solar industries. For example:   

Government policies over fossil-fuel grid power and the technical issues of net metering, interconnecting distributed electric energy back onto the grid or load balance on the grid itself for peak and provisioning, ultimately result in bullwhip effects across the solar value chain most heavily impacting the upstream polysilicon suppliers. BNP Paribas Solar Spotlight 6 September 2010.  

When it comes to industry development, in his Testimony to the Senate Finance Committee, Jon Sakoda of top tier venture capital firm NEA, outlined six key pillars for growing a clean energy industry – the most important of which are subsidized manufacturing incentives and subsidized end markets. Sakoda well-articulated this Cleantech Pillar of Policy.  

Cleantech markets are strongly aligned with energy. The age of oil and the development of the regulated utility infrastructure have led to a complex web of Government involvement.  

Government energy funding rivals the size of most industries  

According to a June 2010 report from the International Energy Agency (IEA), annual Fossil Fuel Consumption Subsidies (37 countries) amounted to $557 billion in 2008. Putting this in the context of some of the world’s largest industries, in 2008 energy subsidies alone were almost double the size of the global software industry ($304 billion), and about three-quarters the size of the global pharmaceutical industry ($740 billion). Similarly, global energy subsidies are four times the $130 billion in annual revenues for US electric power generation.  

And opens or closes the gate to participants  

Though crafted as an enabler, the recent US DOE Loan Guarantee Program underscored how binary the influence of a Governmental seal of approval can be. The Loan Guarantees did not guarantee any outcome, and requires considerable further effort on the part of the recipients. Yet, in a number of technology areas, the viable companies have been reduced to those select few that received the Guarantees.  

Moreover, a Deutsche Bank report from last November (Paying for Renewable Energy) noted that electrical energy Feed-In-Tariff (FIT) programs needed to provide Transparency, Longevity and Certainty, and that this drives investment. Such is not always the situation, however.  

A good example of bad to worse is the Spanish Government’s very recent plans to retroactively change solar tariff rates. This is an example of non-transparent, short-lived, and completely uncertain policy with future uncertainty on past activity.  

What to look for   

1. Fundamental economic value that can reduce government subsidy requirements
2. Overlap of public policy and public funding
3. Stable Government regulation
4. Government incentive programs that are transparent, long-lasting and certain
5. Emergent government subsidies
6. Awareness of government Policy direction, and strong government relations

A need for Government relations expertise in a new venture? In the case of Cleantech, the answer is yes.