Hot rocks need cold hard cash

Australian start-ups have always struggled across that great divide between R&D and commercialisation. It is what is known in the venture capital world as the valley of death, but right now for the clean-tech industry it is looking more like a grand canyon. Not because getting funding has suddenly gotten any harder, although the GFC hasn't helped, but because the rewards on the side have never been greater. Australian's clean energy industry has launched a campaign to convince Canberra to introduce new policies to encourage the development of emerging technologies such as geothermal, wave and solar, to ensure at least that there is something other than wind to fill the relatively ambitious renewable energy target. The geothermal industry is a case in point. Australia has the opportunity to lead the world in the development of hot rock systems and the widespread development of sedimentary aquifers, but most companies are having trouble raising enough money to be able to drill their targets, let alone get the debt financing to take on the sub-surface risk of a new technology. So the Clean Energy Council, reflecting the majority view of the industry, is calling on the government to consider a range of new measures common in the US, Europe and elsewhere, such loan guarantees for a pipeline of projects, accelerated depreciation and feed in tariffs for specific host industries – all measures the Rudd government has either ignored or rejected so far. This week the CEC enlisted the help of a group of US cleantech heavyweights, including Todd Glass, a clean energy specialist at US legal firm Wilson Sonsini, Jerry Lomax, the vice president of emerging energy at Chevron Technology ventures, and Warren Hogarth, a partner in venture capital firm Sequoia Capital, to spread the word and sent them to Canberra to meet bureaucrats and policy makers. Glass notes that clean energy is now the single biggest asset class in the venture capital sector in the US, and was close to the top in asset financing. “It is really phenomenal,” he said. In the US, as elsewhere, the industry had been supported by significant federal policies, even in the absence of a carbon price and a national renewable energy target. Tax credits on investment, production and manufacturing, had had a significant impact, as had accelerated depreciation and renewable energy bonds. Australia, which hopes to have the revised RET legislation in place in the winter sitting of parliament, currently focuses its added incentives on a series of grants, picking a handful of winners in selected industries, through its solar flagships and renewal energy demonstration programs. The CEC commissioned a report from Ernst & Young that found that cleantech investment must be market-driven. “It is not sustainable to rely on finance sourced from government grants, the selling of green rights, or accessing heart string money from family, friends and personal savings,” it said. “When it comes to large scale commercialisation, Australia tends to rely on overseas investors as the market is too small to take on a great deal of new risk. However, investors (local and overseas) need to see the potential for a pipeline of projects and not ad hoc ventures. “Currently, investors are aware of government grants funding commercial scale demonstration of one-off projects. While government grants form part of the future funding mix, they will not deliver the incentives required for multiple project deployment.” Paul Curnow, a renewable energy specialist at legal firm Baker McKenzie, says Australia is competing for global capital, not just against the US, China, Korea, and Europe, where a combined $US200 billion was invested last year, but also within south east Asia, where countries such as Thailand, Philippines, Indonesia, and Vietnam are supporting renewables with a range of policy initiatives. Curnow noted it was now standard practice in other countries to establish a range of incentives such as feed-in tariffs, with differential pricing for different technologies, connection and purchase guarantees, tax and other fiscal concessions and investors had been spoilt with readily available capital. Australia presented a completely different picture, he said, with uncertainty over the carbon price compounded by price volatility and uncertainty in the market for renewable energy certificates, the “least cost approach” to the renewable energy target, and the fact that post GFC financing remained expensive. “There's a lot of pieces of the puzzle that are still missing,” said Curnow. He also argued that measures such as loan and equity guarantees, green bonds, subordinated debt funds, accelerated depreciation and investment and production tax credits should be deployed to leverage private sector finance. “We haven't explored the use of the tax system to use incentives, though these have been driving the market in the US for a number of years. We really need to do so.” 06 May 2010 9:55 AM