Typically, VC backs new clean technologies on a massive scale. The received wisdom is that disruptive technology needs to be rolled out at large scale to bring the unit costs down. The solar industry, in particular, benefited from high levels of VC funding for first generation silicon technology which is now fully mature. We are now in the age of third generation solar which is making progress on its journey to compete with fossil power generation. Based on polymer or vacuum deposited ultrathin films it is light weight, flexible and recyclable. However, even Nobel prizes are no guarantee of commercial success as the third generation polymer company Konarka has recently gone bust after $200 million investment.
Generation and consumption where you live
Renewable energy is available wherever the sun shines, waves lap, or plants grow. Unsurprisingly that also corresponds to where we consume energy (where we live and drive). Interestingly, in the UK we need twice as much heat as we do electricity, and whereas electricity is relatively easy to transport once the investment is in place, heat is much harder to move. This fits perfectly with the small scale and local approach to power generation and consumption. The key enablers here are storage (heat and power) and intelligence on power generation and use. With this information, we can move from large centralised power stations to distributed energy sources where consumption and generation are concentrated in one place.
Solar and waste companies lead the way
Community-led clean tech approach offers enormous advantages to VC investors. The scarcity of £1 billion+ acquisitions or IPOs underscores how hard it is to make an attractive return on investment with a typical £200 million invested. A £200 million investment in solar will typically be spent on building a dedicated factory to subsidise early sales, while a company such as Molecular Solar is projected to reach profitability within £5 million of investment.
Indeed, Molecular Solar is an example of a solar company that fits in the community-led clean tech model. Based on vacuum technology that already exists in the food packaging industry, this third generation company promises a cost structure and performance features which can open up completely new distributed solar applications.
Indeed, Molecular Solar is an example of a solar company that fits in the community-led clean tech model. Based on vacuum technology that already exists in the food packaging industry, this third-generation company promises a cost structure and performance features which can open up completely new distributed solar applications.
The food packaging industry is under pressure on volumes since supermarkets want to reduce waste. Therefore Molecular Solar can be used to generate solar power without new investment.
Beyond renewables, waste is another industry which is distributed and is ideal for a community-led model. Not only is waste produced near to population or production centres, but any recovered/ recycled materials or energy can often be used by those waste producers.
Mercia Fund Management is currently also working with a new waste treatment technology business which promises to revolutionise household waste and offers the potential for every household to source all its power and heat requirements from domestic waste. This of course offers enormous cost savings to local authorities. Again since this technology works on a household scale and uses existing large scale cost-down production techniques it is very capital efficient. Technology roll-out to demonstrator level will require far less capital than the same at conventional power station level which may require £100 million rather than £1 million.
Government support
Costs related to emissions and pollution are borne by everyone. This classic “tragedy of the commons” can be overcome by governments, regulators and tax authorities setting appropriate standards/taxes/permits etc. The government also has a role in stimulating innovation through publicly funded research. Occasionally the fruits of the research can lead to the next disruptive technology company leading to job creation and an increased tax revenues through a growing economy.
The Government also recognises that the journey from research to commercial exploitation can be a risky one and offers a range of generous tax incentives for example within the Enterprise Investment Scheme (EIS) and the recently introduced Seed EIS to emphasise extra support for early stage ventures.
The recently announced DECC £35 million energy entrepreneurs fund is a welcome addition to the sector and is targeted at filling the gap between research and exploitation at large scale. If this funding could be applied in a community-led clean tech fashion, the impact would be greater.
There have been incentives for renewable energy generation and to a smaller extent heat. What is missing is an incentive for energy storage. Renewable energy must be generated when it can which does not always fit with peak demand. Again the community led model helps since demand and supply can be aggregated over many sources, but this does not completely obviate the need for storage (heat and power) to temporally shift supply and demand.
Energy storage is fertile ground for start-ups since there are many market niches to serve covering a range of power and energy levels which allows the start-up to get established and realise some scale economies. This is in contrast to renewable generation where often the only thing which matters is £/kWh.
In summary, there is a great opportunity to invest in an emerging class of community-led clean tech companies as the larger more capital intensive approach falters and the funding dries up. The community-led approach is particularly suited to some areas of solar, energy from waste, and energy storage. Government incentives and targets will of course help but need to ensure their alignment with the emerging needs within community-led clean tech.
[Editor’s note: Thanks to Andrew Oldfield, Head of Cleantech, Mercia Fund Management, for providing us with this interesting insight into clean tech finance. Mercia Fund Management invests in a range of technology sectors including community-led clean tech from its existing two funds and is currently raising further funds to extend this activity to capitalise on the opportunity to invest in the clean tech sector.]
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