Getting Off the Dole

In listening to speakers at several industry conferences over the past several years, reinforced by reading a number of editorials about the national energy bill now under deliberation, I can’t help but conclude that many renewable energy interests put far too much emphasis on attracting or maintaining financial support from the public sector.

Attracting Private Finance to Renewable Energy RE Insider – November 24, 2003 – Paraphrasing some of the main themes I’ve heard: – “More favorable government policies are required to promote accelerated adoption of renewable energy.” – “The amount of government financial support for renewable energy is small compared to the subsidies for fossil fuels and nuclear power, so we should not be embarrassed about seeking more support.” – “The Bush Administration is fundamentally opposed to renewable energy. Renewable energy is going to get screwed again in this energy bill.” Whether or not these assertions are valid, for the long-term welfare of the renewable energy sector, I say “Enough already.” Such comments perpetuate a victim mentality that is self-reinforcing and hence ultimately self-defeating. I am not aware of any other segment of business activity that is as concerned about what the government has done, is doing, might do and should do, than the renewable energy field. In contrast, among management teams running real businesses – in industries ranging from real estate to food to software to oil, irrespective of whether the business is in manufacturing, distribution, retail or service – the key questions they pose themselves remain largely the same: – Who are our target customers? – What do these customers really want? – What are the economics of our offering (price relative to cost) to these customers? – How are we different from our competitors in serving these customers? – How do we really make money? – How can we make more money (through enhanced productivity or new offerings)? It is a sign of a sick industry. Consider the plight of airlines, for instance when the predominant topics of management discussion relate to how the government can and should help. If I was a doctor, I’d diagnose the renewable energy sector as very sick indeed, gravely addicted to government aid. The addiction can be seen in several forms. As a prime example, many photovoltaics companies working in California have based their business models upon the existence of substantial “buy-down” subsidies to reduce the apparent cost to customers of their offerings. By these companies’ own admission, demand for their products and services would dramatically be curtailed by the removal or reduction of the subsidies, thereby leading to financial devastation. I’m not alone in calling their problem an addiction: I recently noted a quote from a California PV industry insider who worried that many of his peers were becoming “incentive junkies.” And, it’s not just subsidies: consider the sometimes nefarious impact of government R&D grants. Companies that excel at tapping the various sources of grants throughout the government at both the federal (e.g., DOE, DOD) and state (e.g., CEC, NYSERDA) level produce a core skill of proposal-writing and lobbying, as opposed to the disciplines of product development and commercialization, in other words, marketing and sales. True, a company that obtains grants gets “free” money that is useful in developing new technology, but it’s a technology that some bureaucratic committee thinks is potentially interesting, not necessarily a technology that the marketplace wants or needs. I can list a number of companies that have procured millions of dollars of grants over the years, but have had only limited (at best) success in converting this technology development into generating revenues from real customers in the market. In some ways, I can understand the obsession with public policy by renewable energy interests. The pursuit of government aid becomes mandatory for self-preservation for those who already have access to it. Then, other renewable energy companies do what they can to get a privileged place at the public trough. So, the name of the game becomes maximizing the pool of available public funding sources, focusing scarce business resources on the domain of bureaucrats, regulators and politicians. And, that’s a huge problem, because it means that the name of the game is not serving customers. When the key constituency for a company is not customers (much less investors or competitors) but government agents, that company orients itself first and foremost to the whimsically political forces of the public sector, putting the needs or concerns of the private sector as secondary. At any moment in time, only one thing can be the highest priority, and for many renewable energy companies today, that highest priority strongly appears to be garnering and exploiting public sector support. Yet, it is only by serving the highly demanding interests of the private sector that a company builds the financial and market discipline necessary to create viable businesses that endure and thrive. In other words, as soon as a company thinks that its primary success factor is ensuring the existence of lucrative public pots of money and positioning itself to take full advantage of them, more so than designing and putting forth a competitively superior offer that meets a customer’s true needs based on the real underlying economics, it is probably not going to be a successful business over the long-haul. If changing the world is what renewable energy interests want to do, then large profitable companies are the best vehicle for achieving that goal, and the path for getting there is ultimately on the capitalist road. Unfortunately, reflecting the public sector orientation of the dialogues prevalent in the field, much of the behavior by renewable energy interests appears somewhat socialist in nature. The desire to override the fundamental market-based precepts of capitalism with bold public policy mechanisms threatens to thwart the successful growth of renewable energy, as inevitably such behavior discourages the attraction of private sector investment, which ultimately will be critical to funding the corporate growth essential for wide-scale impact in the marketplace. I recall a conference that I attended earlier in my career entitled “Financing Renewable Energy”. Eager to see how the financial community viewed the opportunities in renewable energy, instead I heard speaker after speaker talking about different ways government could channel more money towards the advancement of renewable energy. I was discouraged yet wryly amused at the same time. To me, calling public sector aid “finance” as these speakers did was akin to calling the practice of begging “employment”. This tendency still prevails today in the renewable energy sector. Many if not most participants in renewable energy appear to believe that the public sector is pretty much the only place to go for funding the development and growth of their companies. In contrast, private sector finance is generally overlooked or underemphasized, assumed to be uninterested in renewable energy, or perhaps worse, too greedy to bother with. As for the latter perception about greediness, there’s no question that private sector investors seek to make money – that is their job, after all. They are stewards of the financial portfolios of people like you and me, and you’d want them to be working hard to maximize the value of your retirement nest egg, at least I know I do. So, of course, they will negotiate for favorable investment terms, and it’s true that this will be contrary to the financial interests of founding management teams in growing companies. In the final analysis, however, greed is a two-sided coin: investors can legitimately counter-argue that some founders are too greedy by wanting to hold onto too large a share of their company, based on the company’s low “pre-money” value relative to the cash investment being sought. When growing their companies, entrepreneurs should frequently ask themselves the hard question: Is it better to go without outside sources of capital and maintain 100% ownership of a company that’s worth very little, or to own a minority stake of a company that’s going to be worth a lot? Note that Bill Gates and Michael Dell each now own less than 12 percent of the companies that they founded (Microsoft and Dell Computer, respectively), yet each is a multi-billionaire, on the short list of the wealthiest people on earth. Their willingness to let outside investors in, giving away a big piece of the pie in order to get the capital needed to radically expand the size of the pie, should be instructive. By contrast, I’ve seen several renewable energy entrepreneurs take aggressive stances that minimize or entirely shut out third-party investors, and as a result I speculate that these entrepreneurs have relinquished many growth opportunities and settled for a much slower route to potential success. In an era of dynamic market and technological evolution, such as is the case today, the passage of time is often the enemy, so I must question the prudence of overly conservative capital-raising practices chosen by some renewable energy entrepreneurs. As for the perception about investor disinterest in renewable energy, I assert that the perception is, at its core, not true. Repeating what I noted above, investors only care about making money. If there’s good money to be made by an investment in renewable energy, then investors will be interested. The problem for many renewable energy companies that have sought and failed to raise investor capital is that their business cases for making money haven’t been that compelling. Oftentimes, that’s because their business model relies too much on government aid that, as noted above, distorts the company from pursuing the actions that will lead to long-term success in the marketplace. Therefore, the investor turndowns do not reflect an inherent distaste for renewable energy by private capital, though it may look that way to an outsider, given the high number of renewable energy business plans that are discarded. Rather, the rejection of so many renewable energy businesses by private investors is because, unfortunately, there are just too many bad business plans out there that happen to involve renewable energy. And, the “badness” of these renewable energy business plans often relates to over-reliance on public policy supports. Avoiding any reliance, or breaking any pre-existing reliance, on public supports should therefore be an urgent priority for renewable energy businesspeople, to help get the sector onto a better track for long-term growth. This is especially the case when the public support explicitly involves cash expenditures by government agencies, which are particularly vulnerable to being pruned in the face of budgetary pressures associated with growing public sector deficits. How long can states like California continue to afford largesse to renewable energy when their budget is several billion dollars in the red? I confess: it is easier said than done for renewable energy companies to avoid an overreliance on the public sector, given the challenging realities facing renewable energy in the marketplace. In fact, there are many undeniable benefits made available by public policy to renewable energy companies, and it is wise for leaders of those companies to take advantage of them when practicable. But, that taking advantage must not be allowed to go too far, for fear of falling down a slippery slope into depending upon the government as the primary or sole crutch for the company. While there are no black-or-white rules I can offer on what participants in the renewable energy sector should or shouldn’t do, I can at least offer a simple framework that aims to help renewable energy business leaders diagnose whether their company’s orientation to the public sector is appropriate or not: Appropriate – Taking advantage of existing policy supports – Supporting more rational public policies on energy and advocating change in measured tones – Procuring grants for early-stage R&D efforts – Spending incremental resources figuring out customer needs Inappropriate – Building businesses that rely on existence of such supports – Whining about current policy and allocating extensive resources to lobby for distortionary/ unsustainable public policies – Getting accustomed to government grants as primary revenue source – Spending incremental resources figuring out needs/concerns of legislators/regulators At bottom, sound public policy in our capitalist society aims to shore up the market economy where the markets otherwise fail. And, there’s no question in my mind that renewable energy doesn’t currently get a fair shake. Yes, fossil and nuclear energy continue to receive sizable subsidies, despite their maturity. And, yes, the environmental costs of conventional energy are not factored into their market prices. But, let’s acknowledge a reality that everyone learns (or at least should learn) at a very young age: life’s not fair. So, for the renewable energy interests who endlessly complain about the inequities, I say, “Get over it; move on.” Hoping to redress the injustices of bad policies that unduly support conventional energy by overlaying additional bad policies promoting renewable energy is not the right way to go for the long-term success of the renewable energy sector. As the old adage says, two wrongs do not make a right. Instead, renewable energy companies should recognize that economically-viable market segments independent of public policy support already exist today for their products and services. By focusing on serving these segments well, a renewable energy company is much more likely to sow the seeds for growing a vibrant business that can truly change the world over the long haul. My comments herein may be a bit harsh, but sometimes a slap in the face is what someone needs to do to shake a friend and perturb them into acting in a manner that is better for their future. If I can play that role in just a minor way with this RE Insider, I’m happy to do it for the cause of helping put renewable energy on a sustainable track. The key point that I raise herein is that private sector investment – more so than public policy support – is essential for the long-term sustainability of any commercial enterprise in a capitalist economy like ours. Accordingly, I urge entrepreneurs of renewable energy companies to get off the public dole and focus more on the marketplace, in so doing attracting private sector capital as needed for long-term sustainability. After all, sustainability is really what renewable energy advocates are seeking, isn’t it? About the Author… Richard T. Stuebi has been an executive and a consultant in the electricity industry for 16 years. In 1999, Stuebi founded NextWave Energy, a professional advisory services firm serving private sector clients with interests in new energy technologies or business concepts, with particular focus on renewable energy and distributed generation opportunities. Previously, Stuebi was a Senior Vice President at Louis Dreyfus, a management consultant specializing in the power sector at McKinsey & Co. for over 6 years, and an analyst of the North American electricity and coal industries at ICF Resources. He can be reached at
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