Alternative Energy Start-Ups You Can Believe In

By Marc Tracy

Last month, we noted that alternative-energy companies, particularly those not clearly established, were struggling massively in a climate that combines scarce credit with low oil prices (making alternative fuel sources less economically viable). It was important to watch how such endeavors fared, we said, both because they themselves make up a healthy dose of the small start-ups out there, but also because they serve as something of a microcosm--perhaps a leading indicator--of how start-ups in other industries might be expected to do as well.

But a Wall Street Journal article today reports that, even now--actually, especially now--investment in alternative energy is actually booming. The reason? There are wide expectations that various policies of the incoming Obama administration will prove quite the boon to those businesses marketing energy sources that don't emit much carbon. In fact, just a few days ago the man himself said that he wants the U.S. to double its production of alternative energy. In three years. So you can see why investors may want to throw their money in that direction.

"Start-ups across a variety of areas--solar power, biofuels and energy conservation among them--are getting increased financing from venture capitalists and lenders at a time when other small companies are cutting back and being turned away by investors," the paper notes. "And many are hiring more staff, boosting marketing efforts and expanding geographically." So much for being a leading indicator: clean-technology investments leaped 40% dollar-wise, to $8.4 billion, in 2008 over 2007, even as venture financing generally declined in terms of volume.

Much of the explanation for this boost lies in just how enthusiastic Barack Obama and his people appear to be to encourage alternative-energy growth. It's not just subsidies and it's not just regulatory coercion that are being planned: it's both. A carbon tax or cap-and-trade regime, one of which will likely get the full support of the administration, will increase the cost of emitting greenhouse gases, if not put a ceiling on it; rules designed to reduce federal government buildings' carbon footprints will provide an obvious, and extremely large, customer for companies that market pioneering clean technologies; oh, and then there's the proposed ten-year, $150 billion government investment to create five million green jobs.

In fact, Indepenent Street reports today on one way the Obama administration has already begun giving a direct boost to small green-technology companies: it has, where possible, contracted out to such places for tasks related to the upcoming inauguration. (Invitations, for example, were made on recycled fiber by a small Brooklyn printer.) That is, literally, only the beginning, and only the first of many, many drops in the bucket.

The one thing missing from the picture are high oil prices, to make alternative energy sources economically competitive in an open market. Oil is low low low, and it's widely projected not to stabilize above $50/barrel for another year or so. The trick is to understand that, with all of these regulatory inducements and direct government stimulus, it's not an open market; it's a market being tilted towards clean sources. The real question, then, is whether a critical mass of alternative fuel technologies can be developed during this advantageous regulatory period so that, when said period ends, the technology is at that point cheap enough to compete with oil economically. It's a bet that, apparently, venture capitalists, other investors, and lenders think is worth the gamble.

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January 14, 2009 1:58 PM