Are We Headed Toward a Green Bubble?

Billions of dollars are pouring into clean-tech companies--with little results. Is this an intelligent investment or the beginning of another bubble?
Are We Headed Toward a Green Bubble?
Magazine Contributor
12 min read

This story appears in the April 2010 issue of Entrepreneur. Subscribe »

The green bandwagon is rolling again.

At a time when most startups can't get funding and even government-backed small-business loans are scarce, there is seemingly endless enthusiasm for cleantech--that is, young companies that create energy out of renewable sources such as wind or sunlight, or make vehicles powered by something other than fossil fuel.

Cleantech is "the greatest economic opportunity of the 21st century, says Ira Ehrenpreis, board member of the National Venture Capital Association and general partner with Technology Partners, in Palo Alto, Calif. It is the only sector, he points out, that combines bipartisan political agreement, corporate and Wall Street support and a transformational issue--saving the earth's energy and water resources. "The green of the environment and the green of economic and financial returns go hand in hand, he says.

The numbers are staggering. Venture capitalists pumped $4.9 billion into 356 alternative energy deals in 2009, according to Greentech Media Research, and added $32 million the first three weeks of 2010. Although many corporate stocks are still depressed, the stock index for U.S. clean-energy companies is up 25 percent from February 2009 to February 2010, according to the research group CleanEdge. Many more green companies are expected to file IPOs this year, including Tesla Motors, the San Carlos, Calif., company that makes high-end electric cars (but not yet a profit).

At the same time, cleantech is reaping billions in government support. The $787-billion federal stimulus package last year included $79 billion for renewable energy. In January, President Barack Obama awarded $2.3 billion of that money in tax credits to renewable energy companies. Jobs are part of the promise, too: Last month the Bureau of Labor Statistics announced that green jobs are so important to the economy that it's creating a new data category to count them.

By 2018, CleanEdge predicts that global markets for biofuels and wind and solar energy will reach $325 billion. According to the "State of Green Business 2010 report by Greener World Media Inc., organizations from the U.S. Postal Service to Waste Management Inc. are transforming delivery vehicles into green hybrid fleets; 1,125 patents were issued for clean-energy technologies in 2009; and, in a year when commercial construction all but halted, green certifications for new and existing buildings grew faster than ever.

Although the promise of cleantech is huge, and billions are being pumped in to its development, the results so far are not. Renewable energy from solar, wind, biomass and geothermal sources account for only 3.4 percent of U.S. electricity generation, the "State of Green Business 2010 reports. Automakers are years from producing an affordable electric car, and the products of other green companies, from high-efficiency lighting to low-cost solar panels, are still far from consumer-ready (or too expensive to make inroads into the market). Will investors and politicians grow impatient with this slow progress and shift their dollars and support elsewhere? Will they continue to pour money into a sector that simply has not been profitable? This is a pivotal time for cleantech. As the economy recovers, it may emerge as a solid investment in an efficient energy future--or simply, a green bubble.

We've been there before: Just a few years ago a "mini green bubble was created during the optimistic years from 2005 to 2007, and it deflated quickly once the recession started. Stock in the San Jose, Calif., solar panel company SunPower, for example, went from about $25 at its 2005 IPO to $150 in late 2007, then fell to $19 a year later. Another highly promoted company, penny stock World Water & Solar Technologies, a solar-powered water pump company, enjoyed a 4,900 percent rise in its stock price, from 5 cents to $2.50 in 2007. It now trades for 29 cents.

Lots of small alternative energy companies with VC backing have gone nowhere and more failures are expected. Kurt Yeager, executive director of the Galvin Electricity Initiative , a group founded by former Motorola chairman Robert Galvin to upgrade the nation's electrical power grid, predicts "a high fatality rate among today's green companies. Venture capitalists, he says, are feeding green startups today to reap a financial benefit tomorrow. "If one technology doesn't work, they pull their money out, Yeager says.

Ordinary investors have less flexibility and experts have begun to caution them to stay out of green stocks. Likewise, small businesses shouldn't peg their futures to cleantech companies without serious due diligence. But websites such as are hyping green companies again with headlines such as "Bullish Sentiment Reigns in the Green Sector. Some industry insiders fear another inflation of cleantech stock prices is inevitable.

In his 2008 book, Clean Money, author John Rubino warns: "In the coming decade, we'll be inundated with breathless accounts of new clean technologies that are sure to save the planet and make early investors rich beyond imagining. In an interview from his home in Moscow, Idaho, the former Wall Street analyst says, "Don't get sucked into an unproved technology or company just because it sounds revolutionary. You don't have the ability to know which one will be the Google of alternative energy.

Eric Janszen, founder and president of in Bedford, Mass., an economic forecasting firm with a focus on technology and energy, says what will stop a green bubble is the bad economy. "You can't have an asset bubble without a tailwind of credit growth, says Janszen, who famously predicted the housing bubble. Nevertheless, he, too, says it is too early to invest in cleantech stocks, because the economy "is still not self-sustaining. He adds, "You have to be a real materials science expert to know which technology is best.

Tim Carey, a cleantech specialist for PricewaterhouseCoopers based in San Jose, says a lot of cleantech companies, especially in the capital-intensive solar and biofuel sectors, need more financing than venture capital can provide and will soon be going public. "Before you invest in an IPO, he says, "factor out any government programs or subsidies. Political power shifts very quickly and unexpectedly.

One company on everyone's short list for an IPO this year is Bridgelux Inc., a solid-state lighting company in Sunnyvale, Calif. President Mark Swoboda says the 8-year-old company has raised $114 million in venture capital, "and now those guys should be paid back, through a sale or an IPO. Swoboda says Bridgelux receives no government subsidies for its manufacture of LED (light-emitting diode) technologies that he hopes will eventually replace the light bulbs in U.S. homes and businesses.

But like many cleantech companies, Bridgelux is still months away from having a commercial product. Its LED light sources, Swoboda says, last as long as 50,000 hours, use far less electricity and create less heat than conventional bulbs, but they sell for $30 to $60 each. "We feel we have to sell them for less than $10, he says.

An even bigger hype may revolve around jobs. After he was elected, Obama predicted that green jobs would lead the country into an economic recovery. By this spring, only a portion of the $79 billion in stimulus funds had been awarded and, according to government economists, only 52,000 green economy jobs had been created or saved by those grants. Early this year, five renewable energy associations hired Navigant Consulting in Chicago to study what would happen if Congress required utilities to produce 25 percent of their energy from renewable sources by 2025. Such a mandate, the consulting firm said, would create as many as 274,000 jobs--an impressive number, but far short of the 5 million jobs Obama has said the country must produce in the coming decades.

The stimulus package may even be creating jobs overseas, according to the Investigative Reporting Workshop at the American University School of Communications in Washington, D.C. The workshop's analysis of $2 billion in grants to wind power companies shows that $1.7 billion--85 percent--was awarded to foreign firms. The investigation highlights this country's back-of-the-pack position in the worldwide alternative energy race.

Germany and Denmark dominate in wind energy; Germany, Japan and China lead the way in solar energy; Brazil leads in alternative fuels; and, not surprisingly, Iceland and Australia produce the most geothermal power per capita. But many of these companies are bringing their advanced technologies and future jobs into the U.S. market.

Chicago-based Nordex USA Inc., a subsidiary of a publicly traded German company, received $22 million in tax credits from the stimulus fund, but those credits will benefit only U.S. operations, says CEO Ralf Sigrist. Nordex USA operates wind farms in several states and will create 700 jobs in 2014, when its planned wind turbine manufacturing facility is fully operational in Jonesboro, Ark. Some of the components for wind turbines are huge, and Sigrist hopes to cut down transportation costs by attracting foundries and machine shops to the area. As demand for wind power increases, some of the old steel foundries that closed down years ago might even reopen, he says.

But Sigrist, who moved here from Europe, where citizens get to choose their utility companies, is so worried about the state of the U.S. electrical grid that Nordex's new factory will run on geothermal power.

In fact, the condition of that grid may be the biggest obstacle to a green energy revolution. "The nation's electrical system is where telecommunications was 25 years ago, Yeager says. About 3,000 utility companies now hold state licenses to provide electricity to designated areas. Because they operate as monopolies, as the phone company once did, they have no incentive to replace an aging infrastructure that in many cases can't handle cleantech, which produces variable amounts of power flowing from wind farms, for example, or creates high demand from charging the batteries of electric cars. Says Yeager, "Our current power grid is a museum piece.

Yeager and others envision a country powered by "smart microgrids, a decentralized model that uses locally produced power and interacts with sensors on customers' appliances, turning off electric water heaters, for example, when no one is taking showers. Energy efficient "smart buildings, he says, "may cost 5 percent more to build but could use 50 percent less energy, recovering the extra cost in less than five years.

Like solar, geothermal and wind power, smart grid technology is attracting billions of dollars. The stimulus fund dedicates $10.5 billion to grid modernization projects, and 2009 VC investments in energy efficiency and smart grid technology totaled $401 million. Silver Spring Networks in Redwood City, Calif., for example, has raised $275 million in VC funds to develop equipment that connects utilities to users. Early this year, Beacon Power, a developer of efficient grid products in Tyngsboro, Mass., sold $20.7 million more in stock shares and warrants.

Yeager says he doesn't believe the result of all this will be a green bubble that will suddenly burst. "I like to think that we're climbing a green mountain with a steady rise. We may not see a return on all this investment in sustainable energy in our lifetimes; we are doing this for our children and grandchildren.

First, Do Your Homework
Before you commit your company's resources to a cleantech company, the experts advise researching both the company itself and the overall alternative energy sector. Here are some websites to help you get started.

Julie Bennett is a freelance writer specializing in small business and franchising.

Cleantech Primer

Solar Power

How it works: Photovoltaic cells, in modules (solar panels) or thin film, convert sunlight to electricity. Solar thermal power uses sunlight to heat water, which turns to steam, which runs turbines.

Top companies: First Solar, Nanosolar, SunPower, United Solar Ovonic

Pros: Sunlight is free; state and federal subsidies available to users; works on individual roofs.

Cons: Sun only shines half the time, or less; systems are expensive--payback in reduced energy cost can take more than seven years; requires large amounts of land; dependent on silicon prices, which fluctuate.

Wind Power

How it works: Wind turns blades that power generators and produce electricity.

Top companies: General Electric, Nordex (Germany), Siemens (Germany), Vestas (Denmark)

Pros: Wind is free; European companies are bringing advanced technologies to the U.S.; electricity generated by wind can cost the same as coal or natural gas.

Cons: Wind is unreliable; requires large amounts of land; best winds blow in the least populated areas; requires backup power system.


How it works: Drills down into the earth's superheated core; the steam or hot water that escapes turns a turbine.

Top companies: C. Rokas SA (Greece), Ormat Technologies, Polaris Geothermal (Canada)

Pros: Available 24/7; requires less land than solar or wind; technology is inexpensive and easy to mass produce.

Cons: Geothermal reservoirs are hard to locate; drilling could cause earthquakes (A recent project in Switzerland was called off because of tremors).


How it works: Battery-powered electric motors to completely or partially (hybrid) power vehicles.

Top companies: General Motors (Volt), Tesla Motors, Toyota, Zero Motorcycles

Pros: Reduces or eliminates dependence on oil; cuts carbon emissions; less expensive to operate than internal combustion engines.

Cons: Batteries are large and expensive; range for all-electric cars is only 50 miles; requires system of recharging stations that electric grid may not be able to handle.


How it works: Agricultural products to power engines instead of fossil fuels.

Top companies: Archer Daniels Midland, Bunge Ltd., Novozymes (Denmark)

Pros: Cuts dependence on oil; conventional engines easy to convert; can use waste materials, including wood chips, restaurant oils or manure.

Cons: Conversion into energy is expensive; creates some pollution; can cut into world's food supply.


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