LB: Oh sure, sure.
RH: Let's talk about the difficulties from a geopolitical standpoint. What do you see going on in the next two to three years in the cleantech and VC sector here the US given our political climate? Are you going to see, a downturn in VC investments in the cleantech sector or you think it’s going to be a mentality of this is something we have to do anyway and it will eventually bear fruit?
LB: That's a great question. There are several things that are the fundamental characteristics of new technology in the energy space in the US. One is that the capital requirements are orders of magnitude generally beyond what venture capital community is used to investing. Instead of $5 million, you are investing $50 million, instead of $50 million you’re investing $100 million. It’s just incredibly high capital cost business and the adoption cycle in the power business is a lot longer than anyone who is developing a new technology would like it t be.
LB: The power industry is a very conservative industry by design. We had a power outage at my house this morning and in this country that’s a huge surprise when the lights go out. We depend on a level of reliability that is really pretty astounding and the utilities achieve that by very careful and conservative planning and procurement. So showing anything to a utility takes a major claim, showing a new technology with a risk of failure it becomes many times more difficult. Another thing that continues to catch the investment community by surprise is how much political risk that there is in energy in general and really going to your question, in the next two years I think economic conditions will drive how much money is available to be invested and frankly the financial markets will drive whether these sorts of alternate asset classes are extracted and how what sort of returns investors can mandate. But I think that in the next few years we will really be defined by that political aspect with subsidies. You have to call them what they are, they are subsidies, subsidies in flux, you see Vestas laying people off, Nordex who just announced a significant lowers sales forecast. You have a lot of turmoil on the solar side of the business and all of that is based on calculations and political risk. So you look at who is going to be the next President all the way to what is the legislative branch going to look like and that’s going to drive billions of dollars in risk and risk capital.
RH: It also depends on who may head various committees if the house changes hands.
LB: That’s going to be huge issue. On more practical level that is emerging is the US military’s willingness to be early adopters of renewable technologies. They’re not doing it to save the world, they are doing it for very pragmatic tactical reasons, which is always a better driver than either sentiment or subsidy and they also seem willing to work with less than commercial level technologies. If an entrepreneur can get a stamp of approval with the army on say a solar application, that stamp of approval can put them on the path to more mainstream applications. Commercialization is always going to be a process of identifying the eager audiences and finding someone that is doing it for pragmatic reasons like the military is going to be much more preferable than the sentiment or subsidy, because those things are very fickle.
RH: So true...given the DOD has been a big driver and I think you might be able to argue the point that the driver has been multi-pronged wars where they have needed some sort of non-commercialized energy source because they are in the middle of nowhere. If the US does pull us out of Afghanistan and other regions, do you think that the DOD driver might decrease and lead to a stagnation of new energy technology development?
LB: You know it’s a great question. I’ll give you my and this is nothing more than a gut feeling is that I don’t think so. If I can put on my military strategist hat for just a second, I think there is a fundamental understanding that even if we are out of Afghanistan and we are out of Iraq, the military conflict for the foreseeable future will be in the places where the resources are and the places where the resources are such as Middle East, Central Asia, North Africa and other theaters to use WWII term. Those theaters of operation are places where you are in the middle of nowhere, you need lightweight compact, highly reliability, high-efficiency solar power, you need a way to convert very brackish well water into something potable. I think from a military planning perspective that is going to be the mindset. Thinking back to when I was a kid in the 70s and everyone is worried about the Russian tanks driving through the forests into Western Europe.....that’
RH: Just to ensure effectiveness and mobility.
RH: Okay, great. This has been outstanding, to wrap this up.... what is your crystal ball for the VC community for the next 5 to 10 years?
LB: I think that you mentioned it before and I think ultimately it comes down pricing all the externalities associated the generation which basically means pricing carbon. Because right now, you are depending on how you look at those externalities, coal and the cost of coal fire generation. So I think we are going to have to get to a point where political will meets the demand and it’s actually possible to get something done politically and we can put a carbon tax in place or some sort of carbon market in place that prices carbon with some degree of accuracy, and it simply becomes part of the income statement of a manufacturer, a utility. At that point it becomes something loaded with umpteen different little side topics … unfortunately, there are no simple answers in this business. People you know as I said before, sentiment is....and I think I just coined a phrase...sentiment and subsidy won't get you there.
RH: That is great.
LB: It’s got to be economics. It’s got to be fundamentals and I think the only way to take renewable energy from sentiment and subsidy to fundamentals, is really to have a political agreement to change the fundamentals. Right now the fundamentals do not include a price for carbon. If the fundamentals included a price for carbon then it would be very straightforward to adoption of renewable energy both existing technologies and new technologies would become much more straightforward and frankly, the investment decisions could be made without a political risk component. I’ll just give you a quick example. I was talking to some investors in Europe....I think it was Switzerland, and they were asking my opinion, about becoming involved in renewable energy investment in the US. I gave then the answer that didn’t like at all and they politely ended the conversation. I’ve spent a lot of my career in the emerging markets dealing with political risks of one sort or another and the political risk in the US around renewables is higher than the political risk around renewables in most emerging market countries.
RH: Yeah absolutely. Well, this is great. I really do you know appreciate you taking the time to chat with me on this Lincoln and …
LB: Yeah, it’s been fun.
RH: This is good stuff and if you don’t mind I might use sentiment and subsidy will not get you there for the tag line. That is great, that is just a great statement.
LB: Excellent, excellent, thank you Richard.
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