This article was taken from the March 2012 issue of Wired magazine. Be the first to read Wired's articles in print before they're posted online, and get your hands on loads of additional content by subscribing online.
John Doerr was crying. The billionaire venture capitalist had come to the end of his now-famous March 8, 2007, TED talk on climate change and renewable energy, and his emotions were getting the better of him.
Doerr had begun by describing how his teenage daughter told him that it was up to his generation to fix global warming, since they had caused it. Doerr, who made his fortune investing early in companies that became some of Silicon Valley's biggest names, exhorted the audience to band together and transform the nation's energy supply. "I really, really hope we multiply all of our energy, all of our talent, and all of our influence to solve this problem," he said, fighting back tears. "Because if we do, I can look forward to the conversation I'm going to have with my daughter in 20 years."
As usual, Doerr's timing was perfect. Just weeks earlier, Al Gore's An Inconvenient Truth had won an Oscar for best documentary. (Gore is now a partner in Doerr's green-tech team at the VC firm Kleiner Perkins Caufield & Byers.) As the economy recovered from the dual shocks of the internet bubble and 9/11, Doerr's fellow Silicon Valley VCs were already looking to clean technology as the next big thing. What followed was yet another Silicon Valley gold rush.
In 2005, VC investment in clean tech measured in the hundreds of millions of dollars. The following year, it ballooned to $1.75 billion (£1.13bn), according to the US National Venture Capital Association. By 2008, the year after Doerr's speech, it had leapt to $4.1 billion. And the US federal government followed. Through a mix of loans, subsidies and tax breaks, it directed roughly $44.5 billion into the sector between late 2009 and late 2011. Avarice, altruism and policy had aligned to fuel a spectacular boom.
Anyone who has heard the name Solyndra knows how this all panned out. Due to a confluence of factors -- including fluctuating silicon prices, newly cheap natural gas, the 2008 financial crisis, China's ascendant solar industry and certain inescapable technological realities -- the clean-tech bubble has burst, leaving us with a traditional energy infrastructure that is still overwhelmingly reliant on fossil fuels. The fallout has hit almost every niche in the clean-tech sector, but none more dramatically than solar.
Doerr's Ted talk wasn't the start of this VC-fueled drive for a new-energy economy. Many of the investors and entrepreneurs who had ridden the internet bubble to various levels of success had already started pouring money and ideas into clean tech.
One of the first to bet big was Martin Roscheisen. He sold his email-management firm eGroups to Yahoo! for $450 million, and in 2002 he cofounded Nanosolar, a panel manufacturer. Vinod Khosla, cofounder and former CEO of Sun Microsystems, moved his VC firm, Khosla Ventures, heavily into biofuels and other renewables. Andew Beebe, cofounder of the dotcom-era darling Bigstep.com, a web-hosting company, helped start the solar panel maker Energy Innovations in 2003. Arno Harris, who had helped steer what he now calls an "Amazon-Kleiner Perkins online wine store that left a big hole in the ground", worked with Beebe at a subsidiary of Energy Innovations before founding Recurrent Energy, a company that develops utility-scale solar projects, in 2006. PayPal cofounder Elon Musk has put $96 million of his own money into Tesla Motors and was joined by VCs Steve Jurvetson and Nancy Pfund.
In 2008, by which time Kleiner Perkins had allocated more than $300 million to clean tech, the firm launched a $500 million growth fund that it said was "intended to help speed mass-market adoption of solutions to the world's climate crisis". Doerr, who told Forbes that curbing climate change was "the largest economic opportunity of the 21st century, and a moral imperative", helped direct money to everything from solar to smart meters.
These investors were drawn to clean tech by the same factors that had led them to the web, says Ricardo Reyes, vice president of communications at Tesla Motors. "You look at all disruptive technology in general, and there are some things that are common across the board," Reyes says. "A new technology is introduced in a staid industry where things are being done in a sort of cookie-cutter way." Just as the internet transformed the media landscape and iTunes killed the record store, Silicon Valley electric-car factories and solar companies were going to remake the energy sector.
In the US, energy bills passed in 2005 and 2007 provided tax credits and loan guarantees for clean tech, and gave investors further confidence. Venture capital in solar alone rose from $32 million in 2004 to nearly $1.85 billion in 2008. Investment in battery tech rose more than 30-fold during the same period. Around the same time, in 2007, the European Union set a target of making 20 per cent of its energy supply come from renewable sources, spurring further investment in wind-turbine technology in the UK.
Other clean-energy sectors were thriving as well, buoyed not only by VC money but by the fact that the average price of electricity in the US had shot up 35 per cent between 2002 and 2008. At the end of 2006, the total capacity of all the wind turbines installed in the US was 11,468 megawatts, enough to power 3.2 million homes. By 2010, it was nearly four times that much. In the UK, there are currently 3,506 turbines, generating some 5,953 megawatts. "As more entrepreneurs and innovators saw there was capital available in the clean-energy sector, you saw more folks looking into developing solutions and business around that," says Joshua Freed, vice president for clean energy at the think tank Third Way.
One of these was Chris Gronet, a Stanford PhD in semiconductor processing who had been general manager of the thermal processing group at Applied Materials, a firm that provides equipment and software to semiconductor and solar companies. He had come up with a design for a new solar module (a module is a light-gathering photovoltaic cell with all the attendant structural hardware and circuitry) that he believed would be more efficient than the flat-panel modules that had dominated the market for more than three decades.
Conventional photovoltaics are tricky things to install. Under the best conditions -- when their surfaces are clean and aimed directly into the Sun -- they generally operate at no better than 20 per cent efficiency -- just a fifth of the energy striking them is turned to electricity. But an immobile flat surface faces the Sun head-on for only a brief period each day, at best. And simple dust can reduce the efficiency by five to ten per cent.
Gronet's design used a grate made of rows of cylindrical cells rather than a single panel of flat cells. The Sun tracking across a cylinder will always be shining directly on part of it. That meant Gronet's modules could be mounted parallel to a roof and out of the wind, rather than angled up into it. As an added bonus, the tubular cells would gather not just direct sunlight but also ambient light reflected off of the rooftops on which they were mounted.
At around this time, investors were searching for an alternative to the crystalline silicon used in photovoltaics, which was skyrocketing in price. Increased demand had driven the price of processed silicon from around $50 per kilogram in 2004 to well above $300 by 2008. When the higher production costs were factored in, the price of electricity from solar firms was 17 to 23 cents per kilowatt-hour, even after subsidies. That was about twice the average price of conventionally produced electricity at the time.
Gronet's design instead used a mix of copper, indium, gallium and selenium, or CIGS. Though slightly less efficient than silicon in direct sunlight, CIGS performs better under cloud cover and in variable light. The technology had been around for several years but was too expensive to be practical. That changed as soon as silicon climbed above $200 per kilogram. Suddenly CIGS could compete. Gronet incorporated his company in 2005, first calling it Gronet Technologies but quickly changing the name to Solyndra.
Gronet and his chief financial officer, Jonathan Michael, set out to raise capital for a factory. By 2007, they had $99 million from sources including RockPort Capital Partners and Argonaut Private Equity and were busy renovating an old Hitachi building in Fremont, California. In 2008, Virgin Green Fund, an investment arm of business icon Richard Branson, chose Solyndra as the only solar company that it would put money into, out of more than 100 that applied for funding. By the end of that year, Solyndra had raised $600 million, boasted more than 500 employees, and had two major orders -- $325 million from Sacramento-based Solar Power and $681 million from a German company called Phoenix Solar. "Everyone was pretty optimistic," recalls Lindsey Eastburn, who was designing factory-automation software for Solyndra. "We were making product, and we were selling it."
Just as Solyndra was starting to take off and needed more money for expansion, the venture-capital climate began to cool. The 2008 financial collapse erased a quarter of the gains VC firms had made between 2003 and 2007, and venture investments in clean tech fell from $4.1 billion in 2008 to $2.5 billion in 2009.
There was an additional factor at work: impatience. Consider a recent analysis by Matthew Nordan, a venture capitalist who specialises in energy and environmental technology. Of all the energy startups that received their first VC funds between 1995 and 2007, only 1.8 percent achieved what he calls "unambiguous success", meaning an initial public offering on a major exchange.
The average time from founding to IPO was 8.3 years. "If you're signing up to build a clean-tech winner," Nordan wrote in a blog post, "reserve a decade of your life."
The truth is that starting a company on the supply side of the energy business requires an investment in heavy industry that the VC firms didn't fully reckon with. The only way to find out if a new idea in this sector will work at scale is to build a factory and see what happens. Ethan Zindler, head of policy analysis for Bloomberg New Energy Finance, says the VC community simply assumed that the formula for success in the internet world would translate to the clean-tech arena. "What a lot of them didn't really understand," he says, "is that it's almost never going to be five guys in a garage. You need a heck of a lot of money to prove that you can do your technology at scale."
Luckily for the clean-tech industry, a much larger investor stepped in to replace the retreating VCs -- the federal government.
In 2005, the US Congress created a federal loan guarantee programme as part of the Energy Policy Act, which initially was authorised at $4 billion. Ostensibly set up to promote nonpolluting energy sources, its focus on then-unpopular nuclear power resulted in the money going more or less untouched. Applications from other clean-energy sectors suddenly had an opportunity.
Solar projects would ultimately receive more than three-quarters of the programme's financial support, but the list of recipients included everything from a wind farm in Oregon to a cellulosic ethanol plant in Kansas. But by the time GW Bush left office, not a penny had been distributed. Most of the applications, including one from Solyndra, were still wending their way through the approval rounds at the US Department of Energy (DOE). There were only 16 employees tasked with sorting through the applications.
Then Barack Obama took office, and the loan programme suddenly had an administration committed to using federal dollars to stimulate what it referred to repeatedly as "the clean-energy economy".
The DOE, which for decades had focused on managing nuclear waste and doling out subsidies to the fossil-fuel industry, had a new leader -- Steven Chu, a physicist and Nobel laureate.
US government money dwarfed what VCs had put into clean energy.
The loan guarantee programme alone provided more than $16 billion for 28 projects. An additional $12.1 billion went into the sector via tax credits. Federal subsidies for renewable energy nearly tripled between 2007 and 2010, rising from $5.1 billion to $14.7 billion.
Solyndra's $535 million loan guarantee closed in September 2009.
The firm began construction on a second factory, expanded its workforce to 1,100 employees and paid millions for a custom machine designed to put the finishing touches on the cells at a rate of 60 per minute. Obama even visited the Solyndra factory in May 2010.
Yet by autumn of 2010, Solyndra had scuttled plans for a $300 million IPO and was still waiting to hear back on an additional $469 million loan application to help finance its second factory.
Although the company's solar modules were working as planned, Solyndra needed to increase its production capacity to get per-unit costs down. The custom machine had turned out to be a dud. A Solyndra module cost at least 30 per cent more per watt than a traditional photovoltaic -- and the gap was growing.
Given the concerns about Solyndra's financial viability, the company dropped the request for a second loan. Yet in early 2011, despite further warnings about Solyndra's cashflow, the DOE restructured the original loan, guaranteeing that private investors, not the federal government, would be repaid first in the case of a default.
The financial models that had justified the massive investments in clean-energy sources were built on assumptions that the price of fossil fuels, in particular natural gas, would continue to rise.
However, a natural-gas boom transformed the energy landscape.
As with the internet bubble and the more recent housing bubble, there were signs of trouble. In fact, in the weeks and days leading up to Obama's visit to the Solyndra plant, officials at the Office of Management and Budget were issuing warnings that his endorsement could be premature and eventually embarrassing.
In fact, though Solyndra CEO Brian Harrison painted a rosy picture for lawmakers in July 2011 -- boasting that revenue "grew from $6 million in 2008 to $100 million in 2009 to $140 million in 2010" and would nearly double in 2011 -- the truth was laid out in an internal White House memo obtained by The Washington Post after Solyndra filed for bankruptcy. The August 2011 memo, written days before Solyndra went bankrupt, stated simply that "the company has had 0 per cent sales growth since [autumn] 2009".
Perhaps clean energy's biggest problem is this: because natural gas has gotten so cheap, there is no longer a financial incentive to go with renewables. The controversial practice of hydraulic fracturing, or fracking, has opened up reserves so massive that the US has surpassed Russia as the world's largest natural-gas supplier.
The price of natural gas peaked at nearly $13 per thousand cubic feet in 2008. It now stands at around $3. A decade ago, shale gas accounted for less than two per cent of America's natural gas supply; it is now approaching one-third, and industry officials predict that the total reserves will last a century. Because 24 per cent of US electricity comes from power plants that run on natural gas, that has helped keep costs down to just ten cents per kilowatt-hour-and from a source that creates only half the CO2 pollution of coal. Put all that together and you've undone some of the financial models that say it makes sense to shift to wind and solar.
Another blow to the US clean-tech industry was a glut of processed silicon that sent prices back down below $30 a kilogram.
That price, combined with the technological simplicity of manufacturing conventional solar panels, opened the door to relatively unsophisticated operators. For example, in 2007, a Chinese textile manufacturer approached Arno Harris, CEO of utility developer Recurrent Energy, to see if he'd be interested in buying solar panels that they hoped to begin making.
Understandably, American firms have struggled to remain competitive. In 1995, more than 40 per cent of all silicon-based solar modules worldwide were made in the US; now it's six per cent.
China accounts for more than half of global photovoltaic output, and Chinese-made modules are up to 20 per cent cheaper than American ones.
Wind has also taken a hit. Not only can the turbines not match the current costs of gas-fired plants, the flood of cheap Chinese solar panels can make them less attractive as a green option, too. The pace of new wind-turbine installations in the US has declined by more than half since 2008. This past October, Cliff Stearns, the Republican chair of the House Energy and Commerce Oversight and Investigations Subcommittee, admitted to National Public Radio what had by then become obvious: "We can't compete with China to make solar panels and wind turbines."
The boom has gone bust.
And yet, clean tech is far from dead. Certain companies and technologies will emerge from the ruins.
Electric cars seem like a relatively safe bet, spurred by both rising oil prices and international standards requiring greater fuel efficiency. As it has with solar, China has pushed into the battery industry. As a result, prices for the lithium-ion battery modules in electric cars -- which can cost more than some gas-powered cars -- are coming down. Tesla started out making 600 sports cars a year, priced at $109,000 each; within five years, the company says, it will be producing 100,000 cars annually and charging just $30,000 apiece.
Distributed-generation businesses -- the firms that install solar systems to power individual homes and offices -- are thriving because of a financing model more akin to an office leasing a photocopier.
A decade ago, a rooftop solar array for a 280m2 home would have cost the owner about $45,000. The price can now be less than $20,000 -- but instead of having to pay it up front, homeowners can lease the systems from companies such as San Mateo, California-based SolarCit for $119 a month -- less than many electricity bills.
But there is still an investor: the taxpayer. US government coffers have been compensating for a number of market challenges solar faces, including the incumbency advantage of the fossil-fuel industry. In the UK, homeowners who install solar panels are paid 43p per kilowatt-hour they generate; however, the government is attempting to cut this by half, making domestic solar far less attractive.
Even solar's biggest allies on Capitol Hill -- people such as Edward J Markey, a top Democrat on the House Energy and Commerce Committee -- fear the industry's oil and gas foes may have gotten the upper hand. "The fossil-fuel industry and its allies in Congress see the solar and wind industries as a threat and will try to kill these industries as they have for the preceding two generations," Markey says. "They want this to be a five-year aberrational period."
John Doerr may once again have a good reason to shed a tear.
Juliet Eilperin is the national environmental reporter for The Washington Post and the author of Demon Fish:
Travels Through the Hidden World of Sharks
This article was originally published by WIRED UK
