Shepherding Clean Energy Projects Through the “Valley of Death”

A new report issued by Bloomberg New Energy Finance (BNEF) and the Clean Energy Group (CEG) undertakes a much-needed evaluation of current gaps in clean energy financing, offering recommendations to address the so-called commercialization “Valley of Death” financing shortfall that occurs before a clean energy technology can achieve commercial viability. The findings, based on analysis of interviews with more than five dozen industry thought-leaders and underlined with quantitative research from Bloomberg New Energy Finance’s Intelligence database, are contained in the white paper “Crossing the Valley of Death: Solutions to the next generation clean energy project financing gap.”

“Crossing the Valley of Death: Solutions to the next generation clean energy project financing gap.”

Clean Energy Group, with the support of The Annenberg Foundation, commissioned Bloomberg New Energy Finance to join in the study, which examines the shortage of capital for clean energy technologies that require extensive and expensive field-testing before being deployed. Bloomberg New Energy Finance and Clean Energy Group conducted over 60 open-ended interviews with technologists, entrepreneurs, project developers, venture capitalists, institutional investors, bankers and policymakers from 10 countries across the globe to provide solutions on how to address the “Valley of Death” phenomenon.

Michael Liebreich, Bloomberg New Energy Finance chief executive, said, "In the past few years we have witnessed a pre-Cambrian explosion of technologies offering possible routes to reducing the cost of low-carbon energy by an order of magnitude. However, for these technologies to achieve their potential, they must first be tried at commercial scale. The lack of project financing for the first few commercial-scale projects - the so-called Valley of Death - has been a very significant obstacle until now. We undertook this study with two goals in mind: first to survey and measure the Valley of Death; and second, to examine financial and policy mechanisms which could create a bridge across it. We hope it can help to break the logjam stopping new technologies that could change the world from getting to market.”

Ken Locklin, Clean Energy Group’s director of finance and investment, said, “This study presents some exciting new approaches to overcome this Valley of Death financing challenge that we should explore further. These new strategies include a ‘reverse auction’ utility finance proposal from California and insurance products to cover technology risks for emerging clean energy products. Our study is just a first step; the next steps are to come up with realistic solutions that will help quickly move many cost-effective clean energy technologies to commercial scale deployment.”

The report identifies two critical locations where a shortfall of capital often comes into play. The first occurs early in a technology’s development, just as it is ready to exit the lab. The second occurs later, when much more substantial levels of capital availability are needed to prove the viability of a new technology at commercial scale. The problems posed by this commercialization funding challenge represent fundamental, structural market shortcomings that most experts believe cannot be resolved by the private sector acting on its own. Even in good times, when lending standards are most flexible, banks and other financial institutions are simply not structurally positioned to back large-scale projects deploying new technology.

Offering solutions to the problems posed by the “Valley of Death,” the 24-page white paper is structured in two principal sections: (i) a brief look at what the “Valley of Death” actually is and why traversing it is of the utmost importance; and (ii) an exploration of various potential financing or policy solutions that directly address the “Valley of Death” conundrum.

From the myriad ideas and probable solutions gleaned from the over five dozen interviews conducted, the white paper identifies three that are particularly novel and worthy of immediate further study:

• Emerging Technology Reverse Auction Mechanism: A public sector body would encourage developers of projects that employ novel technologies deemed to hold special promise to “bid in” alongside others in a competitive process to win under an offered fixed tariff cap.
• Efficacy Insurance: Commercial insurers with appropriate levels of technical expertise could assess and support cutting-edge technologies too risky for conventional insurance coverage with “efficacy insurance,” potentially receiving support for a portion of their risk in the form of publicly guaranteed or funded reinsurance pools.
• A Government-Backed Commercialization Finance Investment Entity: A similar concept is currently under consideration by the U.S. Congress in the form of the Clean Energy Deployment Administration (CEDA). Seeded with federal dollars and perhaps leveraged via a “delegated investment authority” partnership with already-engaged private sector institutions, CEDA would be expected to make investments in projects that help advance key clean energy technologies deemed in the national interest.

A copy of the report can be downloaded from the Bloomberg New Energy Finance website, at: http://bnef.com/free-publications/white-papers/ .