Christine Eibs Singer

A BoP Perspective on Energy Venture Capital

Editor’s Note: This post first appeared on the Plug-In Blog hosted by E+Co.

MIT Press publishes innovations each quarter. Its fall 2009 issue, “Energy for Change” is well worth reading. It is a study in well established and newer thinking regarding energy issues. Some of it is old news not listened to enough (“The California Effect” by Art Rosenfeld), and some of it is newer and better and gets more attention (Matthew Bunn et al in “A Future for Nuclear Power”). But for me the most important and telling article is Vinod Khosla’s “Whose Rules?” article.

This article is extraordinarily well grounded, especially as regards to establishing the carbon intensity of an economy as a measure of progress, the four macro-criteria for negotiations success* and its powerful statement regarding the need for reducing the cost of capital to differentiate low from high carbon development.

My colleagues and I have spent the last two decades investing in more than two hundred developing country clean energy enterprises and are constantly aware of the disadvantage clean energy faces vis-à-vis the cost of capital. It is significant that these two hundred enterprises – representing a quarter billion dollars of mobilized capital — produce as a portfolio (after losses and after all costs) the very 3% IRR the author cites as the lower boundary that funds such as World Bank IDA should underwrite.

This return is feasible, predictable and practical via investments in local clean energy enterprises. What this means is this: if the world’s public and private sector leaders were willing to underwrite such investments at 3% we believe an enterprise-centered approach to clean energy development would erase energy poverty for the 1.5 to 2.5 billion people who suffer from it.

This is an outcome desired by many. For these last few decades hundreds of entrepreneurs have imagined and then created a world where clean energy for the poor can be delivered at an all-in return of positive 3%. But they have struggled against the voices who proclaim “that’s not commercial”.

What a pleasure to hear voices as influential as Mr. Khosla and innovations zero in on the cost of capital as the critical lever. I particularly love this quote from Khosla:

I believe that access to cheap capital (and thus lower financing costs) is vital; in fact the cost of capital may be the most critical tool in developing a lower carbon GDP economy.

*NOTE on 4 criteria: International agreements must

  1. meet CO2 targets in ways acceptable to different participants;
  2. be morally acceptable rather than forced and accepted under duress;
  3. be politically acceptable inside participating countries; and
  4. adjust to changing circumstances.

I envision these criteria as a triangle composed of the first three criteria, on which is balanced a board named “international CO2 agreement” along which a weight of change moves. If any side of the triangle – the balance of power among the participants, the underlying societal values or domestic politics – is too short then reaching agreement is unlikely. And the weight that slides along this board – changing reality as CO2 is understood and its consequences realized – must be accommodated.