In my former life as a early stage venture capitalist I learned a traditional VC bias against investing in start ups where government subsidies were necessary to make the technology’s economic case work.  Year’s later I’m scratching my head at how the VC market has thrown out this bias in cleantech investing, an example being their heavy investment in solar PV technology.

While one can’t dispute that the worldwide PV markets are getting larger, anyone who has run PVwatt knows that without significant subsidies the technology doesn’t work as an alternative to kWh from the grid.  An incremental improvement in PV’s performance will not change this situation.  In the US, the math says that without a relatively high kWh cost AND a belief that kWh cost will inflate at 5-10%/year AND a large State renewable grant AND a 30% Federal grant or ITC, PV just doesn’t pass a reasonable economic test.

Which means that when Federal or State policy makers contemplate any potential change to renewable grant levels, the market gets really bumpy.  We experienced this at the end of 2008 when the Federal ITC extension was in question.  We’re currently experiencing this again in Massachusetts where the PV incentive program is temporarily suspended as the State transitions to a REC model “sometime in 2010.“  Kind of makes it difficult on a small local solar installer while it’s customer prospects wait for new incentives….here, an absense of policy has slowed one of the fastest developing PV markets in the US.

Like State renewable grants, utility energy efficiency rebates are watched closely for the signaling effect of change.  Earlier this year we saw one utility’s energy efficiency program introduce “accelerated” rebates, only to abruptly cancel the program four months later due to over-subscription.  Customers who didn’t participate are left to wonder whether they should wait on the sidelines until another accelerated program comes back to the market.  Here, the utility’s haphazard policy has stunted market growth.

As the US moves towards more incentives for both broader renewable and energy efficiency upgrades, Federal, State and utility policy makers need to better coordinate the management, introduction and changes to these programs.  They should recognize the dual edged sword they hold – whenever they change the incentives, or worse, suggest they might change the incentives, the market adoption rate is slowed.

Just as the stock market rewards companies which produce predictable financial results with higher multiple stock prices, policy makers need to signal the market as they grow incentive programs, making them predictable and long term.  The incentive programs need to reward action today, including grandfather clauses for those who would otherwise sit on the sidelines while new policies are being developed.  Without this approach, human nature “wait and see” will rule the day.