Tuesday, October 04, 2011

NYT columnist Joe Nocera seems puzzled as to why alternative energy companies can get private financing at the 'good idea' stage but not for the far more expensive process of commercializing the innovation.

Allow me to clear it up for poor Joe.

Like the cliche, there are two kinds of innovation, those that work and are profitable and those that don't and aren't... but it isn't always apparent at the very beginning of the process which will work and which won't.

There are ideas that are flawed, and so much so that the flaws are visible (to everyone but the guy with the idea) at the very beginning of the process. And there are ideas that don't work out, but the flaws are only discovered once the process gets started.

There are ideas that are successful, and so much so that there never was any question that it would be. Interestingly, there aren't ideas that succeed where no one thought they would as, without an advocate, these ideas never get off the ground.

As there are - so far - no alternative energy innovations that have been proven to be successful, these innovations fall into one of the first two categories - the losers.

There are those that are widely recognized as defective and never attract any investment capital. Nothing gets lost but the inventor's time, ego and reputation.

And there are those that appeared to have some commercial potential and thus attract investment capital at the early stages only to have had that funding dry up when the investors learned of the flaws.

The latter is what happened with Solyndra. The company had an interesting idea. They attracted some initial funding. But at some point, the private investors soured on what the company was doing. Not because they lost interest in alternative energy, but because they finally figured out that the company couldn't make a profit on its innovation. And that is precisely when the federal government stepped in with a half billion dollars.

Nocera claims that private investors won't finance the commercialization of the idea. This is, to put it plainly, a stupid claim. Why would anyone put money into a project without an exit strategy, a way of getting a return on their investment? Nobody invests in the better mousetrap if they don't see a path to selling that mousetrap. It isn't that private investors won't finance the latter stages, it is that haven't yet found one that is worth the money... because every single one so far as been shown to have some fatal flaw.

Addressing some other points Nocera tries to make:

He argues that banks don't understand the economics of solar power. What a crock. Economics of power are economics of power, it doesn't matter what the source is. Projects make sense when the revenues charged exceed the cost. If the solar facilities Nocera mentions do in fact have the locked in contracts he says they do, a bank would be stupid to not loan money to the project. Since they didn't, my guess is that the contracts aren't as ironclad as Nocera wants to believe. Or perhaps the contracts are solid, but the banks don't believe the company can build the plants as cheaply as they claim they can. Whatever the case, someone whose business it is to make loans looked at this and decided that it was too risky.

He also cites Andy Grove in claiming that a great many American innovations get manufactured in China because the Chinese government is financing the commericializaton process. But if that were the driving force, then how does Nocera explain all the other non-alternative energy stuff that gets manufactured in China? Could it be that it costs a whole lot less to build and staff a factory in China than it does in the United States?

It doesn't surprise me that Nocera puts out the thin drivel that he does. Maybe once upon a time business journalists adhered to the how, what, when, where and why of a story... but now, they're driven by ideology as their fellow journalists. Nocera believes it is the role of government to spend taxpayer money on things we wouldn't spend money on ourselves... and that comes out in his writing.... even if he has to twist things to make it seem logical.