Investor sees carbon law fueling greentech boom

MENLO PARK, California (Reuters) - U.S. legislation to control greenhouse gas emissions would make renewable energy sources competitive with conventional fuels "overnight," a top Silicon Valley venture capital firm said on Tuesday.

Policies to control emissions of carbon dioxide, a gas associated with global warming, would "instantly make any green tech solution more cost-competitive with fossil-based competitors," said Kleiner Perkins Caufield & Byers Partner John Denniston. "Overnight that will happen."

"If we legislatively put a price on carbon... that would be a watershed event in the energy world," Denniston told the Reuters Global Agriculture and Biofuels Summit at his firm's headquarters in Menlo Park.

"It would send a signal to the entire world that the United States understands that climate change is a crisis, and it would be a rallying cry for the rest of the world to work with the U.S," Denniston said.

Measures such as carbon taxes and cap-and-trade systems have led to quicker growth of renewable energy sources, such as wind and solar power, in Europe.

Kleiner Perkins has invested in about 30 renewable energy companies, including utility-scale solar company Ausra, cellulosic ethanol maker Mascoma and Fisker Automotive, which is developing a plug-in-hybrid luxury car.

Of the 11 investments it has so far revealed, Kleiner Perkins has focused on applying computer-style technology research to solve energy production and distribution problems. It is seeking to create a network of companies that solve specific bottlenecks that have prevented a price-competitive supply chain from emerging for alternatives to coal or gas.

CHRONIC UNDERINVESTMENT?

Investment in alternative energy sources has skyrocketed in the last two years due to concerns about climate change and soaring prices of fossil fuels.

Various estimates put the amount of venture capital investment flowing into what is variously called "greentech" or "cleantech" as between $1 billion and $2 billion, or a small fraction the $1.8 trillion energy and transportation industry.

"I could make a pretty good argument that we're significantly underinvesting in the opportunity," Denniston said.

Asked what key milestones to expect over the next two to three years in renewable energy markets, Denniston said the development of ethanol made from non-food sources, such as wood chips or plant stalks, should see decisive breakthroughs.

He also said the rush of venture funding in the last two years promised to deliver watershed developments in energy storage, an area that has seen little innovation since the lead-acid battery was developed a century-and-a-half ago and the lithium-ion battery, which is several decades old.

In policy terms, he said a carbon tax or cap-and-trade system, in which polluters have to pay for the right to emit gases and can sell emission rights they do not use, would be a major stimulus for the industry, as would a dramatic increase in federal research funding for green tech.

Last year, the government spent about $1 billion on research into alternative energy, compared with $28 billion for the health industry, Denniston said, adding that a decade of potential innovations had been delayed by the government's failure to back more research into green technologies.

"I know we're dealing with a budget deficit, but we need to find a way to increase research spending," Denniston said.

Marking the maturity of some sub-sectors of the alternative energy market, Denniston, a former investment banker, predicted further initial public offerings in 2008 of solar and biofuel companies and so-called "demand response" firms.

Demand response refers to software and other tools that help utilities to cut power use by customers when demand reaches critical levels that strain power grids. He also said a new wave of fuel cell IPOs was possible, but added that his views were "guesswork."

Kleiner Perkins has pledged to spend one-third of its latest $600 million fund on projects to reduce carbon dioxide emissions. Recently Al Gore, a winner of the 2007 Nobel Peace Prize, joined the firm as a partner focused on green finance.

(For summit blog: summitnotebook.reuters.com/)

(Additional reporting by Anupreeta Das in Menlo Park, Bernie Woodall in Los Angeles and Timothy Gardner in New York; Editing by Marguerita Choy)