Slashdot Mirror
How the Economy Is Changing Clean Energy
Al writes "The economy has hit green energy technologies hard, but technologies focused on energy efficiency and clean coal are still attracting money. Over the next few years, venture capitalists say that the biggest winners in clean tech will most likely be companies with technologies that improve efficiency. Such ventures often take advantage of cheap sensors, communications hardware, and software packages to monitor and control energy use both in buildings and on the electricity grid. High-capital businesses are now more likely to succeed if they can attract foreign funding. For instance, Great Point Energy, based in Cambridge, which has developed a process for converting coal into natural gas, has attracted $100m in funding from China."
Of course companies need to maximise the profit. Why should they minimise debt is beyond me (if you are talking about maximising net profit and not turn-over, debt is not an issue).
Because investors don't just care about profit, they also care about risk. Average profit with above average risk is not good.
Debt and profit interact like this (ignoring tax, for now):
Case 1: A company uses 100m of capital, all from shareholders, to make an average of 10m/year of profit. Return to shareholders: 10%, plus annual variation. The company goes bust if it persistently makes less than 0 profit.
Case 2: An equivalent company uses 100m of capital, 50m from shareholders, 50m from 5% debt, to make an average of 10m/year of profit before interest, 7.5m/year after interest. Return to shareholders: 15%. The company goes bust if it persistently makes less than 2.5m/year from its operations, so the risk to shareholders is larger. If profits are a normal distribution - or anything like it - this could be quite a big difference in risk.
So what matters is not profit, but risk-adjusted profit....and leverage increases risk. In theory, shareholders should care because they adjust the leverage themselves (owning 1000 of the share capital in case one, or 500 of the share capital and 500 of the debt in case two, is equivalent). However, the tax system encourages debt by taxing profit AFTER interest. This is a BAD thing, and may have contributed to our current mess, because it decreases shareholder returns in case 1 more than in case 2, encouraging otherwise pointless risky behaviour.