By Jennifer Kho

The U.S. House of Representatives Thursday voted to repeal $14 billion in tax breaks for oil companies and invest the money in renewable energy research.

The 264-to-123 vote brings the bill a step closer to reality, although it will have to be passed by the Senate and signed into law by President George Bush before that happens. Supporters say the bill rewrites an unintended loophole in the 2005 energy bill that added new subsidies to the immensely profitable oil industry. Opponents say it equates to a tax on domestic oil production and could increase dependence on foreign oil.

Either way, the CLEAN Energy Act—along with a Senate bill to raise the U.S. renewable fuels requirement and the expectation that President George Bush will call for an even larger increase in his State of the Union speech next week—is reassuring to cleantech companies that hope to benefit from a Democrat-ruled Congress (see U.S. Election Mixed Bag for Cleantech, Cleantech Rises On Dem House). If it becomes law, it could signal stronger federal support, and could give investors and cleantech companies more security in a climate of sub-$50 oil.

“It’s not realistic to think about energy outside of the context of the impact of government policy and investment,” said Ron Pernick, a principal at research firm Clean Edge. “All the development we’ve been seeing has been driven by global and state policy rather than federal, so as the federal government becomes involved and we see greater commitment toward energy initiatives and investors, that’s a good signal for investors.”

Not that investors are exactly indifferent to the cleantech sector now.

According to the Cleantech Venture Network, an industry monitor, North American venture-capital investment in cleantech totaled $2.9 billion in 2006, a 78 percent increase from the $1.6 billion invested in 2005.

But a preliminary analysis the network released Wednesday found that North American VC investment in cleantech fell 34.3 percent to $613 million in the fourth quarter, from $933 million in the third quarter—a significant drop after investment rose for nine straight quarters (see Cleantech VC Falls 34% in 4Q).

The number of deals grew to 74 in the fourth quarter from 47 in the third, meaning investors bet less money on more companies.

John Quealy, a principal and senior research analyst with Canaccord Adams, suggested oil prices could have something to do with the drop. While oil is mostly used for transportation, not electricity, the price is a “psychological barometer” into the cleantech sector, he said.

The CLEAN Energy Act could help sell the sector to some investors, but not everyone hopes that will happen.

Aside from oil companies, the Institute for Energy Research denounced the act, saying it would raise costs for consumers, discourage domestic energy production, and stifle innovation.

“Diversity of supply, not new taxes, will meet America’s future energy needs,” said Tom Tanton, vice president of the institute, in a statement. “Alternative approaches, including those that encourage investment in new technologies, are a better solution.”

Potential Benefactors

Meanwhile, a number of cleantech companies favor the bill. It’s early to start counting chickens, because the bill will have to pass through the Senate and the President before it takes effect.

But as industry watchers wait for details from the Democrats, they have plenty of suggestions about which technologies should get money.

Mr. Pernick would focus on technologies that would reduce the need for oil. That includes investment in biofuels refining and the production of other biomaterials, like plastics made from crops instead of petroleum, as well as in incentives for hybrids and plug-in hybrids (hybrids that can be plugged into an electrical outlet for better gas mileage.)

Mr. Quealy guessed that solar, wind, and biofuels might get funding, along with alternative vehicle powertrains and advanced battery technology that could make vehicles more efficient.

He also has heard talk of a focus on non-vehicle-related energy efficiency technologies, such as energy-efficient lighting, IT to get more information from the electric grid, and advanced metering, which would enable utilities to charge different prices for electricity depending on the time its used.

Cellulosic ethanol, which is ethanol from materials like wood chips, corn stalks, and switchgrass, also could be a potential winner, along with biodiesel and biogas, Mr. Quealy said.

In any case, government investment in solar and ethanol probably wouldn’t result in a spike in venture investment because those sectors already have seen a boom. “I don’t think this is going to be a macro tipping point for investors coming off the sidelines,” he said.

But the energy act could spur private investment in other biomass technologies, clean coal, advanced metering, and technologies to conserve energy, if it includes incentives for them, he said.

Regardless of which new cleantechs would benefit from the bill, Mr. Pernick said the House discussion could mark the first of many shifts favoring cleantech at the federal level.

“I see this as an obviously favorable first step,” he said. “They are being as active as they can be in their first 100 hours, and it’s good this is one of the key areas where they are focusing their efforts.”