Cleantech: the future, now

The sphere of clean technology, or 'cleantech', has reached a key moment in its development. While the key drivers - climate change, energy supply and increasing resource scarcity - become ever more pressing, the impact of the global financial crisis and the way the world has reacted to it are creating a host of new challenges and opportunities. Although the uncertainty and risks may be higher, history has shown that such periods play a pivotal role in defining the path of any new industry and can reward brave investors with high returns.

A useful starting point when gauging the development of a new industry is the venture capital market, where new technologies and companies are particularly sensitive to change. This certainly holds true for cleantech, where the sector's most notable IPOs - such as Germany's Q-Cell, the world's largest solar cell manufacturer - were initially funded through venture capital.

Cleantech investing by European venture capitalists has grown strongly in recent years to now stand as the industry's most attractive investment theme. Total investment has increased at a compound annual growth rate of almost 40% between 2004 and 2008, and the category now accounts for 24% of all investments made. A total of $1.8bn was invested across 202 companies in 2008.

However, the financial crisis has put the brakes on this growth in investment, and over the last six months overall investment has reduced by about a third. Hardest hit have been the most capital-intensive technologies, such as solar, wind and biofuels, and for many in these industries the next 12-24 months will be a struggle. This, however, will provide a great opportunity for corporate and utility companies to invest in, or acquire, cleantech innovations at reduced valuations.

Quick returns

For investors, the most attractive opportunities are in cleantech firms that demonstrate an ability to deliver a quick return on investment, with companies that can enhance, rather than replace, existing infrastructures particularly well placed. Energy-efficiency technologies are one sector that is sure to gain increasing attention.

Indeed, the most striking feature of the last few months - even in the face of the financial crisis - is that for many, confidence in cleantech has in fact grown and solidified relative to other sectors, as governments have begun to recognise the economic, as well as the environmental, advantages of backing the cleantech industry.

Much of the renewed optimism is down to the new US administration's more progressive approach to environmental issues. This leadership will spur others to follow suit, and there are already indications that China is becoming more willing to agree to emissions reductions now that the US is taking the issue seriously.

While this should be viewed as a positive development, it has caused some to wonder if Europe, which for many years has led the way in cleantech, will be overshadowed by the increasing attractiveness of the US to cleantech companies. This, coupled with ambitious and well-funded initiatives in Asia, make it critical that policymakers across Europe do not allow the region to get left behind.

Governments are also putting their money where their mouths are. The unprecedented sums of investment announced within economic stimulus packages since late 2008 have included large portions that will benefit the cleantech industry. A report for the G20 Summit in London estimated that almost $400bn of the $2.6trn in economic stimulus allocations announced by G20 nations have been earmarked for clean technologies. In Europe, about $54.2bn, or 17% of the total, has been committed to cleantech. So, while for so long the question has been whether large sums would be spent, the major question now seems to be: who is going to benefit most?

Smart grids

One area offering exciting prospects is smart-grid technologies, which allow the distribution of energy from suppliers to consumers in a more efficient and dispersed way. An example in this space is Aim-listed Zenergy Power, which develops superconductive materials that can be used to improve the efficiency of electricity transfer. The company recently raised £9.5m in a private placement to help it compete for part of the $11bn in smart-grid funding from the US stimulus package.

Smart-grid technologies will also allow electricity grids to better accommodate renewable energy sources by helping to overcome issues with unpredictable and variable electricity output, as well as generation from multiple decentralised locations. And at the point of use, consumers will be better able to manage consumption; the UK Government has just committed to installing some 48 million 'smart' electricity and gas meters in UK homes by 2020, at a cost of £7bn.

Energy-efficient buildings, low-carbon vehicles and carbon capture and storage (CCS) also stand to benefit from the large stimulus fund too. It is worth noting here the expanding focus in cleantech, beyond the more 'high-profile' renewable energy industry. Cleantech covers an array of interlinked areas - including the renewable or more sustainable use of energy, water, agriculture, food, materials and waste - and it seems a deeper appreciation of the interconnected nature of all these resources is becoming more widespread.

A high-profile example of this growing awareness can be seen within the biofuel industry, where last year many companies were badly affected by the increasing evidence that demand for some biofuel feedstocks contributed to an increase in food prices.

There are many more links; for example, the amount of energy required to move water around for agricultural and industrial purposes, and the amount of energy used in desalination to provide fresh water, all provide further evidence of the interconnected nature of cleantech. Companies looking to solve multiple issues, or those that at least do not solve one problem at the expense of another, will increasingly be more attractive to investors.

Future plans

Looking ahead to the end of this year, the Climate Change Conference in Copenhagen in December will play a significant role in shaping the future of cleantech. There is confidence that a clear and ambitious consensus on global warming will be reached as the political will improves and evidence mounts that the problem may be more severe than previously estimated. Indeed Lord Stern, the economist who produced the single most influential political document on climate change, said in March this year he had underestimated the risks of global warming and the damage that could result from it.

It was Merrill Lynch that first described cleantech as the sixth technology revolution. And while there are unquestionable short-term difficulties, it is becoming clear that cleantech will provide as much opportunity for wealth creation as the previous five. Indeed, many of the companies with cleantech at the heart of their operations will emerge over the next few years as among the 21st century's greatest corporate success stories. Smart investors wanting to benefit will be well-advised to keep a close watch on the companies emerging from under the radar and from the depths of recessionary despair. It is here that tomorrow's superstars are being born.

Categories: Investment | Equities | SRI

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