DAMMAM, Saudi Arabia (ResourceInvestor.com) -- Alternative energy and clean technology companies are attracting investor capital in record amounts this year, setting up what one solar photovoltaic (PV) industry observer sees as a positive feedback cycle whereby technological improvements and government incentives attract investment and lead to lower production and consumer costs, which attracts more investment, which leads to further gains in quality and efficiency.
And the growth trend looks set to continue, according to recently released research reports. If anything, existing production capacity and nascent distribution networks, along with short supplies of key, high-quality components and associated raw materials - copper, steel and silicon among them - are constraining production of everything from biofuels, domestic solar panels and wind turbines to their industrial-scale counterparts.
“There has been a flood of new money coming into the clean energy sector,” Michael Liebreich, CEO and founder of London-based New Energy Finance, the lead analysts of a recent survey of investment in the European alternative energy market, told RI.
“The risk is that these new investors don’t understand that the energy industry is about heavy engineering and commodities as well as about technology. Fortunes will be made in the coming years, but fortunes will also be lost,” he said.
Growing Financing, VC Investments & IPOs
According to a first-half 2006 review of the alternative energy and clean tech markets produced by Jefferies & Co., Inc., the U.S.-based investment bank, “The U.S. investment community continued to support the Clean Tech sector, investing more money in public and private Clean Tech companies during the first half of 2006 than all of 2005. Investors committed capital in larger amounts to more sectors, including advanced batteries, biofuel, fuel cells, geothermal, hydrogen, power electronics, solar and wind.”
Venture capital investment in the sector is also growing, according to Jefferies’ research.
“Venture-capital investment in clean tech is expanding, with annual dollar volume expected to hit approximately $2 billion in 2006, compared with just $730 million in 2001. In addition, more and more companies are receiving venture-capital funding every quarter, with the average deal size at approximately $6.6 million in 2005, compared with $6.0 million in 2002.”
“While solar energy firms dominated public and private financings in 2005, capital raising by biofuel companies has increased in size and number in response to both President Bush’s State of the Union address and rising gasoline prices, which surpassed the $3.00 per gallon threshold in the U.S.,” according to Jefferies’ first-half 2006 report.
“Venture capital firms, hedge funds and private equity firms, including DFJ Element, Impax Group, Kleiner Perkins and RockPort Capital Partners, closed new funds, specifically focused on the broad CleanTech sector. Through May of this year, over $600 million in venture capital and $2 billion in private equity was invested in the CleanTech sector.”
Having late last month hosted its first “European Alternative Energy & Clean Tech Conference” in London, Jeff Lipton, Jefferies’ managing director of investment banking told RI, “Investor interest remains very strong, though people continue to work to understand the drivers and dynamics, [and] interplay, between various sub-sectors - and where the investment opportunities will be. Interest is broad-based, i.e. not just solar or biodiesel - people are looking at fuel cells, wind, batteries, energy infrastructure. People see an enormous market with multiple interesting and viable sub-sectors.”
Europe in the Vanguard
Europe continues to lead the way when it comes to setting up the financial and operational infrastructure and mechanisms for a sustained and meaningful shift to renewable energy resources.
Europe’s largest onshore wind energy farm is being constructed, and debated, in Scotland at the Whitelee Windfarm, Eaglesham Moor, where some 140 turbines will crank out enough electricity to power some 200,000 Scottish homes, including much of Glasgow.
Scotland is also home to the world’s largest offshore wind farm project to date. Two hundred state-of-the-art wind turbines are to be installed in deep water off Scotland’s east coast not far from Whitelee.
Renewable sources such as wind energy now generate 16% of the country’s electricity - four times that for the U.K. as a whole - and the government has set of a goal of producing 40% of electricity from renewable sources by 2020. North and east, in Scandinavian Sweden, 47% of electricity is now supplied by hydroelectric plants - up from 36% just three years ago - and another 45% is generated by nuclear power.
Turning to biofuels, the European biodiesel market is expected to more than double in value, to around 8 billion euros (5.35 billion pounds), by 2010, according to investment bank Goldman Sachs. Concerns about the security of oil supplies and climate change will result in biodiesel production increasing 35% by 2010 and companies will invest up to €3 billion on production facilities. The use of bioethanol, which Brazil has used successfully to shift away from using imported fossil fuels, is expected to grow by 13 percent by 2010,” Goldman analysts’ wrote in a research note.
“Investors in low-carbon energy technology companies in Europe has shown an average annualised return of 86.7% per annum,” according to the “European Clean Energy Venture Returns Analysis,” a research report produced by New Energy Finance for the organizers of the fifth annual European Energy Venture Fair 2006, held in Zurich last month.
New Energy Finance researchers examined the returns achieved by a sample of 19 investors who had invested in 57 European companies in the sector since 1999. Among the reports key findings were the following:
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The remaining 34 portfolio companies had not undergone any subsequent investment round, and so were valued for the purpose of the study at the same value as at the time of the initial investment. Many of these were quite recent investments, and could prove highly attractive.
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The companies in the sample have created a total of 2,700 direct jobs. It is estimated that in total European venture capital-backed clean energy companies have created a total of just under 9,000 direct jobs and a further 24,000 indirect jobs in the European economy.
Climate Change
“The companies in the sample represented just under 30% of all venture-funded clean energy
technology and service companies in Europe. Based on our knowledge of the other
70% of companies in the population, we think it is a fairly representative sample, in terms of geography, sectors and outcomes,” Liebrich said in an associated press announcement.
The market for solar photovoltaics has been particularly active in the past year. Polysilicon prices have spiked up and a peak appears to have been reached, according to industry observers.
“We see several trends concerning financial investments into solar energy,” Edwin Koot, the founder and principal of Rotterdam-based Solar Plaza, reported.
“Firstly, we see a growing number of PV companies listed on the stock market. Most of them are German, [though] Americans and now coming up [are the] Chinese. Looking at venture capital involvements, the focus within the U.S. is clearly on completely new solar cell and module technologies, as in Germany the companies are more involved in the traditional crystalline silicon technology. Most of these German companies are vertically integrated, meaning they have interests in several parts of the supply chain.”
Asked to characterize the current clean technology investment environment, Jefferies’ Lipton said, “The level of investment is accelerating and I do not see any reason why it will moderate - you can debate around oil pricing and how much that is driving it, but there are other factors here at play - energy security/independence, environmental concerns, focus on sustainability, etc.”
“During previous periods the overall supply demand balance was fundamentally different than today. The demand picture is dramatically different with countries like China and India now becoming significant consumers of energy and commodities and their growth is only going to continue to expand.”
Contrasting it to previous peaks in alternative energy investment and energy-commodity booms, Lipton added, “Prior booms were a function of a temporary supply shock that quickly abated so high pricing could not be sustained. Today, there is much less spare capacity in global energy supply, making energy pricing far more volatile than before. This situation is not going to change, and therefore there is now a premium to alleviate energy volatility - users/consumers will be prepared to pay more upfront and over time to eliminate or alleviate volatility.”
A Perfect Storm
Regarding the recent spike in venture, private and public capital markets and the associated run up in valuations, New Energy Finance’s Liebreich said, “There have been some very strong exits in the past 18 months. Valuations have come off their peaks since earlier this year, and I think the fundamentals of the industry are now strong. They were looking overly ambitious in the solar PV, U.S. biofuels and pre-revenue fuel cell areas.”
“The most important industries in the near term are: on-shore wind, biomass, energy efficiency and traditional biofuels; in the medium-term (3-10 years): cellulosic ethanol, offshore wind, thermal solar and hybrid vehicles; in the long-term (>10 years): plug-in hybrids, more wind, building-integrated solar PV, fuel-cell-based distributed CHP and carbon capture and sequestration. In the very long term, fourth generation solar PV, artificial photosynthesis, algal and bacterial biosynthesis, micro-distributed power devices.”
“Before starting New Energy Finance I identified a confluence of 7 factors which told me that we are the brink of a secular change: climate change; energy security; oil depletion; aging infrastructure in developed countries; energy bottlenecks in developing countries; new energy technologies; new information technologies. There has never been such a perfect storm for clean energy before – in fact there has probably never been such a perfect storm in any peace-time industry ever,” he added.
