The last issue of Cleantech matters featured a roundtable discussion among investors and market observers focused on key trends in the cleantech marketplace. We reconvened our panel for this year’s report to continue the conversation, discuss what’s changed in the cleantech marketplace and exchange perspectives on what is perhaps the most important issue in cleantech today — the capital value chain.
Gil Forer: What has changed in the cleantech marketplace since our last roundtable discussion 18 months ago?
James Cameron: Investors have become extremely risk averse and have started to take out private equity from their allocations — in the time between the last conversation and now, we’ve had very poor capital flow generally.
I genuinely believe that the financial crisis and the recessionary experience in most of the developed world — coupled with a universal desire to better manage resource flows, to be more efficient in the use of fossil fuels, to be more intelligent about the systems for power production and consumption and to find ways of allocating capital to reduce dependency upon fossil fuel imports — have all helped the cleantech sector become more than a niche.
However, we still haven’t seen capital flows in large enough amounts to know whether the sector’s ready to take that amount of capital, because almost everything that looks attractive in the cleantech sphere — from renewable energy to energy efficiency or game-breaking, rule-altering technologies — none of it’s been done at scale before.
I see lots of good signs for investment in cleantech. I think it’s a solid sector to concentrate on, but I’m very aware of how far short we are of the scale of capital deployment necessary to transform the systems that we have, for delivering clean energy, in particular.
Mark Fulton: There has been concern in markets over the past year about the lack of what we call TLC in policy: transparency, longevity and certainty. In particular, we’ve been suffering uncertainty around the longevity of policy in some of the key markets and areas. And that is always a problem for the investment markets.
Specific examples include the failure to achieve any high-level global deals from Copenhagen through to Cancun. The United States energy and climate policy was uncertain and delivered very little during 2010. We also have the arrival of a new Congress, which is more hostile to climate and clean energy. And in Europe, there were major changes in renewable energy tariffs.
If you combine the policy uncertainty with what James observed about the general uncertainty in the investment market, it’s quite a high barrier to get over. However, the fact that 2011 was the largest year on record for total clean energy investment — the fact that there is still money flowing into cleantech markets — is very encouraging.
The good news is that China continues to move forward on most policy fronts and its deployment of cleantech manufacturing bases, and has turned out to be the world leader in cleantech.
Stephan Dolezalek: At the first EY ignition event in 2006, someone from one of the big oil majors said, somewhat in jest, "you realize that the entire market capitalization of cleantech is less than one month of profit for us, and so buying up all of cleantech and getting rid of it might be cheaper than having to deal with it."
It was a great line because it indicated just how small and meaningless cleantech then appeared to large energy incumbents. What’s changed since is that cleantech has been quietly growing to a size where it can’t just be pushed aside any more.
At the same time, we’re seeing increased political pressure to stop supporting cleantech — pullbacks on feed-in tariffs and legislative difficulties in the US. Yet despite waning pressure, in terms of public opinion on climate change, and pullbacks in policy, solar and wind, all of these things are much more alive and well than one might expect.
I think it’s very meaningful that cleantech has grown into its own and into a position where it can continue to grow, regardless of the overall political climate in any given country.
Michael Liebreich: I would build on that by saying, number one, cleantech has survived the crisis actually in better shape than one might have feared. If you look at the investment volumes, we’re again in record territory, and there aren’t a lot of infrastructure capital goods sectors that can say that.
The second thing is that the macroeconomics of cleantech broadly, but particularly around clean energy, had another year to prove themselves — we are seeing continuing progress down the cost curve and increasing knowledge on how little it actually costs to deal with some of the downside of clean energy versus dirty energy. This is a sector that really is at scale: this is not marginal, it’s mainstream now.
Mahatma Gandhi said, "First they ignore you, then they laugh at you, then they fight you, and then you win." We’re almost in the "then they fight you" phase, and that’s why — to Stephan’s point — they are trying to reduce subsidies and supports because certain constituencies now realize that the cleantech agenda will dramatically undermine some incumbencies.
And then the third thing is that dealing with climate change has become synonymous with job losses, whereas shifting to clean energy has become in some ways synonymous with job creation and with the vibrancy of economies. And you see that, whether it’s in Korea with the Green Growth Initiative or in the various pieces of legislation in the US. The dialogue is all around how do we secure jobs for the future and, more profoundly, for structural competitive advantage.
Gil Forer: There’s still a gap between the capital required to enable the transformation to a resource-efficient and low-carbon economy and the capital that is available today. How do you think this gap will be closed or minimized? And are we seeing any beginnings of capital innovation, whether new models, new players or new roles for existing players?
Stephan Dolezalek: I don’t know that we’re seeing many new players, but we continue to be surprised by the huge number of players participating in cleantech in what we would characterize as a dabbling fashion, doing one transaction a year. The number of funds that are very active still remains tiny.
What that means is, while the majority of companies likely won’t make it across the chasm, there are a small number of companies coming out the other side of the chasm who are growing stronger by the day because they have been able to get financing, to get their projects and factories built.
I think 2011 will be the year in which we will see a greater separation between winners and losers. You’ll begin to see some of these winners emerge at real scale.
Brian Bolster: We’ve seen the project finance markets return, so I think we’ll start to see large-scale solar and wind financings. But what we haven’t seen emerge yet is the source of capital that will help us bridge the technologies that need US$300, $500, $600 million to show proof of concept. We would have hoped that the government would step in here, but we’ve a lot less government support than we expected.
And so I think Stephan’s right about the emergence of winners and losers. A lot of business plans in some of the more capital-intensive areas are being recrafted if they weren’t able to get access to sufficient capital.
In utility-scale solar, you’ll probably have 1 or 2 or 3 remaining players out of a market of 20 or 30 companies currently. In the fuel sector, you see a lot of the players turning to the large corporations making strategic investments to find some support.
James Cameron: We’ve worked very hard in the UK on a green investment bank idea, which I do think is an idea whose time has come, and not just for the UK. We have over-relied on the capital markets and private investors to deliver the sort of societal change that we now know we need to deal with climate change and resource depletion.
Yet we have depleted government coffers in almost all the developed nations, while in the developing world, there are enormous demands for capital to feed growth.
This is an ideal moment to build institutional capacity to channel capital at scale into something that delivers the public good and rewards the expertise, the judgment and the skill associated with investment for financial returns.
We’re in a phase now where we can’t carry on having discussions on the lines that the private sector will do this or the state will do this. We clearly need some combination of the two.
Mark Fulton: I think there’s definitely a concern as to whether there is enough public and private money to really do what seems to be required. The latest data shows we’re running in the range of US$250 billion, but it still seems that a quantum leap is required at some point.
We remain sort of cautious as to whether the whole market can step up fast enough and with sufficient size. While we always talk about the policymakers creating the right environment and the right incentives, we’ve got to maximize the leverage of every public dollar to private investment.
Gil Forer: In 2010, we saw a significant increase in activity by large corporations in the cleantech space. Whether acquisitions, partnerships or investments, what have you seen in terms of changes in the corporate approach, and what do you anticipate in the next couple of years?
Brian Bolster: Our conversations with large corporations about strategic opportunities in cleantech continue to increase. Two things are probably most helpful on that front. One is that valuation expectations have come in a bit as companies realize that they may need the corporate strategic investors who want growth but aren’t willing to pay billions of dollars for pre-revenue companies.
Second, I think that corporates have become more comfortable with cleantech as it has proven capable of long-term sustainable growth. A third piece is that corporates are feeling better about themselves and increasingly thinking about M&A in general across the spectrum of industries, including cleantech.
Stephan Dolezalek: When we first started visiting multinational corporations in 2002 to discuss cleantech, we kept running into situations where one or two business units were enthusiastic and wanted to participate in some way, while other business units in the same company were hugely skeptical.
What we’re now seeing is instead of having pro or con business units within a given organization, entire corporations are embracing clean technologies as a meaningful driver of their future results. We now see active cleantech strategies being pursued by certain players in almost every major sector of energy and in other industries like lighting and transport that cleantech touches.
There is a growing divide between those companies that are betting on this transformation and those that are betting on the status quo.
Mark Fulton: I think this is really significant. We’ve got to see corporate balance sheets, we’ve got to see incumbents, we’ve got to see the big industries deeply involved in cleantech if we’re going to meet any of these numbers. And the good news is, you do see them there. In project finance, balance sheet activity is very significant. And let’s face it, in the end, most of this will become a project finance infrastructure rollout. So that’s good news.
The question is: whether they are energy companies, utilities or original equipment manufacturers, will they continue to be active players in the rollout that needs to be done?
James Cameron: Corporate balance sheets are critical right now, and it looks quite optimistic. It goes back to the scale issue. We don’t have enough large cleantech companies to receive institutional investor capital so that deployments can take place in pure plays.
I’d like to see some real game changers, and not just emerging from old energy. There are plenty of people who can take on the incumbents in the utility sector. But we might find some very different global corporations dealing with cleantech than the ones we have currently.
And that tells you that to encourage innovation and make sure there’s sufficient capital deployment from large companies, you need to have a public policy regime that supports competition and rewards capital deployment for innovation, and not just the policy for climate change or clean energy.
Michael Liebreich: In terms of the coming 12 months, we’re going to see a ton of quite good companies related to industrial energy efficiency and industrial processes come into the spotlight. Many of these were funded in ’05–’06 and are being held on their investors’ books at conservatively low values.
In the next 12 to 24 months, we’re going to see some of these companies gain the attention of corporate strategic investors who will find them complementary to some aspect of their operations. While they are below the radar now, these companies are going to be quite an interesting acquisition pipeline.
Gil Forer: COP16 recently concluded in Cancun, where there was a decision to create a green climate fund although the details of actual implementation are still to be determined. What do you anticipate will be the overall impact of COP16 on the cleantech marketplace?
Michael Liebreich: For me, COP16 was kind of the dog that didn’t bark because a lot of people were expecting a real rupture in the global process. So I think the fact that there is a process and that it continues to have some momentum actually is pretty positive.
But in terms of actionable change on the ground for cleantech companies, perhaps something will come out of that process in three or four years that will be worth engaging with, but right now, they’re just kind of happy that the process is continuing. And that’s pretty much the summary of where we are.
Stephan Dolezalek: From a US perspective, I think that one important thing that emerged is that you no longer have the ability to argue that there’s a free-rider problem here and that somehow, Western nations will have to pay for something that the rest of the world will benefit from.
And as we move away from a purely climate-centric agenda, you have two separate questions:
- What is the long-term economic upside that comes from winning in some of these clean technologies?
- Is the real fight ultimately going to be in terms of sustainable economic growth, in terms of which countries secure an affordable energy future?
Climate change becomes an outgrowth and a benefit, but the real driver is not so much the need to address climate change as it is the fact that there will be winners and losers economically and nationally.
Mark Fulton: I think the good news coming out of Cancun is there are still efforts to make it work. There’s the Green Climate Fund that they’re talking about, and there is a lot of hope that governments will attempt to fund the US$100 billion by 2020.
That’s not over, and a lot of investors like ourselves are working on just the simple realities of project finance de-risking in developing countries, such as Deutsche Bank’s Global Energy Transfer Feedin Tariffs (GET FiT) initiative.
James Cameron: We should see Cancun as broadly positive for policy developments in emerging markets. Cancun is, first of all, a global agreement. It’s not of the type that we expected or wanted in Europe before Copenhagen, but it is a global agreement. You can no longer argue that there is no international agreement on climate change. Now there is one.
The other thing is that you can’t argue that nothing is happening in the developing world on climate change. There’s now a lot of policy intervention specifically on climate change, specifically favoring investment in cleantech and clean energy in many developing countries, including in the larger and more populous developing countries.
And that’s all going ahead really quite well in the Philippines, in Indonesia and certainly in Korea and China, but also in Latin America and Mexico.
There’s a lot taking place within the emerging markets focused on clean energy and climate, and that is going to create opportunity for capital deployment there. And not just deployment of Western capital, but capital that is formed in those jurisdictions, capital that’s moving between sovereign wealth funds in those jurisdictions, capital that’s also moving from development bank finance sources that’s going to encourage more investment in those markets.
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