Since 2000, venture capitalists invested $10B USD into “cleantech” companies, and it will approach $4B in 2008 alone. Where is this money going? 70% of the investments to date are in the U.S., less than 10% in China. Cleantech will become the largest investment area for U.S. VCs within 5 years. To date, sustainable power generation such as solar, wind, and biofuels have captured the majority of venture capital dollars.
The key question is will investors see the benefits of both products coming to market and financial return?
Cleantech encompasses a wide range from environmental clean up (water, industrial waste, recycling), power generation and management (clean coal, biofuels, solar power, wind power, geothermal, wave power, smart grid management), and energy storage (batteries and fuel cells). Cleantech has become shorthand for anything that in some way improves energy efficiency and the environment.
Recent enthusiasm by the investment community for cleantech companies has not gone unrewarded. In solar energy, investors have seen significant gains from companies such as First Solar, Suntech, Sunpower, Trina Solar, and LDK among others. 10 Chinese solar companies are publicly listed, with aggregate market capitalization over $7B USD. The Chinese companies fabricate and assemble solar panels for export, primarily to Germany, Spain, and the U.S. The early returns in the solar industry spawned a surge of capital throughout the solar energy value chain, with over 40% of the VC cleantech money and over 80% of the cleantech investment in China going into this sector.
Wind power also has attracted a great deal of venture capital. Investments are primarily in wind generation equipment. There are two Chinese public wind power companies (Goldwind, Chinese High Speed Transmission), but investors have yet to realize the returns on capital invested that the solar industry has generated.
The other major area of venture capital investment in power generation is biofuels, particularly biodiesel and ethanol. Biofuels use renewable feedstocks such as grains and grasses to create alternative transportation fuels. In biofuels the story for investors is one of tears. The U.S. has pursued poorly considered policies around corn-based ethanol driven by politics and farm subsidies rather than sound economic reasoning. The production capacity of the U.S. in corn based ethanol has increased 4X in less than 8 years, at the same time as feedstock (corn) prices doubled and many of the new technologies have proven difficult to commercialize and scale. The debt finance market collapse and the halving of oil prices sound the death knell for the first wave of biofuel companies. In the U.S. alone, several billion USD of venture capital is at risk.
Where to go from here? Solar energy will succeed as long as government subsidies encourage installation of current technologies and provide the incentive for future investment. Wind offers the highest near term prospects for return on investment because it requires the least subsidy to be profitable for investors and providers. Biofuels must be completely rethought with more emphasis on non-food feedstocks and will not be capital efficient for several years.
Venture capitalists will continue to invest in cleantech, moving more of their focus to energy storage, improving existing generation facility efficiency, and improved conservation. A focus on energy EFFICIENCY dominates discussion among investors today. Not only do energy efficiency investments provide the best short term environmental and climate change benefits, they will provide the best financial returns.
There is no “silver bullet” for climate change and energy efficiency. The energy industry is being reconstructed from the ground up with new ways of generating, distributing, managing, storing, and using power. This will take decades and trillions of dollars. However, today’s technologies in lighting, building materials, coal power plant efficiency and emission reductions, and smart power grid management, are beginning the process of modernizing the energy industry. The success in the U.S. reducing sulfur dioxide emissions with market mechanisms in the 1970s has inspired many of the carbon tax and carbon trading schemes underway today. Success in restoring salmon runs to rivers like Oregon’s Willamette provide proof that government attention and policy can undo years of environmental neglect.
China’s challenge is twofold. One is to ameliorate years of damage that rapid economic growth has left behind. Second is to provide the right intellectual property protection and financial incentives for both foreign and domestic technologies. China will be one of the world’s centers of cleantech innovation, but this is dependent on sound government policies. Recent changes in the IP laws, shutting down environmentally non-compliant factories, and large scale wind power deployments show that the Chinese government recognizes both the need and opportunity.
As an example, over 15% of China’s electric power capacity goes toward producing cement. Over 80% of this electricity is generated by coal fired power plants. Making these industries more efficient and “cleaner” will bring large and immediate returns.
The reconstruction of the global energy infrastructure will require local, national, and global action. China – U.S. cooperation in this area is not only vital, but represents the greatest investment opportunity of the 21st century. There is no time to waste.