By Zhan Zhou*
Based on the database of the Cleantech Group, there are about 19,200 cleantech companies in the world, of which over 1/3 are based in the United States.[I] Despite some minor setbacks, there is no doubt that cleantech has become one of the most targeted sectors for both public and private investment. A few numbers can shed light on the fact that the cleantech industry has emerged to be a fast-growing industry of great political and environmental significance:
- During 2012 alone, cleantech companies around the globe raised $6.56 billion of venture capital across 732 deals [II]
- For the global Foreign Direct Investment (FDI), the cleantech sector ranked as the second largest sector after oil and gas by attracting $12 billion from the global FDI into the U.S. in 2011, making it the fastest growth sector for the past decade [III]
- Through July 20th, 2012, the §1603 American Recovery and Reinvestment Act program had awarded $13.0 billion to nearly 45,000 renewable energy projects [IV]
With a seemingly growing appetite for investment in cleantech, some important market challenges lie ahead.
The challenges of investment in cleantech might just start with defining what is “cleantech”. The concept of “cleantech” nowadays is rather broad. The cleantech industry currently covers a diverse range of products, services and processes. In addition to solar and wind energies, it also includes building, transportation, air and waste management, just to name a few. Vertically, the semiconductor, agriculture and electricity transmission sectors can also fall under the umbrella of “cleantech”. Climate change, resource efficiency and low-carbon economy are among the top motives behind cleantech investment.
Of course, the challenges of cleantech investment are much greater than perfecting its definition. For the past three years, since the financial crisis, stocks in clean energy fell faster than others, underperforming the S&P 500 index significantly. Among the clean energy sectors, solar technology stock is the most dynamic, followed by wind and energy efficiency. Most of the solar companies’ capital value has shrunk more than 100% since 2008. Initial Public Offerings (IPOs) have also struggled. A good example would be the recent IPO of SolarCity. Backed by technology entrepreneur Elon Musk and its innovative solar lease business model, SolarCity is the market leader in the U.S. residential solar installation market, and should be the hottest clean technology company in Silicon Valley. However, the company struggled to price its stock sales and even postponed its IPO. The IPO price ended up with being only $8 a share, much lower than the originally expected price of $13-15 a share.
Cleantech investors generally agree that one of the key challenges for a cleantech company’s IPO is the scalability of the cleantech business model and technologies. Current market conditions value the ability to scale technologies or businesses to reach critical mass and having a short and clear path to cash generation, which explains why information technology remains the most active industry among business IPOs. That being said, SolarCity already had one of the most successful cleantech IPOs in years, and now it is being traded at around $19/share, showing that there are still investors out there with faith in this sector.
Other market challenges facing the cleantech sector include lower electricity prices driven by the large-scale development of natural gas from shale, upstream profitability drying up due to over-capacity manufacturing, and a potential drop in demand due to concerns over government debt and budget deficit (e.g. the expiration of §1603 program).
The aforementioned challenges can make it difficult to be optimistic. Yet opportunities to invest in the cleantech sector do exist.
First, the highly volatile nature of natural gas prices discourages many investors from directing funding towards this energy source. Second, 30 out of 50 states have already enacted Renewable Portfolio Standards (RPS), a regulation that requires an increased production of energy from renewable energy sources. Financially, the current ans unusually low cost of capital is also a favorable factor for cleantech investors. Moreover, Master Limited Partnerships (MLP) is another important financing opportunity for the renewable energy industry. The new legislation “MLP Parity Act” is aiming to include clean energy resources and infrastructure projects into the “sources” definition of current MLP, which will enable them to access the financing opportunities that the oil and gas industry has been enjoying for 2 decades -raising capital like publicly traded corporations while simultaneously enjoying corporate tax exemptions. If enacted into law, this legislation will give cleantech investors a major boost. Additionally, more measures have been taken by various local governments to remove uncertainties related to federal grants, policy and state level subsidies for the clean energy sector, such as the $1 Billion “Green Bank” proposed by the New York Governor Andrew M. Cuomo in January 2013.
A Successful Cleantech Investment Example – Project AMP
The success of investments in cleantech shouldn’t be analyzed only in terms of the bottom line; it should have a quantifiable environmental and social impact as well.
Among the numerous past cleantech investments, Project AMP stands out as a particularly successful example of investment in cleantech.
Financed by Bank of America Merrill Lynch in 2011, Project AMP was the first and largest distributed solar deal in history. The $2.6 billion deal supported the installation of solar panels on commercial and industrial rooftops across the country, ultimately capable of generating more than 730 MW of power. Funding for this project was possible through the investment tax credit (ITC), equity investment from NRG Energy, power purchase agreements (PPA) and conditional loan guarantees by the U.S. Energy Department. A particularly innovative part of this deal is the use of streamlined and standardized PPAs, which enable investors to concurrently process and finance hundreds of distributed solar energy projects, thus making investments in ventures like Project AMP possible. Power generation from the distributed solar panels in Project AMP is equivalent to that of an average-sized coal power plant. Equally important is the fact that this project has created more than a thousand jobs while avoiding emission of over 500,000 metric tons of carbon dioxide annually.
While facing various challenges, the cleantech industry definitely provides the most exciting opportunities in addressing the world’s most pressing resources and infrastructure challenges.
*Zhan (Luke) Zhou received a Master’s degree in Environment Studies from the University of Pennsylvania, concentrating in Environmental Policy. He has a background in Material Engineering and is particularly interested in business sustainability and cleantech. Opinions represented in blog posts and research briefs are those of the authors only, not of Wharton, IGEL, or the University of Pennsylvania.
Image by Silvia Schmid