Clean Tech - The New High Tech

Who is going to drive the global effort to reduce greenhouse gas emissions? Environmentalists? Engineers? Scientists? The answer may surprise you.

While we may wish for a world with dramatically reduced energy consumption and a less consumer-oriented lifestyle, the likely reality is we’ll have to feed humanity’s growing appetite for energy and reduce greenhouse gas (GHG) emissions at the same time. This means the unlikely heroes may well come from the investment community.

According to leading clean energy and carbon market analyst New Energy Finance, investors will need to inject up to $500 billion a year into clean energy technology development – renewables, energy efficiency and carbon capture and storage – by 2020 to rein in energy-related GHG emissions before climate change becomes irreversible. But if that’s going to happen, says New Energy Finance’s Global Futures 2009 analysis, “the pace of investment will need to accelerate” despite the economic downturn.

Until recently, clean energy technologies were the darling of the investment community. Investment in cleantech worldwide skyrocketed from $34 billion in 2004 to more than $150 billion in 2007 and 2008. In the U.S. in 2008, cleantech investment accounted for 15 per cent of all venture capital activity, doubling from $3.8 billion in 2007 to $7.6 billion in 2008. Over the past six years, cleantech has grown by 400 per cent, says venture capitalist Nicholas Parker, co-founder of Toronto-based Cleantech Group.

Then the economy collapsed, and with it the exceptional growth in the cleantech market. The credit crunch, threat of potential bankruptcies and lack of certainty around government energy policies in Canada and the U.S. have all helped dry up investment.

“It’s really too early to tell what venture capital investment will look like in the future,” says Tim Carey, U.S. cleantech leader for PriceWaterhouseCooper, about the U.S. market. “But given the amount that has been invested to date and the uncertainty in the capital markets, I would expect that there will be bankruptcies.”

What drives the cleantech market is the high profit potential. It certainly has risks, including enormous up-front capital costs to commercialize nascent technologies and the effects that fluctuating oil and other commodity prices have on an immature cleantech market. Still, the opportunities seem endless.

Governments around the world are now realizing global warming is a real threat, not just to the environment but also to their economies and even national security. As policies begin to legislate relatively rapid GHG reductions, the demand for technology that can get the job done is only going to increase – and with it, the potential for profit.

“There is still interest in this sector,” says Rob Beamish, director of EnviroTech Solutions with Climate Change Central. “Of all the technologies out there, anything with a green tinge to it is generating a lot more buzz. We’re seeing cleantech as the next wave, just like the hightech boom. It has become the favourite child.”

But how that translates into actual investments is still unclear. The venture capital market is on hold, and share prices for clean energy stocks have “dropped more sharply in 2008 than other stock prices,” says Don Roberts, managing director of CIBC World Markets. “This indicates a great deal of uncertainty in the policy arena, especially as it relates to climate change.”

Government policy can make or break a market, and the cleantech sector is no different. What investors are looking for is a clear indication from national governments around the world about what energy policy is going to look like.

“Globally, there’s a huge divergence between the generosity and clarity of the measures,” says Roberts. “In Europe, individual countries have been relatively quiet to date, but the European Commission has a number of ambitious proposals on the table, which we’ll get clarity on later this month. In the G7, the various stimulus packages add up to about $80 billion. The U.S. has dwarfed everyone else at $66 billion.

“Canada is playing catch up, and we’re not really at the table. We got $1 billion for green infrastructure, most of which was for carbon capture and storage. The bulk of the other clean energy stuff was ignored. If I’m sitting down to figure out where to put my money, and I can go to both sides of the border, I go to the U.S.”

In the U.S., cleantech is playing a central role in the economic recovery agenda. President Barak Obama’s push for a new energy economy is boosting opportunities for cleantech investors, producers and adopters. On February 17, he signed the $787-billion American Recovery and Reinvestment Bill, which includes about $83 billion for cleantech spending and tax plans. The measures aim to double renewable energy generating capacity—sourced largely by wind, solar and geothermal—over three years. Other provisions target energy efficiency and expanded, modernized electricity transmission networks.

“We need some stability in the markets,” says Carey, “and the stimulus from the American Recovery and Reinvestment Bill could provide that. But it will depend on how successfully and quickly it’s deployed, especially the loan guarantees.”

The Obama budget is a clear signal that American legislators are taking aggressive action on clean energy policy, as compared to Canada. “We’re on the sidelines. We’re followers on this issue. This creates uncertainty,” says CIBC’s Roberts.

Despite increased U.S. interest, investors have a long way to go to reach $500 billion a year by 2020. In the short term, Roberts says, don’t look to the banks to pick up the slack. In Canada, venture capital will probably play a smaller role than in the U.S. Instead, “I would think the big utilities and oil companies, who have largely sat on the sidelines, will come out in 2009. We’ll also see a lot of mergers and acquisitions,” Carey predicts.

In the longer term, the only way to ramp up cleantech investment is to put a price on carbon. While many experts favour a carbon tax, President Obama is leaning towards a cap-and-trade system. Either way, the price of carbon will determine how quickly investors put their money into the cleantech market.

“The government is going to have to play a stronger role here,” says Beamish. “The market just doesn’t seem to be able to do it fast enough without government help. Limits on carbon emissions will drive the market to invest in other, cleaner technologies.”