Shale gas is starting to affect markets….

The oil gas ratio hit a new record high December 27th with gas trading at $3.11/mmBtu and WTI going for $101.25/bbl yielding an energy ratio of 5.61.   In simple terms this means gas is  trading at the equivalent of $18.05/bbl crude.

The market is starting to notice this rapid shift in natural gas economics.  Back on Dec 10 I mentioned a few of the sectors, such as chemical processing, that would be likely winners due to lower priced gas.  Companies are now starting to announce their plans to build new plants.  Royal Dutch Shell PLC is planing an ethylene plant in the Appalachian region, Nucor is building a gas fired iron plant in Louisiana, Dow Chemical Co. is planning two new chemical facilities in the Gulf coast, and CF Industies is planning to boost its ferterlizer production made from gas.  (WSJ, 12/27/2011, A3) .  All due to relatively low gas prices.  If LNG importers are not able to “reverse to flow” and turn into LNG exporters, then the price of gas can stay low until domestic consumption has a chance to absorb these lower cost supplies.

One of the other sectors that should benefit from the relatively high oil/gas ratio is the CNG (compressed natural gas) transportation buisness.   In October I analyzed Clean Energy Fuels’ [CLNE] stock performance relative to the energy ratio and couldn’t really see any coorelation between the fundamental driver of their business (the oil/gas ratio) and their stock price.   Checking back today I’m still not seeing any sustained improvement in the company’s stock price.  So I’m still looking for the breakthrough in the transportation business.

In other news, shale gas is certainly affecting the price of electricity, both spot prices and prices offered for term contracts for renewables.   In the western US, on-peak spot prices in southern California today were $30.37 $/MWh….lower then they were 30 years ago in 1981 when our company (www.henwoodassociates.com) started producing power.  And the natural gas based market reference price (MRP) used by the California PUC for evaluating renewable projects is off about 15% from the last MRP posted by the CPUC.

While this is happening the solar sector is having problems with oversupply and a softening market.  The oversupply is drivien by the rapid increase in Chinese production (including two IPOs in October and November – Changzhou Almaden and Sungrow Power).   Coupled with  German demand for 2011 reported to be 29% below 2010 levels two German producers, Solar Millennium and Solon SE filed for insolvency this month.  The supply/demand combination is also driving layoff such at those reported at SMA, Suntech, and First Solar.   And stock prices for solar companies, as measured by the solar ETFs KWT and TAN, have dropped by over 60% YTD and their market cap has fallen below the $70 million level that was related to me as a break-even size for an ETF.   In fact, all of the sponsors of sector specific ETFS –  KWT, TAN, FAN, PWND, GRID –  are losing money on their offerings if this is still the break-even number.  Which one will close up first like the progressive transportation ETF did in 2010?

How much of the market woes facing solar producers stems from gas competition?  I’m not aware of any analysis of the relationship of subsidies and RPS mandates to gas prices in the US, but reason tells us there must be some connection beyond a mere correlation of gas prices and solar woes.

I think this is just the start of the disruptions caused by low gas prices.  On a very small scale our company is affected in contract renewals and the prospects of lower electric prices/subsidies for new project development.  Many other businesses will be forced to adapt and potentially sooner then anyone expects.

Originally posted here .

Disclosures – no postions in any securites mentioned.

 

Global Photovoltaics: The Little Engine That Could

When Ron Pernick co-founded the green-tech market research company Clean Edge back in 2000, he made a bold prediction. By 2010, he said, solar power would be a $23.5 billion industry.

To say that Pernick’s prediction was greeted with skepticism is somewhat of an understatement. In 2000, sales of photovoltaics (PVs) totaled $2.5 billion, worldwide. Pernick himself, who at the time, had already been an accomplished market researcher for over a decade, had no idea just how wrong his prediction would be. Last year, the global market for photovoltaics totaled $71.2 billion, thrice what Pernick had predicted.

For many, coming to grips with the solar industry’s growth is like having to admit the earth is flat after all. While statistic after statistic show that solar energy has become cheaper, faster and smarter over the last decade, skeptics still abound.

Take, for example, this stunning statistic: Between the years 1998 and 2010, installation costs for PV systems declined by 43%. This data comes from the Lawrence Berkeley National Laboratory, a respected member of the national laboratory system supported by the Department of Energy, whose team of scientists include Nobel Prize recipients, as well as recipients of the nation’s highest award for scientific research, the National Medal of Science.

In almost any other industry, a 43% decline in costs in little more than a decade’s time would be heralded as a major achievement. The American media barely blinked. Even many of those who do acknowledge the progress the solar industry has made over the last decade still proclaim that solar energy will never be a feasible alternative to conventional energy sources.

At every point of the solar industry’s success, there seems to be a feeling that it will go no further. That, however, is not terribly unusual when it comes to scientific advances. William Arthur Ward’s famous maxim, “If you can imagine it, you can achieve it,” seems to infer the converse: If you can’t imagine it, it can’t be done. Meanwhile, solar just keeps chugging forward, seemingly immune to the naysayers.

Where will the next great innovation come in solar technology? There are a number of researchers contending for that honor. The solar company Pythagoras Solar is banking on BIPV, building integrated photovoltaics. They’ve developed a window with solar cells encased between double panes of glass, a window that simultaneously generates and saves electricity. The company recently won a grant from General Electric’s “Ecomagination Challenge.” That award attracted enough investors to put the window into production. Some have already been installed in Chicago at Willis Tower, formerly known as the Sears Tower.

The development of solar paint technology is making strides as well. Researchers at the University of Waterloo in Canada, in conjunction with those at the University of Notre Dame in Indiana, are readying to present solar paint advancements in an upcoming issue of ACS Nano. They’ve been working on a paste made of quantum dots. Using tiny semiconductor nanocrystals, the material captures almost all visible sunlight.

One of the most promising recent innovations in photovoltaic technology comes from a new solar company, HyperSolar. Rather than develop PV panels, HyperSolar is manufacturing a thin, magnifying film that increases the efficiency of existing solar panels by as much as 300%. Through a technique called photonics, the film collects and delivers more sunlight into conventional solar cells.

Researchers at the University of Texas in Austin have discovered that by using an organic plastic semiconductor, the number of electrons in sunlight that are captured by solar cells could be doubled. In conventional PV solar panels, some electrons are too high-energy, or too “hot,” to be converted into electricity. Using pentacene, a type of plastic, prevents the hot electrons from being lost to heat.

Ten years ago, there was no clear path forward for any of these new technologies, but the solar engine kept chugging ahead, confounding those whose imagination could not embrace possibilities for advancement. So what is Ron Pernick’s Clean Edge prediction for the next decade? According to their “Clean Energy Trends 2011” report released earlier this year, solar photovoltaics are projected to grow from a $71.2 billion industry in 2010 to $113.6 billion by 2020.

Predictions are always risky. Who knows? That one may be wrong, too. Solar PV might just triple the prediction yet again…

Brittany Mauriss is the editor and solar blogger for CalFinder.com, a free service that connects you with solar contractors and energy-efficientwindow estimates. Her passions are renewable energy, indie music and creative writing.

It’s A Nano World

For the uninitiated, “nanotechnology” refers to the science of the very small, engineering particles and their corresponding materials at the nanometer scale.  For a sense of perspective, at one-billionth of a meter, a nanometer is about 1/60,000 of the width of a human hair, so we’re talking engineering not just at the microscopic scale, but the electron-microscopic scale.

Why bother?  Because researchers from across a number of disciplines have discovered that engineering particles at such minute scale can change the fundamental performance characteristics of the material.  You want a material that captures a certain wavelength of light, or transmits a certain frequency of energy?  You just might be able to obtain it by tweaking currently available materials at the nanoscale, to change the “morphology” (think texture) of the particles so that they behave in the desired way.

The nano-world is sometimes mind-bending.  For instance, with enough wrinkles, folds or pockets, a particle with the volume of a grain of sand can have a surface area much greater than that of a basketball.  When you’re able to play topological tricks like this, amazing performance improvements in even the most basic stuff can be achieved.

As this capability has been increasingly revealed in the past decade or so, more and more acadmic research and an increasing number of companies are investigating how nano-engineering can improve the performance of all sorts of things.  This is especially true for the cleantech arena. 

Product innovation ranges across the map:  nanomaterials optimized for increased performance of membranes for fuel cells and cathodes for batteries, enhanced thermal insulation for building materials, higher capacity of contaminant capture from water, and on and on and on.

At few weeks ago, as the investment banking firm Livingston Securities convened their 7th Annual Nanotechnology Conference in New York City, Crystal Research Associates released a new report, entitled “Nanotechnology and the Built Environment:  The Transition to Green Infrastructure”.  This document profiles some of the seemingly-mature industrial sectors that are being transformed by nanotechnology, including some of the biggest corporations in the world such as GE (NYSE: GE), BASF (Deutsche:  BAS), Siemens (NYSE:  SIE) and Honeywell (NYSE:  HON) working on some of the smallest scales imaginable.

The report covers many of the sectors you’d expect to be revolutionized by materials enhancements, such as photovoltaics and lighting, but also touches on a couple of real surprises.  For instance, consider NanoSteel – a company that is commercializing metallic coating technology developed at the Idaho National Laboratory to improve the performance of structural metals under challenging environmental conditions, such as high temperature or corrosion.

In addition to NanoSteel, other presenters at Livingston’s nanotech conference that particularly piqued my personal interest included Siluria (developing an approach to convert methane into ethylene, thereby reducing the requirement for petroleum to make plastics) and QM Power (offering a new basic design of motors and generators promising higher-efficiencies).

It’s always interesting to go to events such as this to get exposed to companies working under the radar screen that are aiming to achieve fascinating innovations, sometimes in the most mundane or obscure areas.  Even if not all these companies will ultimately be successful, either in serving customer needs or in generating good returns to investors, it’s heartening to note the degree and scope of creative disruption that continues to seethe in our world of incredible challenges, turbulence and pessimism/cynicism. 

Many players thinking big about the future are moving small, as small as possible.

Shale Gas Poses Financial Threat to Clean Tech

By Bill Paul

 

What a coincidence that as ExxonMobil’s interest in shale gas grows, the company declares, in its latest long-term energy forecast, that it has seen the future and it is natural gas. Or as the Wall Street Journal put it, “Exxon Declares Gas King”

Every clean tech advocate and investor should beware this statement – and others like it that fossil fuel’ers like Daniel Yergin have recently made – because it underscores clean tech’s greatest vulnerability, namely: the more embedded investment fossil-fuel firms have to protect, the more ferociously they will fight to stop the development of “game-changing” clean technologies.

Cynic that I am, I would argue that clean tech has been “allowed” to develop by the fossil folks and their Wall Street allies who truly control the global energy industry partly because billions of embedded investment in coal-fired power plants and other aging fossil-fuel infrastructure have been coming off the books in recent years. Couple that with the expected surge in energy demand through at least 2050, and it has become advantageous for Wall Street to put money to work building a global clean-tech industry.

With shale gas ascending, however, clean tech is faced with the prospect of billions of its dollars being diverted into new fossil-fuel infrastructure that won’t come off the books for decades. Bonds that are sold to develop the shale gas industry are bonds that must then be protected from game-changing clean technologies.

Could this push climate change past the “tipping point”? Absolutely. But that’s not an argument that will sell on Wall Street.

Here’s one which, if enough people start talking about it, may help keep clean tech in the big-money game. A new study  from the NationalCenter for Atmospheric Research (NCAR) concludes that switching from coal-fired to gas-fired power generation would do little to significantly slow down climate change and might actually accelerate it.

 

 

Bill Paul – billpaul9348@gmail.com – is a consultant and the owner of Earth Preservers – http://earthpreservers.com — an environmental education newsletter and edutainment website for kids of all ages. A former Wall Street Journal energy reporter and CNBC special energy correspondent, in 2010 Paul was named a “thought leader” in energy by the US public television program “Consuelo Mack WealthTrack” — http://wealthtrack.com.

Shale gas drives oil / gas spread to a new record

On January 13, 1994 the ratio(*) of the price of oil to the price of natural gas was 1.14.   Today it hit a record high over this period of 5.26.   Gas traded at $3.28 today, just 21% of the $15.38 / mmBtu it traded for on December 13, 2005.   Shale gas is providing gas in volume at moderate cost driving this record high price disparity.

IMO, the impact of moderately priced gas hasn’t been factored into energy policy to any great extent.   Nor has the balance of the energy market had time to react.  And the media hasn’t realized this is happening.

But there should be many winners – combined cycle generation, CNG vehicles, chemical processing that uses gas, and gas consumers.  Why isn’t there a stamped into new fleet conversions to CNG….it’s way cheaper than gasoline?

The will also be disruption, – coal, climate change strategies, and renewable generation will be impacted.   Why sequester carbon when you can replace a coal plant with a super efficient, super clean, combined cycle plant and emit 50% less CO2?

My prediction for 2012 – electric generation clean tech feels some competitive heat.

(*) The energy price ratio is the price of crude on a $/mmBtu basis divided by the price of natural gas on a $/mmBtu.  The crude prices used are the front month NYMEX contract for WTI crude at Cushing Oklahoma.  The $ per barrel price is converted to $/mmBtu using 5.8 mmBtu / bbl.   The gas price used is the front month NYMEX contract for natural gas at Henry Hub Louisiana.

Originally posted here

The State of Cleantech Venture Capital

I generally like creating my own content, riffing off other newsy material I find in the print or electronic press, but sometimes someone writes such good stuff that it’s really hard to improve on it.  This is one of those times.

Also, sometimes I’m just too busy to come up with original material or do the requisite secondary work to make a broader set of points.  This is also one of those times.

Last week, Matthew Nordan of the venture capital firm Venrock penned (well, OK, typed) an excellent four-part series entitled “The State of Cleantech Venture Capital”.

Part One focuses on the amount of venture capital into cleantech.  Looking at capital flows over the past several years and projecting forward, Nordan concludes that a record amount of cleantech venture capital will be required over the next few years to bring deals from recent years across the goal line to exit — but expresses the concern that “there may be insufficient Seed/Series A capital available to fund new cleantech enterprises.”  This is a worry to me, as well.

Part Two aims to analyze the returns that cleantech venture investors have been able to generate.  Nordon notes that the conventional wisdom — that cleantech venture capital must have much worse returns than venture capital overall — is patently incorrect.  “Relative to its level of funding, cleantech has actually overdelivered on exits…[venture-backed cleantech start-ups] take less time [to exit than companies in other sectors]…[and] cleantech-only VC funds have about the same valuation metrics as VC funds overall.”  Of course, Nordson does not emphasize that the venture capital sector as a whole has performed poorly over the past decade, but at least cleantech VC doesn’t trail a field that is sucking wind.

Part Three profiles 24 cleantech firms that have undertaken or filed for an initial public offering (IPO) since 2000.  Nordon’s analysis indicates that half of the seemingly-successful companies — these are only the ones that IPO’ed, after all — “stumbled” somewhere along the way towards their exit.  By Nordon’s definition, “stumbled” means receiving investment at a too-high valuation at some point, and then suffering when the valuation falls in a subsequent round of investment.  Such “down-rounds” are inevitably very painful.  As Nordon advises entrepreneurs at the end of his piece, “the share price that really matters is the one at the end.”

Part Four offers some brief concluding remarks, among which are “It’s still really early [in cleantech venture capital}”, and “The optimal investment vehicle [to finance cleantech start-ups] remains to be figured out.” 

Nordon and his firm Venrock are eager to play in this cleantech venture capital game, rough-and-tumble though it may be.  I am too.

EV Companies Need to Douse the Fire Issue

Long a dream of environmentalists, and long a laughing-stock among car enthusiasts because of lame designs (e.g., GM’s EV1 and a long litany of goofy looking vehicles that look like a cross-breed between golf carts and toys), electric vehicles (EVs) are finally starting to make a real impact in the mass-market auto marketplace. 

Of all the electric vehicles, the most prominent is the Chevy Volt, which is a really good looking car with pretty impressive performance (range, acceleration and fuel economy). 

However, a negative news item about the Volt is starting to gain a little momentum:  that the batteries are prone to fires.  Over the summer, a Volt caught fire at a National Highway Transportation Safety Administration (NHTSA) facility a full three weeks after a crash test.  And, more recently, a Volt being charged in a home garage in North Carolina was involved in a fire.

Notwithstanding the possibility of misinformation — it now seems that the latter fire was not caused by the Volt, but started elsewhere in the garage, according to the local fire marshal — nevertheless there’s high potential for the Volt and all EVs to be stained and tarred with the perception that they are unsafe fire hazards. 

This stems from the use of lithium-ion batteries — which offer high energy and power density as is critical for non-stationary applications, but also have a propensity to burn.  Indeed, this was a serious issue a few years ago for laptop computers — and while that concern largely faded away, it came back into focus last week after an iPhone caught fire on an Australian commercial flight, and now threatens the EV sector before it can gain solid market traction.

Of course, no-one’s claiming that gasoline-powered vehicles aren’t prone to fires either.  Indeed, between the flammability and the toxic nature of the fuel, it’s hard to imagine the gasoline-powered auto we have taken for granted for decades being approved by regulators now if it were just being introduced today. 

However, gasoline vehicles have not been generally known to spontaneously combust when standing still, either.  

The last thing that the EV sector needs is a Hindenburg image.  The car makers and the battery makers in the EV arena need to tend to this issue, immediately.  The quicker-than-normal response of GM, offering loaner cars and the possibility of buy-backs to Volt owners concerned about safety issues, indicates how urgent the situation is.

Predictions For Cleantech In 2012

It’s December again (how did that happen!?) and our annual time for reflection here at Kachan & Co. So as we close out 2011, let’s look towards what the new year may have in store for cleantech.

There are eggshells across the sector for 2012. Global economic uncertainty in particular is leaving some skeptical about the chances for emerging clean technologies. And those who watch quarterly investment data, or who look only in a single geography (e.g. North America) may have seen troubling trends brewing this past year. But the true story, and the global outlook for the year ahead, is—as it always is—more complicated.

As you’ll read below, we predict a decline in worldwide cleantech venture capital investing in 2012. But as you’ll also read below, we believe the gap will be more than made up by infusions of corporate capital. And the exit environment, depending on who you are and where you list, still looks robust in 2012 for cleantech (it may not have felt so, but it was actually surprisingly robust in 2011, according to the data. See below.) All in all, if you’re a cleantech entrepreneur seeking capital, our advice is brush up that PowerPoint and work the system now… while there’s still a system to work.

Because, as we detail below, the largest risk, to cleantech and every sector in 2012 we believe, is the specter of precipitous global economic decline and the systemic changes it might bring. Details below.

Here are our predictions for cleantech in 2012:

Cleantech venture investment to decline
In the face of naysayers then forecasting a cleantech collapse, in our predictions this time last year, we called an increase in global cleantech venture investment in 2011. We were right. At this writing, total investment for the first three quarters of 2011 is already $6.876 billion, with the fourth quarter to report early in 2012. Given historical patterns (fourth quarters are almost always down from third quarters), we expect 2011 to close out at a total of ~$8.8 billion in venture capital invested into cleantech globally. That’d be the highest total in three years, and second only to the highest year on record: 2008.

cleantech 2012 predictions venture investment
Total 2011 investment is expected to show growth from 2009’s figures once the fourth quarter (dashed lines, estimated) is added. However Kachan predicts total venture investment in 2012 to decline from 2011’s total. Data: Cleantech Group

Yet in 2012, we expect global venture and investment into cleantech to fall. Not dramatically. But we expect cleantech venture in 2012 as measured by the data providers (i.e. companies like Dow Jones VentureSourceBloomberg New Energy Finance,PwC/NVCA MoneyTree, and Cleantech Group) to show its first decline in 2012 following the recovery from the financial crash of 2008. Our reasoning? There are factors we expect will continue to contribute to the health of the cleantech sector, but they feel outweighed by factors that concern us. Both sets below:

On one hand: What we expect to contribute to growth in cleantech investment in 2012

  • China gets a hold on its economic turbulence – For five years now in our annual predictions, both here at Kachan and when I was a managing director of the Cleantech Group, we foretold the rise of China as cleantech juggernaut. Yet, now with China having become the largest market for and leading vendor of cleantech products and services by all metrics that matter, and now receiving a larger percentage of global cleantech venture capital than at any point in history, there have been recent warning signs. New data just in (for instance, falling Chinese property prices and sluggish export growth because of faltering first world economies, not to mention the first decline in clean energy project financing in China since 2010 as wind project financing declined 14% in the third quarter of 2011 on fears of over-expansion) suggests the Chinese economic engine is slowing. On the face of it, that might look bad for cleantech. But we put a lot of faith in China’s central government and the seriousness with which it views this sector as strategic. Even now, the country has just gone on the record forecasting creating 9 million new green jobs in the next 5 years. Nine million! And China has a good track record in executing its 5-year plans.
  • Rise in oil prices – Cleantech is a much wider category than energy. But for many, renewable energy is its cornerstone. And while there’s no question about the long-term markets for renewables, the biggest factor affecting their short-term commercial viability is the price of fossil-based energy. The good news: indications are that oil prices are headed upwards in 2012, which should be expected to help make renewables more economic. Naysayers maintain that a poor global economy will destroy demand for energy, keeping the price of oil artificially low. For much of 2011, the price of oil was relatively low. But we argue the price per barrel will continue its inexorable rise in 2012 given continued growth in the size of the global market for oil, driven by market expansion in the developing world. Further adding to the expected oil price increase is a little-known fact: there’s been a decline in the quality of oil the world is seeing on average. And the poorer the quality of the oil, the more it costs to refine it into the products we require. Oil prices are headed up.
  • Corporations’ even stronger leadership role – Corporate venturing was up in 2011, possibly setting new record highs, according to the data providers (4Q data not in yet.) Cleantech corporate mergers and acquisitions globally were up in 2011, again possibly setting new record highs, according to the data. The world’s largest companies assumed the leadership we and others predicted they would last year at this time—and indications are they will continue to do so in 2012, with balance sheets still strong.
  • Solar innovation as a perennial driver – Investment into good old solar innovation and projects is still strong, and has remained so for years, while other clean technologies have risen and fallen in and out of investment fashion. And that’s despitemost solar companies being in the red and having billions of dollars in market capitalization disappear over the last year. As some solar companies will continue to close up shop in 2012, look for investment into solar innovation to remain strong in 2012 as the quest for lower costs and higher efficiencies continues.
  • Persistence of the fundamental drivers of cleantech – The sheer sizes of the addressable markets many cleantech companies target, and the possibilities for massive associated returns, will continue to draw investors to the sector. Why? The world is still running out of the raw materials it needs. Some countries value their energy independence. More than ever, economies need to do more with less. Oh, and there’s that climate thing.

On the other hand: What worries us about the prospects for growth in cleantech investment in 2012

  • Investor fundraising climate tightening – Today, limited partners (i.e. “LPs” – the organizations and/or wealthy individuals that fund venture capital companies) are still bankrolling cleantech worldwide; in its 3Q 2011 Investment Monitor for clients, the Cleantech Group details 34 dedicated cleantech and sustainability-focused funds receiving billions in capital commitments internationally in the third quarter of 2011 alone. But we expect a slowdown in venture fundraising in 2012. Blame Solyndra for negative American LP sentiment. Or blame the lack of rock star returns in cleantech of late. But there are more indications than ever that some LPs are becoming increasingly reluctant to fund cleantech. They’ve been grousing about cleantech for years. But the politicizing of the Solyndra bankruptcy has amped the rhetoric higher than ever, and will foster a self-fulfilling prophesy in 2012, particularly in America, we believe.
  • Waning policy support in the developed world – Expected conflicting government policy signals to continue in 2012. Don’t expect cleantech-friendly U.S. policy leadership in 2012, an election year. We wouldn’t be surprised if the ghost of Solyndra and other U.S. Department of Energy stimulus grants and loan guarantees continued to haunt American cleantech through the whole of 2012, making any overt U.S. government support of clean or green industry unlikely. While cleantech is far from solely an American phenomenon, there’s no mistaking that the (now expired) American national loan guarantee program helped loosen private cleantech capital in an immediately post-2008 shell-shocked economy. However, continued uncertainty over the future of the U.S. Treasury grants program and production tax credits is holding the U.S. back. Policy support suffers elsewhere in the developed world. For instance, in the UK, investor confidence was recently dealt a blow by a dramatic drop in solar feed-in-tariff (FIT) rates, and the erosion of renewable policy support in Germany and Spain is well known.
  • Lag time of negative sentiment – Even if the sky indeed started falling in cleantech (and we don’t believe it yet has), it would take a few quarters to show in venture or project investment numbers. Remember, deals can take quarters to consummate. Transactions being counted now may have been initiated a year ago. Fear takes several quarters to manifest. Which is why we believe today’s uncertainty will start to show in 2012’s performance.
  • VCs still circling their wagons – In 2007, before the financial crash, the percentage of early stage venture investments into new cleantech companies was roughly the same as later-stage venture investments into established companies. Since the crash of 2008, deals have remained skewed—both by number and size of deals—towards later stage companies, illustrating investors’ preference to keep existing investments alive than take risks on new companies. While the exact ratio varies quarter to quarter, and from data provider to data provider, there have been generally fewer early stage companies getting funded. That’s hampering cleantech innovation. We expect the trend to continue into 2012.
  • Perennial concern about exits and IRR – Despite the size of its massive addressable markets and near-record amounts of capital entering the space today, on the whole, cleantech investors are still seeking the returns that many of their web and social media tech brethren enjoy. Even now, 10 years into this theme that we started calling cleantech in 2002. That’s not for lack of exits; 2010 saw the largest number of cleantech IPOs on record (93 companies raised a combined $16.3 billion) and 2011 has already had 35 without the last quarter reporting. And cleantech M&A activity in 2011 was strong and significantly higher than last year. No, the concern is for lack of multiples. For instance, 8 of the 14 IPOs of the third quarter of 2011 were trading below their offering price as of the publication of the Cleantech Group’s 3Q 2011 Investment Monitor. Don’t let anyone tell you exits aren’t happening in cleantech. They’re just underwhelming. And/or they’re happening in China.
  • Macro-economic turbulence, collapse, or at least, reform – They’re the elephants in the room: The Occupy movement. Arab Spring. Peak Oil. The continued and growing mismatch between overall global energy supply and demand and food supply and demand. Ever-increasing debt and trade deficits. Currency revaluation or political/military developments. Any or all of these could spur another massive global economic “stair-step” downwards of the scale we saw in 2008, or worse. Concern about all of these points and the impact they’d have on the cleantech sector weighs heavy on us here.

Venture dip made up for by rise in corporate involvement
The world’s largest corporations woke up to opportunities in cleantech in 2011, making for record levels of M&A, corporate venturing and strategic investments. General Electric bought lighting and smart grid companies. Schneider Electric bought some 10 companies across the cleantech spectrum. Corporate venturing activity was high, as were minority-stake investments. In just the third quarter alone, ZF Friedrichshafen invested $187 million in wind turbine gearbox and component maker Hansen Transmissions of Belgium, Stemcor invested $137 million into waste company CMA in Australia, and BP invested $71 million into biofuel company Tropical BioEnergia in Brazil. And there were dozens more minority stake transactions like these throughout the year.

Look for even more cash-laden companies to continue to buy their way into clean technology markets in 2012, supplementing the role of traditional private equity and evidencing a maturation of the cleantech sector.

Storage investment to retreat
Significant capital has gone into energy storage in recent quarters. In 3Q11, storage received $514 million in 19 venture deals worldwide, more than any other cleantech category. Will storage remain a leading cleantech investment theme in 2012? We’re betting no. Here’s why.

Storage recently made headlines as the subsector that received the most global cleantech venture investment in the third quarter of 2011, the last quarter for which numbers are available. An analysis of the numbers, however, shows the quarter was artificially inflated by large investments into stationary fuel cell makers Bloom Energy and ClearEdge Power. Do we at Kachan expect more investments of that magnitude into competing companies? No. Why? Even if you believe analysts that assert that stationary fuel cells for combined heat and power are actually ramping up to serious volumes (oldtimers have seen this market perpetually five years away for 15 years, now), just look how crowded the space currently is. Bloom and ClearEdge are competing with UTC Power, FuelCell Energy, Altergy, Relion, Idatech, Panasonic, Ceramic Fuel Cells and Ceres Power … just some of the better-known 60 or so companies vying for this tiny market today. And many are still selling at zero or negative gross margins.

But the main reason we’re not bullish on storage: Smoothing the intermittency of renewable solar and wind power might turn out to be less important soon. Sure, nary a week goes by without announcements of promising new storage tech breakthroughs or new public support for grid storage (e.g. see these three latest grid storage projects just announced in the U.S., detailed halfway down the page.) But we believe that utility-scale renewable power storage might be obviated if utilities embrace other ways to generate clean baseload power.

In 2012 or soon thereafter, we expect those clean baseload options will start to include new safer forms of nuclear power (don’t believe us? Read Kachan’s report Emerging Nuclear Innovations—U.S. readers, don’t worry: nuclear innovation won’t apply to you.) Or NCSS/IGCC turbines powered by renewable natural gas delivered through today’s gas distribution pipelines (see The Bio Natural Gas Opportunity). Or even geothermal (gasp!) or marine power (see below). All of these promise to be less expensive than solar and wind when you factor in the expense of storage systems required—incl. electrochemical, compressed air, hydrogen, flywheel, pumped water, thermal, vehicle-to-grid or other—if solar and wind are to be relied on 24/7.

Marine energy to begin coming of age
I’m a closet fan of marine energy, despite today’s extraordinarily high cost per kilowatt hour. We started covering wave, tidal and ocean thermal energy conversion equipment makers in 2006. Anyone who’s heard me talk publicly on the subject has had to suffer through hearing how I’d much prefer invisible kit beneath the waves than have to gaze upon solar and wind farms taking land out of commission.

In 2006, the lifetime of equipment from then-noteworthy companies like Verdant Power and Finavera (which since exited marine power after a failed test with California’s PG&E) in the harsh marine environment could sometimes be measured in days. The designs just didn’t hold up. Even Ocean Power Delivery, now Pelamis Wave Power, with its huge, snakelike Pelamis device, had hiccups in early onshore grid testing. Back then, the industry clearly had a long way to go.

Today, six years later, we think it’s time to start taking marine energy seriously. A high profile tidal project is now underway in Eastern Canada’s Bay of Fundy. Several weeks ago, Siemens raised its stake in UK-based tidal energy developer Marine Current Turbines from less than 10% to 45%, because it liked the predictability of ocean energy, and Voith Hydro Wavegen handed over its first commercial wave project to Spain. And last week, Dutch company Bluewater Energy became the latest vendor to secure a demo berth at the European Marine Energy Centre at Orkney, Scotland—the most important global R&D center for marine energy. Things are going on in marine power. Still, its major hurdle is the large variation in designs and absence of consensus on what prevailing technologies will look like.

2012 won’t be the year marine power becomes cost-competitive with coal, or even nearly. But you’ll hear more about marine power in 2012, and see more private and corporate funding, we predict.

Increased water and agricultural sector activity
Look for increased venture investment, M&A and public exits in water and agriculture in 2012.

At one point, only cleantech industry insiders championed water tech as an investment category (and, frankly, at only a few hundred million dollars per year on average, it still remains only a small percentage of the overall average $7B annual cleantech venture investment.) Industrial wastewater is driving growth in today’s water investment, with two of the top three VC deals of the last quarter for which data is available promoting solutions for produced water from the oil and gas industry, and the largest M&A deal also focused on an oil and gas water solution. Regulations aimed at making hydraulic fracturing less environmentally disruptive to will spur continued innovation and related water investments in 2012.

Where water was a few years ago, agriculture investment appears to be today. There was more chatter on agricultural investment than ever before at cleantech conferences I attended around the world this past year. Expect it to reach a higher pitch in 2012, because of:

Investing in farmland is even resurfacing, in these uncertain times, as a private equity theme.

Remember the food crisis three years ago, when sharply rising food prices in 2006 and 2007, because of rising oil prices, led to panics and stockpiling in early 2008? Brazil and India stopped exporting rice. Riots broke out from Burkina Faso to Somalia. U.S. President George W. Bush asked the American Congress to approve $770 million for international food aid. Those days could return, and they represent opportunity for micro-irrigation, sustainable fertilizer and other water and agriculture innovation.

And so concludes our predictions for 2012. What do you agree with? What do you disagree with? Leave a comment on the original post of these predictions on our site.

This article was originally published here. Reposted by permission.

Who Can Count to 100 Billion?

By Assaad Razzouk

On Thursday 10 November 2011, I spoke at an OECD / IEA workshop in Paris entitled “Expert workshop on tracking climate finance flows from the private sector and multilateral development banks.” Despite the dry title, the topic is of great significance: Developed countries have a collective commitment under the December 2010 Cancun agreements to “mobilize” USD 100 billion per annum by 2020 of “climate finance” for developing countries; and a predictable argument is ongoing about what “mobilize” means; what qualifies as “climate finance” and whether this aspirational USD 100 billion is on top of the capital flows which might currently qualify as “climate finance” from rich (even if some are a bit less rich than they thought they were a few months ago) to poor countries.

There are no existing frameworks to have an argument within, and the OECD, the IEA and others are therefore trying to build such a framework, hence the workshop I attended, and its attendance: OECD government representatives, IEA representatives, statisticians and data gatherers, policy wonks, representatives of the multilateral development banks and consultants. Participants at workshops like this one are trying to do the right thing: Establish a common definition of “climate finance;” attempt to harmonize relevant reporting methodologies; identify weaknesses in data gathering and try to do something about them, etc. –because the less rigorous the framework one applies to what is the USD 100 billion and how it is computed, the more the scope for disagreements between developed and developing, and the scope to wriggle out of doing anything additional.

Into the ring steps the Soros-backed think tank Climate Policy Initiative or CPI which released last month a report entitled “The Landscape of Climate Finance,” concluding that its “research suggests that at least USD 97 billion per annum of climate finance is currently being provided to support low-carbon, climate-resilient development activities” (page i). Miraculous! USD 97 billion is almost USD 100 billion, so there: we’re done, ahead of schedule! Even better, CPI has already figured it all out: “out of the estimated USD 97 billion in global climate funding, on average USD 55 billion is provided by the private sector, while at least USD 21 billion is provided by public budgets … [and] bilateral and multilateral agencies and banks also contribute another USD 20 billion by leveraging the public funding they receive” (see page iii).

The report is 101 pages. I read them all before the workshop because at Sindicatum we are investing USD 300 million in climate finance, we think we can invest billions profitably and therefore I hoped the report would help me find these providers of USD 97 billion per annum to talk shop. What I found instead is that most of the CPI report actually shows that the numbers cannot be trusted; and highlights where improvements need to be made in how we track data and which methodologies we should apply, in order to arrive at sound numbers. Indeed the USD 55 billion provided by the private sector appears to be a CPI estimate provided notwithstanding the fact that the “real scale and details of private finance are hard to grasp”, “much of the information collected is not publicly available”, “the OECD also tracks ‘net private grants’ provided internationally, but little is known about the objectives and recipient countries of these grants” etc. and by the OECD’s own admission, it doesn’t have this data. Furthermore, it seems to me that most of the USD 97 billion in the CPI report, even if it had no double-counting, which I doubt, is littered with “business as usual” loans and investments. In my comments at the Workshop, I said that very little commercial lending into renewable energy projects in developing countries is genuinely non-recourse finance (I cited a few examples) and this lending must therefore logically be excluded from any computation of “climate finance” because its non-recourse nature simply means that it isn’t climate finance at all.

CPI somehow nonetheless manages to hit the magic number, even though most readers of their report should conclude, as I did, that the USD 97 billion is not a sound number at all. It is hard not to think that CPI just thought it would be politically convenient to arrive at a number which, what a coincidence, was approximately USD 100 billion. Contrast this to my on-the-ground experience that there is enormous exaggeration by multilateral institutions, bilateral institutions, banks and private sector participants in relation to how much they are actually investing in “climate finance” and the only reliable numbers we can find are for grants and concessional loans. As I argued in a previous piece, our experience is that investment is declining in the very same field where ambitious USD 100 billion proposals (which probably will never see the light of day) are using up precious time and resources: The CPI report is a perfect example of time and resources being utilized to seemingly engineer the right answer because that’s easier than actually doing the investment work.

Nowhere near USD 97 billion is flowing per annum from developed countries to developing countries and it’s neither needed in that form nor to that extent. Far more powerful would be to encourage developing countries (via limited grants and concession finance) to put policies in place which the private sector can then leverage to mobilize the necessary investments (see my colleague Gareth Philips’ blog for an example). These would be clearly additional investments, i.e. not business as usual, and one could quantify them. I would guess that most of the money would be sourced locally, with foreign investors like us acting as catalysts and sponsors. The UNFCCC already provides a framework to capture this type of approach under its emerging Nationally Appropriate Mitigation Actions (NAMAs) efforts, or domestic initiatives such as ETS (the EU, New Zealand, Australia, California etc) or bilateral offset mechanisms (Japan)). By way of example, if a Government were to declare that new policies to reduce and ultimately remove fossil fuel subsidies was a NAMA and register this with the UNFCCC, then they could also monitor investment into the resulting actions. Grant aid and concession finance can be targeted towards this goal and even CPI would be hard pressed not to compute the figures correctly. In the meantime, I think it is quite dangerous to issue reports purporting that zillions are already being invested in climate finance when most of these investment are in fact business-as-usual: We are obfuscating the need to invest billions to deal with climate change by conveniently fudging the numbers instead of making sure that the price of carbon-intensive energy increases through policy initiatives which mobilize increasing amounts of private sector investments.

Assaad Razzouk co-founded and is CEO Sindicatum Group. Assaad was an investment banker at Nomura International plc in London, where he was successively Head of the Middle East Group, Head of Corporate Finance – Emerging Markets, Head of Corporate Finance – Financial ICT, and Deputy Head, Global Corporate Finance.  Prior to that Assaad was at Price Waterhouse. He is a graduate of Syracuse University (Summa Cum Laude) and holds an MBA from Columbia Business School.

Seeking Ideas for the 4th Annual Cleantech Blog Power 10 for 2011

This is the 4th year of the Cleantech Blog Power 10 Ranking of cleantech companies doing it right.  Before we make our selection, I’d love this year to read any recommendations you’d like to send.  Check out Volume III for 2010 for ideas, but don’t be dissuaded from sending suggestions.

Eligibility for inclusion in the ranking requires meeting a 6 point test. Suggestions for inclusions in future volumes are welcome. The 6 point test:

1. The company is energy or environmental technology related
2. I like their products
3. The market needs them
4. The company is smart about building their business
5. I’d like to own the company if I could (for the right price, of course!)
6. It is not already one of mine

When you send ideas, email them to Editor, Power 10, at dikeman@janecapital.com. Make sure to include the company name, their website, a description of the product, and why it makes the list on the test above.

That is:

What makes it energy or environmental technology related

What makes their technology/product unique and special

Exactly how they are making a material difference in the sector

Why I would want to own them

And include any linkage or affiliation you have to the company.

Or just send in the name and we’ll do the rest.

Don’t be afraid to send in startups, esp if they are already forcing bigger companies to react to them, or have literally created a new market.  And feel free to attach any additional information you think is relevant.

Neal Dikeman

Chief Blogger, CleantechBlog.com