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.

What is Your Water Really Worth?

Hydrocommerce Corner-Where Water & Money Meet

Brought to Investors by and its water investing portal,

January 26, 2010 Edition
By William S. Brennan
Bio and more info:

What is Your Water Really Worth?

A typical day for most adults in the western hemisphere begins with a cup of coffee, a shower and a brush of the teeth before we head of to work for the rest of the day. Most never even give water a second thought as we move about our daily routine since every time we turn the faucet, out gushes a commodity that never seems to end. But what would happen one day if you went to turn the shower on and nothing came out? Or worse the color was dark brown or something unrecognizable that reeked and was visually unappealing? What would you be willing to pay for uninterrupted clean water in the developed world? From an investment perspective, water prices are based on user expectations, failing to reflect the costs of infrastructure and maintenance. A prime example is the Metropolitan Board in Southern California where a 14% price increase did not cover the cost of delivering water, triggering the utility to access its reserves for $182 million. We bring this to light because this is not a one off situation. Water utilities get paid based on usage fees, giving them perverse disincentives to conservation and limiting their ability to invest in new technologies should water stress occur.

Most Americans as well as inhabitants of developed countries don’t pay much attention to the price of water because it is probably the cheapest utility bill that arrives in the mailbox. Think about it. Aren’t you excited that your cell bill is going down due to competitive pressures. So when is the other company going to show up at my front door and install a new water pipe in my front yard so I have an option who I should write the check to at the end of the month? Never! What you have now is what your children and grandchildren will have for the next 50 to 100 years. I can say that with a high degree of confidence since we have for the most part the same pipes and the same company supplying water over the last 100 years. Sure the name may change and the municipality may run out of money forcing it to sell its water works but the majority of us are dealing with the same company that our Grandparents did. This means that those same pipes that worked so well in New York, Philadelphia, Boston and Los Angeles since the 1930’s are still the same pipes that are bringing us our water today!

So what is the real underlying value of water relative to the state of our infrastructure, the energy used to treat and move it and ultimately, is it priced correctly? The water that runs into our homes goes through a comprehensive treatment protocol that is governed by the EPA before it ever hits the transmission pipes. The cost of treatment alone when you add in the energy to move water through various membranes and filters is likely far more than the average person realizes. Once clean enough for potable use, that water travels miles to reach its destination through a complex menagerie of pipes, motors, and valves before it reaches its final destination. Did you ever consider the energy cost to move water up a hill? Just ask the Metropolitan Water District in Southern California or Denver Water in Colorado and they will be happy to provide an answer. In addition, hydro electric plants regularly pump water uphill by “pumped storage,” in which water is moved from a lower-elevation storage facility (either a reservoir or a purpose-built container) to a higher elevation for release during peak demand. Although pumping the water uphill consumes more electricity than is generated by the water flowing back down, the financial return for the peak power is higher than the cost of pumping water during off-peak times. Did you ever give a second though to just how much energy is needed to provide water services? Energy is required to lift water from significant depth in aquifers, pump water through canals and pipes, control water flow and treat waste water, and desalinate brackish or sea water. Globally, commercial energy consumed for delivering water is more than 7% of total world consumption. Energy consumption effects water use more than we realize with 50% of our fresh water being used by electrical power plants

What most fail to realize is that the water industry is a “rising-cost” industry, with prices rising faster than the rate of inflation. Most costs are associated with infrastructure replacement, regulatory compliance (treatment), and population growth (for some areas). Labor, energy, and chemicals are the three major operating expenses for many systems where rising costs are coupled with flat or declining demand (conservation), another source of price pressure. One of the first points we always make with investors in the water sector is that water demand is relatively price inelastic; however, large-volume and discretionary use may fall due to price response. Ultimately, water customers experience the combined and regressive effect of water, wastewater, and stormwater charges. So get ready for higher water rates.

From our view, full-cost water pricing is essential for sustainability, as well as economic efficiency; in the coming years, accurate pricing will signal and encourage efficient production and use and emerge as the catalyst for behavioral change among end users. In the absence of full-cost pricing, subsidies can flow to or from water systems and sustainability will become more questionable, especially in regions where water shortages are expected to persist. Regulated water utilities, many of which are nongovernmental, are likely to charge customers for the full (accounting) cost of service. Presently many government-owned (but not all) water systems are reluctant to charge the full cost of service through rates. That will change albeit slow due to the political nature of the beast. Census Bureau data illustrate a persistent gap between expenses and revenues for water and wastewater services (comparatively). Remember, ratemaking can be politicized (“willingness to charge”), which may play a role in cost avoidance, including investment deferrals as we have seen from our not so stimulating U.S. stimulus plan. However, cost allocation and rate design are both technical skills that reside within the body of a water utility. And don’t leave out political skills which are needed too (communications, participatory processes, and accountability) in order to prepare the public for the inevitable price increases that we believe will be 3x-5x your present water bill over the next five years.

Often overlooked by most people, politics has and will continue to play the leading role in setting the ultimate price of water globally, resulting in prices that short term, may remain artificially low in comparison to the intrinsic value of water in certain parts of the world; not enough water stress exists in those areas to move pricing that wakes up the end user. Shortsighted but prevalent. Consider this as likely scenario…even while the average water usage drops among end users, the cost to maintain existing operations continues to climb. First, a minimum usage charge for those areas that the water usage does not support the underlying cost will be implemented. Ultimately, however, we will pay the full cost and when that occurs, pricing will become significantly higher and hopefully more intelligently applied across the usage spectrum. We anticipate that regional pricing structures will become more creative (as we have seen in certain parts of water starved California) – including tiered rates where the first tranche of water-basic “human right” water is priced just below or at full cost while the next tranche of water beyond the first tier is substantially increased through tariffs and usage levels that provide a true and measurable disincentive to overuse. So while you ponder over your next underpriced water bill (if you are lucky enough), consider picking up a few shares of the local water company if it’s a publicly traded security.

By William S. Brennan
Brennan Investment Partners LLC

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Disclaimer: This column, Hydrocommerce Corner-Where Water & Money Meet with Bill Brennan, is the opinion of William S Brennan.Content found in the articles is subject to the terms found in the disclaimer and does not represent a recommendation of investment advice. Investors should seek the advice of a qualified investment professional prior to making any investment decisions.

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