Cleaning Up On Clean Technologies
It’s getting to be prime time for clean technologies.
After years incubating in laboratories, then nurtured as start-ups by green-leaning venture capitalists, the clean-tech sector is finally getting serious attention from deep-pocketed investors who are seeing clearer exit strategies through an increasing number of successful public listings.
In 2005 clean-tech firms raised $592 million in IPOs, a figure that jumped to $1.35 billion last year, which has already been eclipsed by $2.4 billion raised this year in three major U.S. markets alone. “You can expect to see quite a few going public in the next 12-24 months,” says Jeff Lipton, Managing Director of CleanTech Investment Banking at Jefferies Group, especially in the solar sector, where there has been a string of successful launches.
The clean-tech sector is not strictly defined because it continues to broaden as a wider array of environment-friendly technologies approach commercialization, but four broad categories are central: renewable fuels and electricity generation, energy storage and conversion, energy intelligence technologies and advanced materials.
New companies on the horizon are generating electricity through solar thermal (huge parabolic mirrors focusing sun rays to boil water or oil), geothermal, tidal wave farms, developing aviation fuel from algae, or turning out biodegradable plastics and ‘green cement’ to cut down on the 7 percent of our carbon emissions generated by the conventional kind.
Green And Global
A convergence of global drivers is fueling this investment surge, including concerns about global warming, energy security and prices, as well as consumer demand, now reflected in supportive government policies, for products that make better use of limited natural resources. “There has been a fundamental shift, there is no going back,” says Joseph Muscat, Americas director of Ernst & Young’s cleantech advisory services.
“These are the defining issues but they are also the defining opportunities of our generation,” says Nicholas Parker, cofounder of Cleantech Group. ”You can make a lot of money in this space while at the same time making a large contribution, and that jazzes a lot of people now.”
That buzz is most palpable among venture capitalists, who provide the critical seedbed for start-ups, and evident in soaring commitments. VC clean-tech investment spiked to $1.1 billion in the first half of 2007, a 35% increase from 2006, according to a Deloitte survey. Between 2004 and 2005 VC investment nearly tripled, from $493 million to $1.4 billion, according to the National Venture Capital Association.
As fast as it’s growing clean-tech investment is still a relatively small percentage of total VC investment – between 5-10% by most reckoning – but it’s enough to supply a strong pipeline of new start-ups. New Energy Finance has identified 866 development stage ‘pure-play’ clean energy companies. Later the bigger money comes in, from more mainstream VC firms, investment banks and hedge funds, as well as the strategic investment arms of major corporations, who are among the big winners so far in the clean-tech boomlet.
More than $16 billion poured in to this sector last year from private equity investment, representing a 67% increase over 2005, and New Energy Finance says it expects investment to increase at a compound annual rate of about 17% through 2013.
The bulk of this investment is energy-related - the core of cleantech - with 86% of investment going to wind ($8.4 billion), biofuels ($4.7 billion) and solar ($2.3 billion), including build-outs of mature technologies, such as on-shore wind and first-generation, corn-based ethanol.
“What cleantech is about today is scaling up – that’s where we are, and it’s got be cost-competitive and therefore price competitive, that’s critical,” says Ron Pernick, co-founder of Clean Edge, a research and publishing firm, who says even a modest price premium will deter all but 5 percent of potential customers.
Photovoltaics, IPOs And P&Ls
Solar Stands Out
That’s happening, perhaps most dramatically in solar. A few years ago, Sharp’s 30 megawatt (MW) solar panel plant was the world’s largest; a German company is now building a 500MW facility in Oregon. Annual worldwide manufacturing output was 600MW five years ago; it will be 3 gigawatts (GW) next year, and could be 6GW by 2010, says Pernick, spurred by public green energy mandates.
Critically, the cost of photovoltaics has plunged, from $22 per watt hour 25 years ago to 25 cents, compared to the 9 cent cost of electricity generated by natural gas. With current tax breaks wind electricity is down to 6 cents – just a penny over coal’s cost – the key reason wind is already a mature industry, dominated by large firms, and deep-pocketed investors, such as T. Boone Pickens (go to slideshow) who is building the nation’s biggest wind farm in Texas.
It’s not just venture capitalists and investment banks making money on the sun. Corporations are finding vast savings in efficiency investments while others are making strategic investments for future pay-offs. Some firms are already well-placed, especially those in related or ancillary businesses, such as silicon wafer manufacturers who last year sold more to the solar industry than to chipmakers. That was just fine with Applied Materials, which expects $600 million in solar-related sales in its 2007 fiscal year and more than $1 billion by 2009. (Go to interview with CEO Michael Splinter.)
Despite this stunning growth, solar has so much further to go: it currently satisfies a little more than 0.1% of total U.S. electricity demand. The huge upside is catnip for investors dreaming of discovering the next household company name.
A Plus Grade For IPOs
A string of successful IPOs in the sector has stoked the excitement. Suntech Power opened on NASDAQ at just under $21 when it went public in December 2005 and is now $41.70, while SunPower opened at $27 in November and now trades at $91. First Solar, a thin-film producer, had a $400 million launch November 2006, rising 340% by the end of the second quarter of this year.
These successes attracted $428 million of additional investment into early stage solar technologies (thin-film and non-crystalline) last year, which trumped the $235 million of VC money that went into second generation biofuels, including cellulosic ethanol, which many hope will be the salvation for that more troubled sector.
Other investment plays are more prosaic, such as trimming our current profligate waste of energy, a business opportunity that has spawned a cluster of new companies. Comverge, Inc. is now helping more than 500 U.S. utilities make better use of their power output through their demand-response “smart megawatts” technology, helping to defer expensive new generation and transmission construction.
Comverge went public in April, opening at $21 and currently trades at $35.31 a share. Boston-based EnerNoc, , which offers similar demand-side management technologies, listed on the NASDAQ Global Market this May, opening at $26 – and now trades at $47.70.
“The performance of these two IPOs will cause many private companies to take notice and position themselves for near-term IPOs,” said a recent Jeffries report, which declared it was bullish on the sector because so much of the existing energy grid needs upgrading.
Goldman Sachs, one of the most aggressive – and presumably successful - players in the clean-tech sector, with an estimated $2 billion invested, continues to inspire followers.
One of the more recent entrants, Nomura, formed a clean-tech investment unit last year and in its first investment, made in June, took a lead role placing $14 million in SpectraSensors Inc., a leading supplier of gas analyzer products, that help control pipeline corrosion and avoid explosions.
Nomura’s share was $8 million, according to Whitney Rockley, a principal in Nomura’s clean-tech unit, based in London.They were joinedin the C-Round of financing by Chevron’s venture capital arm, along with some earlier VC investors, including American River Ventures, Blueprint Ventures and Nth Power.
With such promising prospects it may not be surprising that a recent KPMG survey found 44% of oil & gas executives favored at least 50% of public energy spending go to renewables (a quarter said more than 75% should be so earmarked), but it might surprise some that 82% cited declining oil reserves as the justification.