Energy Efficiency Market Attracting Smart Money

In the current economic climate of corporate thrift, the booming market for technologies to use less energy continues to attract more investor capital.

PG&E employee installing a smart meter in California.
Courtesy PG&E
PG&E employee installing a smart meter in California.

According a recent survey by research firm The Cleantech Group,energy efficiency firms attracted nearly $1.1 billion in venture capital in 2010, almost double that of 2007.

“I believe the trend will continue,” says Cleantech Group CEO Sheeraz Haji. “The world will continue to open its eyes to the massive opportunities to make buildings and factories more efficient. This will drive deployments in both existing buildings and new construction as the economy recovers.”

He points out that solar energy and electric vehicles may have attracted more capital that year, energy efficiency had the most deals — meaning smaller amounts spread out over a diverse group of technologies.

While energy efficiency sector can encompass as a lot of things, it broadly includes a basket of technologies aimed cutting energy consumption or wringing more energy out of other processes.

Haji says these are the kind of technologies that can attract the attention, and money, of established corporate partners in addition to VCs — almost $40 billion in investments across all of cleantech in 2011, compared to $9 billion last year.

Most active corporate investors include General Electric, with 10 deals totaling $137 million, and Intel , with six transactions for $181 million.

That's more than all but the top-five cleantech venture funds, including DFJ and Kleiner Perkins.

Green - Winners & Losers - A CNBC Special Report
Green - Winners & Losers - A CNBC Special Report

“Corporate investments are likely on the whole to be larger than VC investments, as these technologies may be seen as new expansions of already large and mature market with large and mature players,” says Bob Gohn, research director with Pike Research.

“We absolutely see the big companies increasing their activities in energy efficiency,” adds Haji of Cleantech, with the big firms focused on acquiring smaller competitors and looking to expand their energy management offerings.

In the past few years, “smart meters” have been nearly synonymous with energy efficiency, allowing power users to better control consumption or to send on-site generated energy back into the grid.

Investors noticed, too. Some $524 million was invested in 40-plus deals.

Most analysts see continued growth in this area, with the U.S. market maturing

Pike Research’s Gohn says he sees shipments in North America peaking at around $1.6 billion in 2012, and declining by more than 8 percent annually through 2017.

“The decline has been long anticipated, as the smart meter penetration rate reaches a significant percentage of the electric meter installed base in the U.S., and the (government) stimulus spending that accelerated deployments fades away,” he says.

Demand elsewhere in the world is set to accelerate, says Garvin Jabusch, chief investment officer at Green Alpha Advisors.

“One reason we're bullish on these right now — as with so many things in the ‘next economy’ recently — is China's big commitment to energy efficiency,” he says. “China now has a plan to install a billion smart meters at a cost of $240 billion over the next nine years.”

He adds “more modest but still large” expansion plans exist in many other nations.

Another bright spot in energy efficiency is the home energy management segment, a younger cousin to established building automation systems like those from Johnson Controlsand Honeywell .

One new entrant, Opower, takes a homeowner’s power meter data and shows when and how power is used during a day.

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This is valuable information, when most consumers are used to simply paying a power bill every month, and it gives them a chance to change their consumption patterns to save energy and money.

The firm raised $50 million from VCs Kleiner Perkins and Accel, and has 57 utility partners across the country, including DTE and Progress Energy Resources.

New concepts like this were unheard of even a few years ago, says Jabusch, who adds that as “the greener, next economy gradually supplants the legacy economy, energy efficiency solutions will become ubiquitous.”

“All meters will be ‘smart,’ all new lights will be highly efficient, all power will be carefully matched with [customer] demand and generation dynamics,” he says.

According to a recent survey by Johnson Controls, the average energy efficiency investments takes around three years to pay for itself, and Jabusch adds that short timeframe will keep the efficiency sector booming for years to come.

“That's right, I'm calling for 100 percent market penetration,” he says. “Adopters love it because of the large economic benefits: lower operating costs, lower maintenance costs, and so on. It provides what businesses always seek — the same or better amount of output, quality and performance at lower costs."