Investing in renewables and clean tech is rewarding, in every sense of the word. The myth that the nice ethical glow you get from investing in green ventures is compensation for the reduced financial returns is being consigned to history as fast as coal is being forced from the UK’s energy mix.
JAMES MURRAY Editor-in-chief of BusinessGreen
Renewables and associated low carbon technologies, such as smart grid systems, energy storage, electric and fuel cell vehicles, and energy efficiency innovations, are now at the heart of global multi-billion dollar industries.
Recent statistics from the Office for National Statistics (ONS) revealed the UK’s Low Carbon and Renewable Energy Economy was worth over £43bn in 2015, employing 234,000 people and generating exports of £4.11bn.
And that’s just the tip of the iceberg. Analyst firm Bloomberg New Energy Finance (BNEF) reported recently that plummeting wind and solar costs meant renewables accounted for more than half all new power generation capacity globally last year as an estimated $241bn of investment was mobilised and a record 138.5GW of capacity was deployed.
Pilot projects all around the world are demonstrating how energy storage and smart grids mean renewables do not necessarily undermine a well-managed grid, even when the sun doesn’t shine or the wind doesn’t blow.
Moreover, companies targeting these markets can expect significant policy support. The Paris Agreement means the whole world is signed up to curb their carbon emissions (that may change thanks to President Trump, but every other major market remains fully committed to decarbonisation).
Escalating health concerns over air pollution are similarly prompting politicians to aim supportive legislation at renewables and zero emission vehicles. In short, there are enormous opportunities for clean tech start-ups and investors able to target a market that is going to keep growing for decades.
So why would anyone shun this booming opportunity? Data for angel investors is hard to come by, but BNEF shows that in recent years venture capital and private equity investment in the sector has failed to match highs seen before 2010. If the prospects are good, why do many clean tech entrepreneurs find attracting early stage investors a slog?
The reality is clean tech firms struggle to deliver the quick-fire exit strategies you find in other technology markets. By definition these companies tend to be working in the field of hard engineering; projects are often capital intensive and patient capital is often essential.
Similarly, while the falling cost of clean technologies means exposure to policy risk is less acute than it once was, plenty of investors have been burnt by sudden cuts to subsidies or regulatory changes.
Last, the huge opportunities on offer mean competition are intense and casualties inevitable along the way. Playing in a market the world’s largest energy, engineering, and auto firms are targeting creates M&A exit opportunities, but it also results in high barriers to entry for disruptive innovators.
However, there are ways to overcome all these obstacles. Savvy green investors talk of being patient and accepting that exits can take longer than they would with your latest Web start-up. They also recommend focusing on firms that can build a business without recourse to long term subsidies and the political risk that comes with them. And they advise looking closely at the less glamorous parts of the clean tech sector that rarely command headlines: renewables component developer, grid technologies, light weighting of materials or energy efficiency innovations.
Investing in renewables and clean tech is not for everyone, but when you look at the scale of the market opportunity, not to mention that ethical buzz, the industry’s appeal is obvious. It’s often high risk, high reward – but aren’t all the best things in life?
In an industry famed for requiring ‘patient capital’, entrepreneurs are finding new opportunities to break through in adjacent markets.
CLAIRE CURRY – Bloomberg New Energy Finance
In the past, innovation focused more on hardware, ‘real’ solutions that were often risky, had long development times, were prone to failure – and ahead of their time. They were putting forward solutions to problems that businesses and consumers weren’t really aware of – so the components of the supply chain needed to sustain many of these start-ups weren’t in place.
Scaling up in the past was also difficult: in the end, multinationals invariably did it better. If you wanted turbines, you’d have been more likely to go to Siemens or GE than a start-up, so fledgling businesses often had difficulty raising enough capital to expand.
Also, the focus on the consumer (via smart meters, for example) didn’t take off as expected.
Now, however, reduced costs have enabled start-ups to develop in secondary markets – ‘smart’ storage batteries at Germany’s Sonnen, for example.
Renewable power generation has become more established, and that has also opened up opportunities in adjacent markets beyond utilities. For example, there has been an explosion of interest in solar’s adjacent markets – say, for irrigation or street lighting.
There is also financial innovation in the cleantech sector. Take SunFunder: one of this year’s BNEF New Energy Pioneers. By aggregating diversified portfolios of investment opportunities in the off-grid solar sector, it unblocks a bottleneck for investors.
Other BNEF 2017 winners – We Care Solar’s remote maternity care, for example – indicate the potential gains for entrepreneurs willing to innovate in adjacent markets. Start-ups that can enhance efficiency of existing technologies are also promising, using AI to gather ‘wind intelligence’ for better predictive maintenance, or, like BNEF Pioneer RomoWind, using ultrasonic technology to improve turbine performance.
There are four marked trends influencing start-up activity:
- Automation – autonomous vehicles and AI-related developments will continue to offer start-ups opportunities to innovate in adjacent markets.
- Data management for efficiency gains – reducing down-time of wind turbines, for example, and integrating ‘boosters’ with legacy tech.
- Cleantech 2.0. We’ve most past the point of solving fundamental problems, such as how to generate electricity via wind. We’re now looking to address secondary problems and enhance existing technologies.
- Direct-to-consumer sales. There is potential to revisit consumer market – as Sonnen found with its home-battery product in 2016. The technology behind smart homes, once ahead of its time, is attracting new interest. Utilities have begun to get on board with consumer-focused developments.
M&A activity also suggests multinationals are looking for smaller, specialist business opportunities that will help them grow their share of growing cleantech markets. GE Ventures bought a stake in Sonnen in order to expand its share of the growing solar power-storage market. Total is actively expanding its renewables activity and recently bought French battery-maker Saft for 950m euros. Engie, meanwhile, took an 80 per cent stake in a US battery storage business Green Charge last May.
Sources: Global Trends in Renewable Energy Investment 2017, UN Environment, the Frankfurt School-UNEP Collaborating Centre, and Bloomberg New Energy Finance