Top Financiers, Business Leaders Look Into Clean Tech's Crystal Ball

Dec 1, 2009

The UK's top clean tech financiers and business moguls see a strong future for renewable energy and smart grid technology, but they also recognize investment risks on the road — and an important role for government.

At a clean tech summit last week, Nicholas Parker of the Cleantech Group, David Blood of Generation Investment, Michael Liebreich of New Energy Finance and other experts postulated what the next few years have in store for clean tech.

Three themes in particular dominated: A robust carbon price is necessary, clean tech economics is about the long-term, and Asia will dominate the clean tech market.


1. The outcome of Copenhagen may not matter, but a "robust" carbon price is necessary to move the market forward

"Whether Copenhagen is successful or not, we think price signals will kick in. Why? Because there is a fundamental imbalance between supply and demand" of clean water, food and commodities, said Parker, co-founder of The Cleantech Group, a sponsor of the Guardian UK Cleantech Summit.

While several speakers echoed his expectation of a price signal, only Blood, a senior partner at Generation Investment Management, was willing to venture a carbon price floor during the meeting: "$100, easy," he said.

Easy to say, but getting to a $100 per ton price point, where external costs of greenhouse gas emissions are factored in, will involve more than a quick sprint to reach the finish line. EU emissions allowances are trading right now for just over €13 per ton of carbon, close to $20 per ton. In the U.S., carbon allowances on the Northeast's Regional Greenhouse Gas Initiative sold for less than $3 per ton in RGGI's latest auction.

Government will have to play a role, said Henri Winand, director of Intelligent Energy. He hearkened to Silicon Valley's mantra: "the green is in the green," but added that it's up to governments to create a market where none exists.

Next week's international climate summit in Copenhagen is a chance for world leaders to get started.

"Copenhagen creates an ecosystem ... a backbone for clean tech," Winand said.

Blood agreed that government money and political will are necessary for "early stage investment." But "ultimately, the solution to address the challenges of climate change will be driven by business," he said. The economic crisis and government deficits make clear that there isn't enough in government coffers.

"We need to move a significant amount of capital to climate change, and it will be business that does this," Blood said.

Liebreich, CEO of New Energy Finance, also argued that market pressure will be far more effective than political pressure in precipitating deep emissions cuts.

He sees the market picking up once the financial system gets its house in order. The current widespread belief that clean energy is expensive is a myth, Liebreich said. That myth pervades for several reasons, including the cost of financing, which remains high as a result of Western central bank policies. This should resolve itself once banks fully recover, power grids are upgraded, and the government stimulus packages "fully hit the frontlines," he said.


2. Clean tech economics is about the long term

A fundamental paradigm shift in market incentives is at hand, and investors need to understand that incentives structures and payoffs are different in clean tech, the conference speakers said.

"Even though there is clear reason in terms of generational, ethical reasons to transition to a low carbon economy, it is obvious that line of thinking hasn't yet taken hold," Blood told the summit. It's a profound statement for a capital market used to operating on short-term incentives.

"We need to get business to act, to get business to transition capital to low-carbon economies, we have to make it about driving long-term economics," he said. "The focus on short-term quarterly earnings is causing us to make very bad investment decisions."

Investing in clean tech is fundamentally different than investing in information technology in that the turnover rates are longer, explained Bruce Huber of Jefferies International.

"The challenge we have for a low-carbon economy in the context of efficiency and smart grid, which are arguably venture-type returns because the technology is not yet mature," Huber said.

There's also a higher risk, particularly with efficiency technology such as smart grid, that an investor who puts capital into one technology may find the technology becoming obsolete because of regulatory choices or the arrival of a better mouse trap.


3. Asia will dominate the global market for clean tech

Clean economics will become the new space race, Parker told the conference. If you don't believe him, he said, watch market-maker Warren Buffet.

Buffet has made three "keystone investments" in the last 18 months, two of which involve East Asia: He invested in GE's Ecomagination, which has clean tech projects in emerging Asia, and in China's BYD, an electric car enterprise working on battery technology.

If international green stimulus packages are compared, it's easy to see how Asia is already leaps and bounds ahead.

Tom Murley, head of HgCapital's energy team, pointed out that when the U.S. recovery package is examined, "most of U.S. stimulus has gone, not to creating manufacturing jobs, but to build wind farms and solar parts using equipment made outside the United States, because that system is fundamentally broken."

The incentive schemes in the U.S. are directed at investors rather than manufacturers, he said. The U.S. may assemble the turbines for a wind farm, but there's less value added because the technology development is now happening in China.

Emma Howard-Boyd, director of Jupiter Asset Management put it simplest. Citing a report from HSBC on the many government stimulus packages approved this year in countries around the world to breathe life back into the global economy, she notes that of the billions of dollars allocated, only $59 billion has been spent, and $51 billion of that has been in China.

In the next year, clean tech policies and products will begin to fit more snugly into a broader, low-carbon economy picture, Parker said.

For now, the over-arching message is that the West needs to get moving to go to catch up to Asia. The panelists all stressed investment in R&D, not in order to dominate the global market in clean tech, but to begin to catch up.

 

See also:

Five Big Surprises on the Global Cleantech 100 List

Cleantech Jobs Spring Up as Investment Pours in and Factories are Transformed

Cleantech Investment: 3rd Quarter Sizzles, Courtesy of Washington and Solar

Report Urges U.S.-China Cleantech Partnership, Not Competition

Long Way to Go Before Climate Treaty Lifts Cleantech Sector

 

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