A Rebound in Cleantech Investments?

The first half of this year has been much slower regarding investments in clean technologies and renewable energy projects, $294 million in the US in Q1 2009, compared to $1,8Bn in Q3 2008. Recently however, investments are increasing, reaching $540 in Q2 '09. A clear sign that the economy is recovering.

The lower activity is not necessarily only a bad thing; vc funds making deeper assessments before committing themselves will make the capital influx into the clean tech sector hopefully reach those who most deserve it, healthy, profitable companies with a feasible expansion plans. This will decrease the risk for creating bubbles. Many good ventures will however suffer, especially if they have not yet reached the commercial stage.
Ideally, increasing cleantech investments will be done with the scrutiny and careful analysis applied during the worst decline.

More in the Mercury and, regarding the Swedish situation, here

Investments continue to pour into cleantech

Despite the fact that investment rate has decreased during the last six months, money continue to pour into cleantech. PowerIT is one of the companies; the may play an important role in increasing the efficiency in the US power grid.

Some observers have called the strong interest in renewable energy and environmental technology a "green bubble". I would argue that while it is definitely probable that some individual companies will not perform as well as expected, and temporary trends may create situations where entire sectors are overpriced, the underlying reasons for investing in cleantech are strong and valid, and many sectors will continue to grow until environmental problems are solved or at least mitigated.

Recovery through Infrastructure and Cleantech Investments

According to Cleantechies.com, infrastructure and alternative energy will be two areas which Obama's recovery plan will focus on.

There are signs of similiar strategies in other countries. If carried out, this may soften the fall of young cleantech companies even further.

Short term challenges, long term opportunities

No sector is immune to the current financial unrest, and also many cleantech companies will face hard times during the next year or two. And highly leveraged projects, as often is the case with many wind power, may be postponed or cancelled.

Still, there are reasons to believe that the cleantech sector will fare relatively better than other areas. And in the long term, the outlook is still positive. The reasons are several:

• Renewable, domstic energy is a measure to improve national security. It's a long-term necessity independent of the current financial unrest. Public funding will continue to reach the necessary goals.
  

• The possible physical mechanisms behind climate change are indifferent to a Wall Street crisis. Companies who embrace this fact will act accordingly and invest in renewable energy and related technology as a long term strategic resource. Further on, renewable energy will be a priority for public funding.

• Emerging economies will participate in the global emissions market. Sooner or later, giant economies like China and India need to share the burden and reduce the CO2/$ growth ratio.
  
  
• Higher living standards in emerging economies will increase consumer consciousness and the demand for a cleaner near-environment. When you are starving you don't have time to bother about smog or inadequate waste-management, but as conditions improve, these issues will come closer to the top of the agenda. That is good news for companies within these sectors.
  
  
• Energy efficient is more important than ever when times are hard and resources scarse.

In particular, projects and technologies that benefit from public funding will find less problems than others. So will those companies and projects financed by equity rather than debt. The situation is troubling, but there is no need to panic.

Cleantech Opportunities in the Eye of the Storm?

The current financial crisis could possibly affect the energy industry in profound ways, according to Wall Street Journal

Although most opportunities may seem risky at this point, for investor with financial soundness and strength now could be a good period to acquire and take over undervalued assets. With banks turning down borrowers, projects could remain undeveloped and innovations left unfinanced.
Speaking of acqusitions, the largest Swedish power company Vattenfall has made an offer on British Eclipse Energy. The offer at £18 per share roughly amounts to £51,5 million. The company has a 250MW combined natural gas and wind power offshore project, on the coast of England, and five land based wind power projects in Wales. Iberdrola and EON are mentioned as other "predators".

IKEA Greentech - a new Swedish cleantech investor

IKEA will invest in Swedish and European cleantech companies, through it's subsidiary IKEA Greentech AB. IKEA prospers from the interesting combination of a excellent distribution network and customer base and a very solid financial position.

In particular, IKEA will invest in cleantech companies with products that benefit it's clients (they amount to 500 000 000), warehouses (270) or suppliers (1500), from the alternative energy and energy efficiency areas.

So what should they focus on? Do the maths, 500 000 000 clients is a very interesting customer base. Hence, finding high-quality products relevant for IKEA's customer should be a top priorirt. Further on, they should be cost-efficient in small scale. An area that satisfies both of these conditions is energy efficiency (including water and material efficency). I would say that where the largest potential is to be found.
Small-scale energy generation using energy from the sun (solar power, solar heating and wind power) does fit with the first description. Small-scale energy generation is getting increasingly popular whit high petroleum prices, and solar insolation is favourable in many of the countries where IKEA is present. However, as discussed earlier, the efficiency of these installations is often far lower than medium- to large scale plants.

Considering what may be useful for their suppliers and warehouses, other areas may be interesting as well.

Fortum to invest US$ 10 million in cleantech venture capital fund

Finnish energy consortium will invest US$10 million in the Canadian cleantech fund Chrysalix Clean Energy Fund.

The investment portfolio of Chrysalix includes solar power, fusion power research and fuel cell technology. More investemnts are being evaluated.

The purpose of these investment activities at Fortum is said to be dual; to gain strategic insight in new energy technology and to receive sound financial returns.
Investments in new clean technology will be made both internally and externally. Through enhanced R&D activities Fortum hope to gain long term competitive advantages.

Read more about it here.

Lignoboost aqcuired byt Metso Power

Lignoboost and their predecessors have during almost a decade developed a promising technology to produce biofuels from black-liquor a byproduct from the pulp industry. Now they are taken over by Finnish group Metso.

I have earlier mentioned them regarding my skepticism about some ability to attract Swedish VC. Well, at least they got aqcuired by a large group of companies, that already produce technology with the same target market. That will open up many opportunities for Lignoboost.
It will be interesting to see however, if politicians, public servants and institutional investors will take this as another example of the Swedish cleantech "brain-drain": the inability of Swedish cleantech companies to attract national investors, and the eventual take-over from foreign companies (Solibro being a high-profiled example). Further on, would it is interesting to question wether this is a problem or not.

The state of the Swedish cleantech market

According to E24 (in Swedish), Swedish cleantech companies face a dismal outlook, with only 3 out of 14 publicly traded companies making a profit last year.

A few observations could be made however. First of all, these numbers should not be taken as a representation of the whole cleantech market. Many successful cleantech companies are not traded on the public stock market. It is also important to remember that many companies not mentioned in the article work with cleantech in one way or another, but only as a part of their product or service portfolio. For instance: Sweco (consulting), ABB (energy efficiency, etc) and Alfa Laval (biofuel equipment, etc). Further on, in the long term several of the companies mentioned in the article face growing demand for their products.

To invest in a company that is yet to make a profit requires excellent market insight and at least a basic technical understanding of the products being offered. And even more so than in the case of investing young but profitable companies. Rome wasn't built in a day and many cleantech companies will need several years of R&D before being able to launch a competitive product. Ambitious innovators may become early leaders in developing markets. But without an initial knowledge, the outside investor might as well bring her or his money to a racecourse, where the gambling is equally risky but more exciting.

Kista Cleantech Venture Day

Another cleantech investment event is coming up, this time in Kista, Stockholm, 20th of November. At the event, which is co-organized by the city of Stockholm and the US Embassy, a group of Swedish Cleantech companies will be presented to US investors. Several of these companies have been mentioned earlier on this blog.

Read more about the event "Kista Cleantech Venture Day" here

The current state of the cleantech sector in Sweden

The state of cleantech investment in Sweden

A brief overview of some current events in the Swedish cleantech investment sector:

• Swedish public foundation Industrifonden ("The Industrial Fund"), has invested USD3 Million in Chromogenics.
  Although the first commercial applications include bike helmet visors, the technology is expected to be used in energy efficient windows.I have earlier mentioned Chromogenics here and here.
  

• The Swedish Energy Agency, Energimyndigheten, recently published their (in Swedish) overview of the Swedish cleantech sectors, with focus on the investment development. THe report can be found here (in Swedish).
  
  
• How can cleantech companies and venture capitalists and other types of investors meet in a beneficial manner? That question was studied by Maria Tunberg from Cranfield University/Swedish Agricultural University. According to the study, TAG could be the answer. TAG stands for TechnologyApproval Group, and is a model that has been working with reasonable success is Great Britain. The TAG models focuses on uniting three different parts of the cleantech market: technology providers and developers looking for capital, possible clients and VC companies. A committee, with representatives from industry and possible, evaluates the market potential of different cleantech companies. In that way, cleantech providers can adapt their products and services according to the needs of the market, and find possible clients. Investors can take part of the results, and be sure to put their money in technology companies and innovators that are sure to have clients and a market potential.
  
  
• Criticism has been forwarded regarding the interest (and hype) about cleantech in Sweden. According to Anders Ocklind from the Swedish fuel cell company Cellkraft, companies that have been hyped recently, especially those picked by Michael Wood. It should be noted however, that this criticism comes from a competitor to the chosen companies. The criticism seems to be focused on the technologies themselves. As earlier stated in this blog, it is true that specific companies and products may be overvalued, and thus failed investments. But that does not necessarily only depend upon technology characteristics. It should be remembered that although the technology is the primary component of the investment opportunity, it is not the only one. Revolutionary application or innovative marketing of a mature technology can give a strategic advantage. Besides, it is a natural consequence of selecting several assets for a conceptual portfolio that some assets will not develop as good as others. By diversifying the portfolio that is not necessarily a problem.
  

More cleantech money than investment opportunities?

As earlier mentioned in this blog, investor's interest in cleantech is growing, and there is no sign that this trend is over anytime soon. At a global scale, investments grew with approximately 67% between 2005 and 2006. New Energy Finance estimates that this sector will keep growing by 17% until In total, US$17 Bn was invested in the cleantech sector in 2006. US$2Bn available was not used however. Apparently there is more money dedicated for cleantech investment than there are opportunities. Possibly, a greater amount of international integration of cleantech investments could be beneficial in this case, especially to capture and to market innovations in neighbour countries and from the emerging economies. In that way, a larger part of the resource could be used for what they are intended. In particular, this could be an opportunity in the Scandinavian region, where the cultural and geographic distances are small.
There are several challenges for this development. Trade tariffs is one of them. And regional and national protectionist subsidy schemes & public investment mechanisms may encourage a local rather than an international focus.

Trade tariffs against cleantech

The European Commission has extended the European import duties on efficient light bulbs. The tariffs are supposed to protect European light bulb producers from their Chinese counter parts. This is problematic from a cleantech trade point of view. It means higher prices for consumers and less incentives to improve domestic and commercial building energy efficiency in Europe. Further on, it is a hinder for the development of the environmental technology industries in emerging economies.

However, perhaps could European LED and OLED lighting producers benefit from this?

The Value of Young Cleantech Investment Companies?

While the blog Investeringar i vindmöllor och förnyelsebar energi" (in Swedish) recommends Borevind as an investment, considering it's rather low value, it would not be an investment free of risk. The price/equity ratio is 225%, which is lower to other Swedish cleantech companies. But should Borevind be compared to technology companies such as Morpic or generation asset owner Elous Vind? They have a rather different focus (Morpic develop technology solutions and Elous own wind power projects). No doubt about Borevind having chosen an interesting market niche. Metainvestments in the renewable energy field, if conducted wisely, could be more profitable than focusing on a few specific technologies or one kind of power projects. The Borevind portfolio is not very diverse however, focusing mainly on wind power. The tiny investment in Rindi Energi may be a step in the right direction, considering the stable conditions and increasing demand for this type of bioenergy solutions.

placera.nu (in Swedish) confirms that the Borevind investments need to be quite successful to meet the high expectations. Investors, often institutional ones, may create a hype in the cleantech area when pumping in money into the market without proper previous research, because a general political and public interest in renewable energy. The valuation of companies like Borevind may be a sign of this hype.

Further on, the price-to-equity ratio should be used with care when analyzing young cleantech companies. There is little historical data available and thus difficult to make a comparative analysis. Thus, other factors should be considered to estimate the value and assess the investment opportunity. Price-to-earnings is of one them.

Landmark approval of Wallenius system

The PureBallast system, developed by Swedish companies Wallenius Waters and Alfa Laval has been approved by UN/IMO. PureBallast is a solution for treating ballast water of ships. The process is checmical-free and imitates nature's own way of treating water. This is the first time a chemical-free solution of this kind gets approval by the IMO. The solution can also be used in other applications, such as cleaning swimming pools.
German shipping company E. R Schiffahrt has already ordered the systems for four of their boats.

Ballast water is a huge environmental problem, with microorganisms and other organisms invading coastal areas where they are non-indigenous.

The Cleantech Investment List Is Growing

Michael Wood, the US ambassador in Sweden, has put cleantech investments on the top of the agenda. Recently, he added a few companies on his list of interesting Swedish cleantech companies:

• Ageratec
  
• Catator AB
  
• EcoHeater AB
  
• HB Transfer Stockholm
  
• Kockums AB
  
• Midsummer AB
  
• Nilar International AB
  
• Svensk Rökgasenergi AB
  
• Swedish Biogas International AB
  

Readers of this blog will remember that I have written about some of these companies earlier. And having followed Ageratec for some time, I am glad to see they get attention.

There are however more companies that potentially could be included. How about:

• Malmberg Water, water treatment and biogas upgrading
  
• Envac, automatic waste management systems
  
• Hotab, biomass combustion plants
  
• Ecoera, advanced agro-pellets technology
  
• Scandroots, biological waste treatment
  
• myFC, small fuel cells

Prediction of the Cleantech Market: Looking into the Crystal Ball (II)

I have in a recent post written about my predictions for the cleantech market. In that post, I suggested that energy efficiency would be the sector that will get the most attention in the near future from investors. In this post, I will develop the issue, including suggestions of the companies that would benefit from such attention.

Energy efficiency is low-hanging fruit when trying to reduce GHG emissions. Both in industrial and domestic sectors, there are huge gains to be made/wastes (naturally, the cost of capital may vary). In many cases, it is easier to implement these measures than that to replace fossil fuel sources with renewables as a way to reduce CO2 emissions. There is a large potential for companies that provide energy efficiency a key issue in their product offer and perform well, since the concept is yet to take off on a grand scale. Considering that potential, some of them might be undervalued today. Further on, as the world economy grows, and new groups adapt to Western consumption patterns and standards, the need for energy efficiency will increase.
Good performance in the EE area may not show in the stock price however, if energy efficiency is a small part of the companies activities.

Some of the companies and sectors suggested in this post might not be thought of as "energy efficient" at a first glance, but they will profit from providing efficient products and services. Citing Tom Konrad, there is no Vestas of energy efficiency. Energy efficiency isn't a clearly defined sector, but rather a philosophy that spans across several sectors. A common characteristic however, is technology. Through technology the use of energy will diminish: power technology, engine technology, building & infrastructure technology, information technology and so forth. Energy efficiency is about making components and appliances lighter yet stronger, wasting less energy and resources.

Power monitoring and regulation
It is quite obvious that companies that work directly with energy efficiency are bound to benefit from an energy efficiency wave. Especially companies for monitoring and regulating power at a large scale are interesting. These companies may be found in the software, microelectronics & power engineering sectors.
Example of companies in these sectors:
enerNoc: Energy and power management for utilities
Energy connect: Supply and demand based power management
Comverge: Power management & Metering

IT, data management & computing efficiency
Stationary and server computers waste a lot of energy in the form of heat. In addition, because of this heat the computers need to be cooled to avoid break-downs, causing further energy consumption. With ever increasing server parks, this is becoming a significant factor. Google has together with Intel launched a program for increasing energy efficiency in computing, and setting performance targets. The initiative includes tech heavyweights such as Dell and eBay. In addition to improved management, using innovative materials may reduce power consumption. Information technology obviously also offers opportunities for reducing energy consumption, such as remote working, video conferencing etcetera.
IBM: processing data for peak-hours calculation, server management software
Google: efficient information management
Norstel: low energy semi-conductor materials
Cisco & WebEx: remote office solutions
Western Digital: a new line of energy efficient hard drives

Lighting
Increasing the use of LED for lighting will reduce energy consumption drastically, according to Peter Svensson, energy consumption from lightning represents 22%, and with a higher use of LED lighting that consumption could be reduced by 50%. They are already more efficient than CFL bulbs ("low energy bulbs"). Further on, CFL bulbs contain mercury. Still they seem to be the mainstream choice for years to come. More countries are bound to follow in the footsteps of South Africa, Brazil and Australia to phase out incandescent in favour of CFL bulbs. LED lighting would probably need larger cost reductions before making a real break-through.
LED & CFL bulb producers:
Lighting Science Group Corp
Philips

Infrastructure & construction
The have we construct and maintain buildings and infrastructure has an important impact on the energy consumption. Companies that can deliver “green buildings”, or that provides parts that lower energy consumption will benefit from this. Further on, consultants refurbishing existing buildings and infrastructure will have a busy schedule.
Johnson Controls: building energy efficiency
HySSIL Pty Ltd: light weight, high-strength concrete
Chromogenics: energy saving, "intelligent" windows
ITT Flygt: pump systems awarded for their efficiency

Efficient power generation, transformation & operation
General Electric & Sensicast Systems: remote motor management through wireless networks
Power Efficiency Corp: technology for managing electrical motors & increasing efficiency
ABB: a large number of products & services increasing efficiency

Energy efficiency is not only for the philantropic investor, it is a necessary measure and as such a sound investment opportunity.

Swedish cleantech investors are making moves at home...

.. slowly. And the steps aren't that big.

But things are happening. Recently, Sustainable Technology Partners Nordic invested 15 million SEK in Swebo from Boden, northern Sweden. Swebo is (was) a family owned company, providing plants and equipment for bioenergy generation, with an focus on efficient combustion solutions of non-refined feedstocks.

And the 15th of June, Capman announced that they, together with SEB Venture Capital and Aloe Private Group, will acquire 80% of the shares in KMW, a company delivering medium-to-large scale biomass CHP plants. The company is based in Norrtälje, north of Stockholm.

Both these companies have in common a long tradition, stable development, quality products of proven technologies on a growing international market. They are no brand new "stars", with a hyped technology and high expectations based un uncertain assumptions. The message is quite clear from Swedish cleantech investors, at least so far.
Let's do some predictions. Next targets may include Hotab-Gruppen. 30 years in the combustion market, with turnkey biomass plants for multiple feedstocks. They also have a clear export focus, especially directed towards the Eastern European market. It is family owned, and venture capital influx would facilitate further expansion. Other potential candidates may be Janfire and Petrokraft.

Companies with a shorter history, and expectations rather than a solid sales record, might find it harder to attract domestic investors. That may affect more or less hyped, innovation-based companies. A few examples: Ecoera, Chromogenics and Lignoboost
(Don't get me wrong, I am not judging their products, only their short term possibilities to access Swedish venture capital.)

Another possible future trend may be horizontal integration, takeovers and fusions between the cleantech companies themselves, which was the case when Nibe acquired Iwabo Naturenergi

Risk för cleantechbubbla? Knappast. Däremot för enskilda företagsbubblor

Dagens Miljö skriver idag om risken för en cleantechbubbla. Visst, på kort sikt kan enskilda företag och delsektorer att sjunka i värdering, till föjld av uppskruvna förväntningar. Detta kan tillfälligt drabba hela sektorn. Men cleantechsektorn som helhet har större potential, särskilt om man sprider sina ägg.
Jag har redan skrivit om detta här, och om att nästa "boom" kommer inom energieffektivisering.

"Boomen" vi sett är i stort sett logisk och marknadsmässig.
Självklart kommer enskilda företag av olika skäl inte klara sig i konkurrensen, och vissa företag är säkerligen övervärderade redan idag.
T.o.m. hela delsektorer kan komma att krascha. Marknaden kommer till exempel så småningom att straffa t.ex. etanolsektorn p.g.a. lågt energiutbyte för vissa former av etanol (majs&spannmål), och externa kostnader för andra typer (jatropha). En eventuell rekyl inom en delsektor kommer att drabba hela sektorn, dock tillfälligt.
Cleantechsektorn som helhet kommer på lång sikt snarare bara öka, eftersom fler blir varse om de externa kostnaderna i ett icke-hållbart samhälle. Förnyelsebar energi behövs inte bara p.g.a. klimatförändringar, utan också av säkerhetsskäl och för energioberoende. Även andra delar av cleantechsektorn kommer att gynnas i takt med att länder blir rikare och efterfrågar en renare miljö. Dessutom har investerare dotcom-bubblan i färskt minne och kommer att vara mkt mer kritiska i granskningen av förhållandet mellan nuvarande vinster & värde.

Difference between the renewable energy boom and the dot-com bubble

Joel Makower at the Environmental Economics & Sustainable Development blog provides some important points about why the renewable energy boom is persistent, and not yet another dot-com bubble. The most important point he makes is:

1. The problems aren't getting any better. This is fairly obvious, especially if you've seen The Movie. The environmental movement, it's been said, is rapidly morphing into the climate movement, and there's a parallel shift taking place on the business side. The motivations may be different -- for activists, climate has become a rallying cry that gives disparate groups a singular focus; for companies, it's about the need to squeeze efficiency out of every operational nook and cranny while reducing risk and enhancing image -- but the upshot is the same: Until the climate problem is under control, it will be Job One, environmentally speaking, inside most companies. And as concern, regulation, and market-based mechanisms to address climate change ramp up, this will be a key business focus for a long, long time.

Although I do not entirely agree on the statement that problems aren't getting better (at least I believe they are become worse at a decreasing speed), the essence is important: there is a real and big problem to counter. Companies in the renewable energy and cleantech sectors are speculated at higher and higher values, but if they do provide a solution to the underlying problems, they deserve it.

Another point, that wasn't made by Makower, is the experience learnt by investors from the dot-com bubble. This time investors will investigate the companies scrupulously before investing, and companies will need to show net profit. The marginal influx of capital from gold-digging amateurs will not affect this. Companies will not become stock market stars only by claiming that they provide "cleantech solutions" or that they work with "sustainable fuels"

One may suggest that the renewables boom and the bubble of the late 90's have one thing in common: the element of uncertainty. Speculations in companies in the IT era where often made because of unknown future revenues, based on a large customer base. Investors wanted to jump on a train without knowing the final destination, only that the general direction felt right. There are two general aspects of uncertainty regarding the renewable energy sector: the extent and effects of climate change as well as the policys implemented to counter it. However, these elements are not significant for the development of the renewable energy sector as whole. The uncertainty regarding the effects of climate change does not refer to the existence of climate change, but rather details; will the damage on the global economy be 1% or 10% of global GDP? Further on, although the political development may vary, the general direction is clear. Certain types of renewable energy will most likely fall in political disfavour with time, like corn-based ethanol. Depending on how subsidies and taxes are designed, it will be easier to invest in certain types of energy because difference in capital and operational costs. It is clear however, that the sector as whole will benefit.