Taking the long view on cleantech investment

The slew of struggling cleantech companies, particularly in solar and battery technology, combined with the headline grabbing bankruptcies that have accompanied these struggles has led to a general gloominess surrounding cleantech investing.

And yet significant long term macro trends remain that indicate that the global energy market is shifting away from strict fossil fuel dominance, creating a myriad of opportunities for new energy companies to profit. Ira Ehrenpreis, who runs the cleantech investing group at Technology Partners, spoke with Pike Research recently about why he remains bullish on the sector. Ehrenpreis believe we’re experiencing short term problems which have been exacerbated by non cleantech specific weakness in the global economy, but that the cleantech thesis is still solid.  So first let’s review some of the macro factors that Ehrenpreis spoke to and which have others still believing in cleantech.

The Macro Factors

The Energy Market is massive: It’s a trillion dollar market and Americans spend more on energy than wireless communications, ecommerce and medical devices.

Energy demand is increasing: IEA projects global energy demand increasing 40 percent by 2035. 6 Terawatts of generation will have to built over the next 25 years, more electricity generation than currently exists worldwide. Ehrenpreis is hopeful that renewable energy will provide half of that new production.

Investment has grown: 2012 was the year of the trillionth dollar invested in cleantech since 2004. Investment has grown 29 percent annually since 2004 from $52 billion annually to $243 billion today.

There’s room for innovation: In the U.S., energy industry spending on R&D is 0.3 percent of sales compared to 11 percent for the software industry and 14 percent in biotech, suggesting there’s actually a great deal of room for innovation resulting from long term chronic underinvestment, particularly on the electrical grid.

My concerns

There’s no guarantee that renewables will win: Cheap natural gas is the largest current issue as its relatively lower carbon emissions and large deposits have many folks seeing green, so much so that in a few years the U.S. will become in an exporter. Bottom line is that renewables will always carry hydrocarbon pricing risk. The key is to narrow it to the point that it’s less of an issue.

Subsidies are still on people’s minds: Yes, the playing field is unfair with fossil fuels getting six times what renewables get in subsidies. But the rollback of subsidies in North America and Europe is unlikely to change as the developed world faces an unprecedented debt crisis. Others, like solar analyst Paula Mints, have written that the push for grid parity is hurting the solar industry and that consumers need to adjust to paying a higher price for electricity. That may works in a place like Germany that is so culturally supportive of renewable energy. But the growth markets, like India and China, will always weigh the economics of any energy generation first and foremost.  People, I believe, will still get behind investment in cleantech but accepting higher energy prices, either via subsidies or higher end market prices, will always be an uphill battle.

Investment is currently slow: The Cleantech Group’s analysis showed that in the second quarter cleantech investing declined 25 percent year over year, even if it has growth historically. Combine that with the almost nonexistent IPOs in the U.S. and things look rough.

Reasons to be optimistic

Global demand: Ehrenpreis said that “while I’ve never been more bearish on U.S. cleantech overall, I’ve never been more bullish on global cleantech.”  Chinese cleantech investment soared 92 percent to $18.3 billion in the second quarter. China is no longer where companies go only for flexible and inexpensive labor. It’s a key endmarket for products, opening up an exciting new market. Add India’s massive power needs, highlighted by its historic blackout recently, is another catalyst driving energy growth.

Cleantech investment exits don’t take any longer than other sectors: Venrock Capital’s Matthew Nordan has analyzed the time from funding to IPO for cleantech and it’s 8.3 years, actually less than the 9.4 year average, quoted by the National Venture Capital Association. There are also lots of cheap assets right now for strategic investors as so many cleantech startups, which require lots of scaling capital, have produced IP that can’t be scaled without investment.

The generalists are getting out: It’s a somewhat overlooked factor, but many of the generalist VCs that had been interested in cleantech are getting scared off by headlines and Solyndra-like failures. This tremendously favors the firms that truly understand the sector and more importantly, it means there will be less competition for the best deals at a time when valuations will be lower due to the cloud over cleantech. That’s a good scenario for investors.

The question, to my mind, has always been when. When will the market be there and when is the right time to make the investment so that one is neither too early nor too late. The macro factors will take over and prevail, because hydrocarbon prices should rise and because clean energy solutions are both improving and riding a cultural shift. But timing this energy transition is the art.

Question of the week

What’s the most important macro factoring impacting cleantech?