The Take

Cleantech investments are sexy again, here's why

Cleantech investments are sexy again, here's why

Posting in Energy | From Issue 18 May 19 & 26, 2014

On paper, renewable energy, energy efficiency and green technologies attracted less new money over the past two years. But returns for mainstream investors look more compelling than ever.

Cleantech is sexy again, as evidenced by dozens of presentations by entrepreneurs, industry executives, analysts and financiers at the recent Bloomberg New Energy Finance (BNEF) "Future of Energy Summit 2014" conference in New York (video interviews from the summit are available here).

BNEF founder Michael Liebreich put the sector in fresh perspective, explaining that while there have been two years in a row of reduced investment (particularly in Europe), the Wilderhill New Energy Global Innovation Index (NEX) has outperformed major market indices considerably over the same timeframe. (The index comprises "companies worldwide whose innovative technologies and services focus on generation and use of cleaner energy, conservation, efficiency, and advancing renewable energy." Its performance is illustrated below.)

NEX-2013-2014-BNEF.jpg
"It doesn't look like a cleantech crash to me," Liebreich said.

According to BNEF analysis, 80 percent of the reduced global investment in the sector was attributable to rapidly declining prices for renewable energy assets; only 20 percent was actually because of reduced investment activity. The researchers expect clean energy installations to grow 37 percent from 2013 to 2015, with 102.9 gigawatts (GW) of new builds anticipated in 2014, and 112.4 GW in 2015. Conventional (fossil fuel and nuclear) electrical generation capacity additions will fall by two-thirds from 106 GW in 2010 (which was overwhelmingly dominated by coal) to 39 GW (overwhelmingly dominated by natural gas) in 2030, while clean energy capacity additions triple, from 93 GW in 2010 (mainly wind and hydro) to 290 GW (primarily solar and wind). The anticipated additions are detailed in the chart below.

Global-power-generation-capacity-additions-2010-2013-BNEF.jpg

The global energy system, Liebreich said, has entered a "phase change" (previously, he called it a "tipping point") as the transition to renewables proceeds. Germany's feed-in tariff for solar power is now below residential retail prices. China is investing $60 billion a year in clean energy (more than all of Europe), and over the next 15 years, the Asian nation will dismantle more coal power capacity than it adds. The cost of lithium-ion battery packs for electric vehicles (EVs) has fallen 43 percent since 2010. By 2020, BNEF believes EVs will be cost-competitive with conventional vehicles for most users. "The future," Liebreich said, "will not look like the past."

Jim Rogers, the former CEO of Duke Energy, reflected on the massive disruption in the utility sector, saying, "If I were 25 today, I'd be an attacker." Utilities are resistant to anything that threatens their core business, he said, and their reflexive reaction is to protect both it and the existing regulatory model their business is built around. "Most incumbent utilities find it an unnatural act to cannibalize their existing business," Rogers explained, adding that defending that business is no longer practical.

John Edson, president of Lunar, a design firm, agreed, observing that the business domain is complex and highly regulated, and too separate from the domain of customers, who mainly think about comfort and convenience. "The highly regulated utility industry is prime for disruption," he said, suggesting that new entrants will transform the business much as rideshare company Uber is transforming the taxi business.

But the real action in cleantech is in the developing world, where consumers are leapfrogging the traditional hub-and-spoke grid model based on huge fossil fuel and nuclear plants, and jumping straight to distributed clean energy generation and microgrids with storage capacity. In fact, Rogers said, building microgrids in places like Africa will lead to "reverse innovation" as the insights gained from that experience come back to the developed world, bringing resilience and protection against storms and grid attacks to the hidebound grids of the United States and Europe.

Jeffrey Immelt, the CEO of General Electric, agreed: "Distributed power will come to the U.S. last." GE manages a $5 billion renewable energy generation business globally, and GE Capital, the company's venture capital arm is investing heavily in low-cost grid storage solutions (particularly sodium batteries), and fuel cells. Immelt was optimistic about innovations yet to come. For example, by pairing a natural gas engine with 38 percent efficiency with a fuel cell, GE can raise the efficiency of power generation to 65 percent. GE is also eyeing the "Internet of things" opportunity. "There will be whole new industries created around the industrial internet," Immelt said, noting that every power generating unit generates a terabyte of data on a daily basis.

Enthusiasm for renewable energy generation was high. Frank van Mierlo, CEO of 1366 Technologies, a solar cell manufacturer chosen as one of the "New Energy Pioneers" presenting at the conference, said that in the next 12 months, the world will install 50 GW of solar -- equivalent to the power demand of New York City. "By the end of this decade, solar will be cheaper than coal," he asserted. "We'll prove the naysayers wrong."

Jenny Chase, a BNEF analyst, noted that solar photovoltaic (PV) power is growing more rapidly than BNEF expected. In 2009, the firm forecast that PV installations would grow from 8 GW a year to 20 GW in 2011, but that was too conservative. BNEF now thinks global installations will grow from 39.5 GW in 2013 to 55.1 GW in 2016. Costs have continued to fall, and utility-scale system costs are expected to decrease at least another 26 percent by 2020. Solar PV now provides 4.7 percent of electricity supply in Germany, 8 percent in Italy, 3.1 percent in Spain, 2.2 percent in California and 10 percent on Oahu, Hawaii, she said. The technology is already competitive with spot power market in Chile, Chase added.

U.S. Secretary of Energy Ernest Moniz emphasized the point, saying that "clean energy cost reduction has been an insufficiently told story" and ticking off a list of areas where the Department of Energy (DoE) is investing in energy transition with good results. He also hailed Hoboken, N.J., Mayor Dawn Zimmer's plan to build resiliency by converting part of the city's power grid to an islanding microgrid. Zimmer embarked on the plan after witnessing the devastation wrought by Superstorm Sandy in 2012, precisely as I predicted after the storm. Although the DoE is still officially supportive of efforts to develop next-generation nuclear plants and the as-yet-unrealized dream of small modular reactors (of which the leading developer just cut its investment program, citing a lack of investor interest), when Liebreich mentioned that China just made a big commitment to thorium reactors, Moniz simply quipped "I wish them well."

Climate activist Bill McKibben of 350.org lived up to his reputation as a firebrand speaker, declaring, "The fossil fuel resistance is everywhere, sprawling, protean ... and will determine whether the world as we know it has some kind of future. That old, dead energy has to go away."

Finance for resilience

Even the boring old finance and insurance sectors put on sexy new outfits for the "Finance for Resilience" competition, which featured a dozen "interventions" that could each generate at least $1 billion a year in incremental finance for the clean energy sector.

Suzanne Buchta, the Global Co-head of Green Debt Capital Markets at Bank of America Merrill Lynch, said that the global market for green bonds could double from around $30 billion notionally this year.

Cathy Bessant, a global technology and operations executive with Bank of America Merrill Lynch, promoted the work her company is doing to make green bonds mainstream. (In the first quarter of 2014 alone, $9 billion in green bonds were issued.) The day the conference opened, a green bond was offered "that read like every other bond memo," Bessant said, indicating that the approach is finally achieving mainstream acceptance.

In her view, energy transition hasn't lacked for solutions, just capital and political willingness (a point I've made as well). "We aren't waiting on technology," she said. "We're waiting on adoption. We're waiting on the end of orthodoxy." (Sean Kidney of the Climate Bonds Initiative, who I interviewed for my article on green bonds last November, also offered a fresh sign of the hunger in capital markets for the vehicles: The Spanish renewable energy company Iberdrola had just offered a €750 million green bond tied to its renewable energy projects, and received four times as many orders as it could fulfill.)

James Collins, energy strategist with Accenture, promoted a "Sunset Credits" program that would replace the $1.9 trillion in annual global post-tax fossil-fuel subsidies in 2012 with tax credits that sunset over time, to help to level the playing field for renewable energy, where only $254 billion is spent globally each year.

Daniel Wiener, founder and CEO of Global Infrastructure Basel Foundation, offered a LEED-like plan developed in partnership with SwissRe to create an "empirically developed sustainable credit rating" that would communicate the competitive advantage of sustainable infrastructure and reduce energy costs, lower exposure to climate risk, and gain higher public acceptance, opening up an infrastructure market potentially worth $5 trillion.

Simon Bransfield-Garth, CEO of Azuri Technologies, proposed a $1 billion debt fund that would bring solar energy to 5 million homes in the developing world in five years, and help eliminate the $38 billion market for kerosene, which is mainly used in lanterns. Securitized against assets and the forward revenue stream, the program would be deliverable now, he said, with no subsidies, and return its capital in two years.

Yariv Cohen, chairman of Kaenaat, promoted a plan to bring 100 percent clean energy access to Africa.

Michael Mendelsohn, senior analyst with the National Renewable Energy Laboratory, championed his agency's efforts to foster tradeable and highly liquid financing instruments for clean energy, by offering standard contracts, best practices, robust datasets, and standard risk analysis methodologies.

Jules Kortenhorst, CEO of the Rocky Mountain Institute (RMI), promoted his company's tools for helping big, blue-chip corporations invest in renewable energy on their facilities, including a how-to playbook, a transaction database, education and tools, and case studies. RMI thinks it can double the share of renewable energy at Fortune 500 companies in five years, mobilizing $15 billion a year in investment by 2019.

Josue Tanaka, managing director with the European Bank for Reconstruction and Development, offered tools for promoting investments in energy efficiency, including energy audits, local bank support, and channel financing. The bank believes it can finance up to $5 billion in projects in three years.

David Stevens, founder and CEO of AMF Guarantee, promoted his company's expertise in project finance and offered monoline guarantees for green bonds, which would structure deals for safety and provide AAA guarantees so local institutions can invest in projects rather than relying on foreign investment (which he called an "original sin"). With a $100 million capital raise, the company could guarantee $2 billion in projects every five years.

Julian Richardson, CEO of Parhelion Underwriting, touted his company's risk insurance for geothermal drilling. With a $125 million underwriting facility, he said, his company could remove tail risk and downside risk by underwriting a small portfolio of wells in a portfolio, opening up 2,000 potential projects. The plan could underwrite $7.8 billion in investment with a mere $125 million facility (a 62x leverage).

Andrew Gaines, co-founder and managing partner of DeRisk, offered insurance for independent power producers as a way of de-risking renewable energy projects in emerging markets. The approach could advance $2 billion to $3 billion a year in new projects, he said.

Cyrille Arnould, head of European Investment Bank, laid out a plan to "do more with less taxpayer money" by catalyzing finance for clean energy capacity in developing countries. With €500 million, he said, the bank could back €25 billion in projects.

With so much financial innovation at work to de-risk and standardize investment, tens of billions of dollars pouring into the sector annually, major corporations staking their futures on it, and an enormously clarified sense of purpose and direction across the industry, there is no doubt that cleantech has emerged from its adolescence and is growing into a mature, reliable industry -- one that's ready, willing, and able to disrupt the old models in power generation, commercial buildings, and ultimately, transportation.

The world's focus is shifting from growth to resilience, and cleaner, safer, more sustainable ways of doing things aren't just nice ideas anymore. They're fast becoming our everyday reality.

The Agua Caliente Solar Project in Yuma County, Arizona, is billed as the largest solar PV project in the world at 290 MW. Image courtesy of NRG Energy

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Chris Nelder

Columnist (Energy)

Chris Nelder is an energy analyst and consultant who has written about energy and investing for more than a decade. He is the author of two books on energy and investing, Profit from the Peak and Investing in Renewable Energy, and has appeared on BBC TV, Fox Business, CNN national radio, Australian Broadcasting Corp., CBS radio and France 24. He is based in California. Follow him on Twitter. Disclosure