Towards A Cleaner Future

Global Markets

FutureOne of the most interesting aspects of the cleantech market is its global nature, in terms of both problems and solutions. North America and Europe, including Israel, will probably remain the primary providers of innovative technology for the near future, but demand comes from around the globe. The emerging economies of Asia will be a major market as their governments invest in necessary infrastructure and, in many cases, will generate their own innovations.

North America



Over the past three years, the US has emergedas the largest venture investor in cleantechcompanies. That lead is likely to remain.

In large part, that's due to the sheer weight of money in the US private equity industry, and VCs realising that cleantech can offer the returns they need. Investment has centred on relatively late-stage, capital-intensive investments in globalmarkets where government intervention is driving demand. According to CVN research, the US saw 817 cleantech deals worth around $6.3 billion between 2003 and 2006, 13 per cent of the total venture market.

Energy generation received the largest portion of investment (26 per cent), followed by energy storage (16 per cent) and energy infrastructure (11 per cent). Investment in non-energytechnologies ismore diversified than in other territories, led by materials (10 per cent), air treatment (8 per cent) and waste and recycling(6 per cent).

In terms of the domestic agenda, the US isgradually matching or even exceeding Europe in promoting clean technologies. The stategovernments have been most proactive - led by California, almost half of the states now offer initiatives such as renewable energy portfolio standards or subsidies to promote alternative energy and other environmental technologies.

Although the federal government remainsrecalcitrant on many environmental issues, worries over energy dependency in the unstable Middle East have inspired programs to promote fuel cells, ethanol and other technologies.

Together with the entrepreneurial culture,world-leading universities and military research investment, that should ensure a steady rate of innovation in clean technology from the US.

Europe and Asia



Europe has traditionally been at the vanguard of cleantech, with national governments and the European Commission leading environmental regulation and a strong consumer consciousness of green issues.

The European VC industry might not have quite the same deep pockets as its American rivals, but cleantech investment represents a somewhat larger slice of the overall VC market. European cleantech investment totalled around $2.4 billion in 431 deals between 2003 and 2006, 19 per cent of the total market. Energy generation took by far the largest slice of venture investment with 62 per cent, while other energy-related technologies added another 14 per cent.

Manufacturing and industrial (7 per cent), materials (6 per cent) and water treatment (6 per cent) were also prominent.

For the VC investor, the European market presents its own challenges and opportunities. As in other sectors, much innovation comes from private or family-owned SMEs which are often not amenable to private equity.

The market, however, is more mature than in the US, and offers scope for buyouts and consolidation-led deals. Some M&A activity has already been seen in the renewable energy market.

The early-stage market is dominated by government-backed funds, notably the UK's specialist co-investor The Carbon Trust. According to CVN's recent European Cleantech Investment Report, The Carbon Trust invested in more deals than any other European investor during 2003-2006. 3i placed second, comfortably leading the commercial VCs.

Israel is a strong source of innovation and investment with 13 deals worth $113 million in the three years to 2006. Unsurprisingly, given its geography and history, water treatment is a major sector with 38 per cent of investment. Energy storage (45 per cent) and agriculture (13 per cent) are also important. Two dedicated cleantech funds have recently opened, and established funds are also targeting the sector.

China



The economic growth of recent decades has come at a huge environmental price - according to a 2004 World Bank study, China has 16 of the world's 20 most polluted cities. Water and air pollution in many areas is far beyond Western safety standards, and energy infrastructure is dirty, inefficient and severely lagging growth.

In the next five years or so, China will become the largest market for cleantech because it has no other choice. The government is planning to invest RMB1400 billion ($180 billion) in environmental protection and improvement during the current five year plan, with an average annual increase of 15 per cent.

China is generating strong innovation in areas such as solar power generation, new materials and clean production. The country's first dedicated cleantech VC fund was launched in 2001 by the fundmanagement arm of Tsinghua University, Beijing, but domestic VC is otherwise minimal.

India

ChinaIndia shares many of China's problems in terms of pollution, resource efficiency and infrastructure failings. The potential shortage of clean water is perhaps the biggest threat to India's growth, with electricity shortages not far behind.

Attracting investment for clean technology on the necessary scale in India will be a major challenge. While China has the proven political ability to implement large-scale investment, the Indian style of government remains rather less efficient. Innovative water initiatives have proved successful on a small scale, and there has been some success in solar and wind power. Electric car manufacturers have also attracted international VC interest.



Rest of World

Japan has been innovative in solar technology and new materials, focusing on mass manufacturing applications. The cleantech market is dominatedby the large corporates however, with littleindependent entrepreneurship or VC activity.

Australia is strong in water treatment and solar power, and is starting to attract VC interest.

Cleantech investment in other parts of Asia remains negligible, although with the potentialfor growth.

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