iSight - Investing in the global future

Investing in America

Clean technology investment, which covers a wide range of sectors including the broad spectrum of power saving technologies and renewables, has become a force de jour in the United States only very recently.

The average American has caught on to the trend of going “green”. It is now chic to drive a hybrid vehicle and drivers of Hummers, probably the worst gas guzzlers on the planet, draw mocking comments from the audience. George Clooney, the celebrity actor, is seen in magazines driving an electric car, and even George Bush stated that he had shifted from oil to hydrogen in his state of the union address earlier this year.

Today, Europe is still leading the way with its installed base of renewables being much larger. The European Union has signed on to the Kyoto Protocol, yet the US and Canada have not. Kyoto’s intention is to reduce the levels of greenhouse gases by the end of the decade to the same levels as those of the early nineties.

But America is catching up fast, and while it is lacking a unified federal renewables scheme, there are state initiatives that have gained strong momentum. Influenced by Kyoto, and essentially bypassing the federal government, 20 of the 48 lower states have established so-called renewable portfolio standards. For some states these exceed the European Unions’ objectives.

The best-known programme is probably the California Solar Initiative (CSI), which is making $2.8bn in subsidies available over the next 11 years for residential photovoltaics and is expected to propel the US amongst the top renewable energy generators globally. The scheme is different from the benchmark German EEG (Renewable Energy Act), which pays a fixed fee on a sliding scale per kWh produced. CSI provides a rebate per watt to the home-owner depending on the construction year. The objective is to install approximately 2,600 MW until 2016, whichis more than half of today’s total existing PV base.



California is also establishing a network of hydrogen fuelling stations, an initiative known as California Hydrogen Highway, another global first. It has more stringent emission laws for passenger cars and light trucks than Europe. Today consumers cannot buy a new diesel car in some states such as California, Massachusetts and New York. This will change in 2007 when European auto OEMs introduce a new generation of diesel engines. In October 2006 low sulphur diesel became available at some gas stations in the US and this is also expected to help the adoption of diesel-powered passenger cars.

But why has the US been a laggard with regards to clean energy production and investments in renewables? One ought to bear in mind that most technology revolutions and wide-spread adoption of new technologies in the 20th century happened in the US first.

Possible explanations include the large landmass of North America. While there has been a concentration of the population in the larger cities, just like anywhere else in the developed world, there are still plenty of thinly populated areas. Thus, landfill sites or power plants and the associated pollution are, to a lesser degree, more visible to the average American than to the average European. The country also has had vast natural resources of its own, including oil, natural gas and coal which is not the case for most central European nations.

Policy in the US has, over the decades, emphasised cheap prices for energy, especially petroleum expressed in a much lower tax rate than anywhere else. The gallon standard gasoline in the US costs 40% of the price to the consumer at the pump in Germany. Cheap fuel is part of the freedom of mobility in the US, a country of great distances and individualism. Going to war to secure oil supply has been generally accepted, but there now appears to be a re-thinking of this doctrine.

Cleantech investments have ramped up dramatically in the US, total third quarter 2006 Venture Capital investments were $933 million – which meant the country realised its ninth consecutive quarter of growth, according to the Cleantech Venture Network. Most of this was in the biofuels area. In the US there was about six times the amount invested in biofuels compared to the European Union.

There is now an eco-system forming including focused funds and established partnerships that have added cleantech partners. 3i venture has established cleantech globally as one of its core investment themes. Investment bankers have spotted the opportunity and most banks now have a cleantech practice.

There is not much entrepreneurial experience in the sector because it is still early in the game. However, we have seen professional teams from unrelated industries that have built great companies in the past establishing themselves in cleantech. Their belief in the sector is almost missionary and we have spoken to many company-creators who see cleantech as the next “big thing”, going far beyond the “killer apps” of the early 2000s that were sold to VC backers back then. These newly formed teams are being complemented by sector experts and technical founders.

The other extreme is also noteworthy, founders from cleantech with no venturebacked experience, let alone successful exits, are trying to tap into the private equity coffers. Two years ago their business plans would not have excited anybody in the VC community; today they find themselves in a goldmine. We have witnessed presentations from these teams and appreciate the steep learning curve they have to go through. Since no money was available to them and their ideas in the past, their companies are often bootstrapped, and legal and IP issues are a major concern. However, we see the most innovative technology coming out of the US and thus we find it worthwhile to take a higher exposure to risk.

In 2005 and 2006 solar, in general, and photovoltaics in particular have been well sought after opportunities, as have investments in bioethanol and biodiesel. Ethanol has been subsidised for years and currently a tax credit of 51 cents per gallon is available to the producer. In 2006 about 5 billion gallons of ethanol have been produced mainly from corn, replacing MTBE as an alcohol in standard gasoline. Many bio-ethanol ventures have been funded this year and there have been successful IPOs in the space.

Biodiesel in the US is a very nascent industry which will probably develop beyond what we have seen for ethanol due to its superior energy content and the fact that it can be used with the existing multi-trillion distribution infrastructure. We are also very bullish on water and waste-water treatment. Wind, which is the most advanced renewable in installed power globally, with about 70,000 MW, will play a larger role in the US. Currently, about 9,000 MW of wind power are installed in the US. However, these investment opportunities are more likely to be expansion capital and debt investments.

Cleantech investment themes and entrepreneurial teams will undoubtedly mature because the sector will become more professionalised. We have great hopes for cleantech in the United States, especially since the infrastructure for power generation and distribution is aging and becoming unreliable. For the US economy to grow the way it has been in the past decades, massive investments in the energy infrastructure are needed and some of it will be in renewables. The outside pressures of a world that becomes flatter every day are simply too overwhelming.



Sometime in April 1986, I sat in a lecture room at the University of Stuttgart participating in a discussion with fellow students and the professor on the future of power generation and the role of renewable sources. The professor had just done something he had never done before – he had cancelled his regularly scheduled lecture and called for an open discussion on a recent event that was to mark the way Europeans thought about energy generation in the years to come.

One of the four nuclear reactors in the Ukrainian city of Chernobyl had blown up and we faced the frightening possibility that a radioactive cloud would spread over most of  Europe. A similar event had occurred in the United States in 1979, when a reactor on the Three Mile Island Nuclear Generating Station near Harrisburg, Pa., overheated and released some radiation into the atmosphere. However, the accident in the Ukraine seemed to be of far greater magnitude.

At the time of the Chernobyl disaster, the University of Stuttgart had research going on in photovoltaics (PV), or solar cells. So the question of whether to use environmentally friendly PV, rather than nuclear power, was central to our discussion in the lecture room. The session ended somewhat inconclusively. The students thought alternative forms of energy generation should be considered after Chernobyl, but our professor did not share this view. He tried to convince us that PV would never be competitive on a kilowatt-hour (kWh) basis with centrally generated power from nuclear or conventional plants. He argued that solar cells would be too expensive, since their energy density was too low and cost per watt for the solar material much too high.

Twenty years hence, PV is what captures most minds in the US energy investment community. In approximately the last 18 months, we have witnessed successful IPOs of companies that are positioned across the solar value chain. One of the most recent solarpower public offerings came from First Solar Inc. The maker of thin film solar modules went public on Nasdaq in November 2006. First Solar reported costs of $2 per watt for its thin-film product, translating into an average price per kWh that is close to the retail price for the highest priced markets in the US. We are close to, but still not cost competitive with, centrally generated power from conventional sources.

But that does not mean my professor was right. Electricity generated from PV will become cheap enough within the next 5-10 years to be able to compete on average with retail kWh pricing from fossil fuels. Among the reasons are factors my old professor could not have predicted. For one, he could not have imagined that the government would give incentives to move away from fossil fuels, like the carbon emissions “tax” in place today. But probably the most profound factor is the price increases we have witnessed for conventional fuels, such as oil and natural gas.

High prices for fossil fuels are nothing new and peak price cycles have usually been followed by lows that have killed earlier renewable energy generation efforts. For instance, a barrel of crude oil traded up to $100 and higher in the midst of the oil crisis in the ‘70s and came down to about a tenth of that price thereafter. However, in the past 20 years or so the inflationadjusted average oil price was close to $30. Most analysts agree that the average price per barrel will probably not go below $40-$50 because OPEC would throttle down supply. Another factor that my professor could not have predicted two decades ago was the emergence of global warming as a worldwide debate, rather than a discussion among a small community of scientists. Today, global warming is a concern among a majority of the populations in developed countries and its significance is manifest in the growing numberof subsidies for renewable energy generation and the new “green” corporate image that many large companies are adopting. We will witness that the topic will win elections for politicians and drive share prices of corporations.



Major corporations – even US auto companies – are falling all over themselves to not only present a “green” image, but also to back it up with new policies and products. One of the more dramatic examples came in January 2007, when General Motors unveiled its new, all-electric concept car, the Chevy Volt, putting to rest any question of whether it “killed the electric car”.

But if you want a benchmark to measure how far America has come in its willingness to embrace cleantech, look no further than the California governor, Arnold Schwarzenegger. In 1992, the prepolitical incarnation of the bodybuilder and actor had General Motors build him the first civilian version of the military Humvee –which had a starring role in the just-completed first Gulf War. The result was the gas-guzzling Hummer – which seemed, like Schwarzenegger himself, the embodiment of America’s tendency to “supersize” everything.

A decade-and-a-half later, while reports that Schwarzenegger’s garage is Hummer-free appear to be only rumors (he does, however, reportedly possess a GM-owned hydrogen-powered Hummer), the California governor seems to have almost redeemed himself in the eyes of U.S. environmentalists by proposing early this year a plan to reduce carbon dioxide emissions that rivals and surpasses many plans put forward in Europe.

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