At the two-day gathering of investors and alternative energy firms in May, the mood ranged from gloomy to buoyant depending on the technology and the geography.
Big banks and venture capitalists alike said they are cautious at best about solar investments, even though several predicted that solar costs could start to achieve ‘grid parity’ by next year. Investors were more upbeat about the less glamorous ‘efficiency’ market. Geographically, they were especially bullish on China, Africa and South Korea.
One concern that rang throughout the Cleantech Forum — organised by San Francisco-based research firm Cleantech Group — is that renewables still don't receive enough funding to put them generally on an equal footing with entrenched fossil fuels.
Richard Youngman, Cleantech's European Managing Director, threw down a gauntlet with his opening remark. “Now there are [hundreds of promising companies] around the world developing clean technologies,” he said.
“The phase two we're expecting in 2010 is another challenge altogether which is to take that to mass scale and change the industries they serve in ways that perhaps we can't imagine. The demand on the skills and the capital that's going to require is immense.”
Climate bonds
One novel funding idea came from HSBC. Nick Robins, the British banking giant's Executive Director of Climate Change Centre of Excellence, suggested that the time could be right for ‘climate bonds’ that would allow the public to lend to green energy projects. “The asset class that I keep hearing talk about is not listed equities, perhaps it's not even private equity,” he said. “It's bonds.”
Many green initiatives centre on infrastructure programmes like transport, grids, and building efficiency. Since infrastructure traditionally receives bond financing, there could be a natural segue of funds into public-oriented schemes aimed at reducing carbon footprints, Robins pointed out. HSBC is one of several institutions that have banded together to form the Climate Bond Initiative to investigate climate bonds.
Robins also called for the continuation of government stimulus programmes, in large measure because government spending in turn triggers a significant ‘multiplier’ of other investment activity. HSBC calculates that governments' announced green stimulus commitments around the world have totalled US$521 billion. Robins said that amount could stimulate the same amount again from other investors.
He did, however, caution that government stimulus programmes can drag down in delays. “There are risks around this stimulus phenomenon. One of them is clearly around delivery. And we have seen delays in the implementation of commitments the governments have been making,” Robins said, noting that governments delivered just US$82bn last year, but forecasting they would deliver US$248bn this year. “We do actually need to see efficiency in the delivery of these commitments,” he said.
China — A sleeping giant?
Much of the new stimulus spending will be in Asia, particularly in China, he noted. Several investors at the Paris conference noted that China represents tremendous potential for clean energy.
“[Pollution] brings a huge social pressure,” said Nicolas Chaudron, a Partner at AGF, the French private equity unit of German financial services giant Allianz. Chaudron was moderating a panel discussion entitled From Red to Green: The Rise of China in Cleantech. Chinese leaders, he said, “have to do something for the environment if they want to keep the social pressure at limited, reasonable levels.”
Andre Loesekrug-Pietri, Managing Partner of CEL Partners (China Equity Links), a French venture firm that invests in China, agreed: “The [Communist] Party wants to save its head,” he said, claiming that 30% of public demonstrations last year “were linked to environmental issues.”
He said other factors will also drive a strong green agenda in China, including the country's determination to cut its reliance on imported coal and oil.
“They don't want to become the USA of tomorrow — they don't want to have this dependency,” Loesekrug-Pietri said. He added that China's massive urbanisation movement — some forecasters predict 70% of the country's population will live in cities by 2020 — supports tremendous investment opportunity in building efficiency.
China's green surge will also mean that the country's many manufacturers of solar, wind and other equipment could start acquiring Western companies, in much the same way China's automobile industry has been picking up brands including Rover and Volvo. “I would not be surprised — I have no inside information — that Q-Cells might be acquired by the Chinese,” quipped Loesekrug-Pietri, referring to the pioneering Germany manufacturer of solar photovoltaics (PV).
Several speakers at the conference also pointed out that China is no longer just a hotbed of manufacturing; rather it is also now challenging the West as an innovator. “We're seeing massive innovation in clean technology,” said Nicholas Parker, Executive Chairman of Cleantech.
One sector where China has clearly roughed up the West is solar. A rampant push by Chinese manufacturers like Yingli, have pushed down the cost and price of solar to a point that has dampened investor enthusiasm.
As Cleantech Capital CEO Paul Kloppenborg bluntly stated: “I don't think that is a very good idea to invest money in, simply because the production game, the scaling of production that started in the West, has in two-and-a-half years been located now in China.” Noting that China accounts for 40% of the world's solar module and cell production, and that manufacturing costs are “a fraction” of the West's, Kloppenborg declared: “Game over.”
Not only are Chinese manufacturers benefiting from government subsidies and low cost labour, but they are also astutely improving manufacturing efficiencies and technologies — having learned initially from partnerships with Western companies like Q-Cells.
“It's not a surprise that the line which churns out one and a half as time many widgets sits in China,” said Robert Markus Feldmann, Managing Director of Deloitte's Clean Tech Europe Practice. “The next Chinese manufacturer which opens up his factory will have yet again the newest line and will then compete against the other Chinese.”
And contrary to popular myth, the Chinese are turning out quality, noted Felix von Schubert, a Partner with London based VC firm Zouk Ventures. “One would think that quality brand names must be somewhere in North East Germany. But actually most of the banks say that if we don't use Yingli, from China, they're not going to invest.”
The Chinese price pressure, and the move to quality, benefits the consumer. Citing figures from Germany's Fraunhofer Institute, von Schubert noted that if pricing trends continue and if Germany cuts feed-in-tariffs as proposed, then market-driven solar costs next year in Germany will reach grid parity.
(As this story was going to press this summer, however, Germany's upper house, the Bundesrat, recommended smaller FiT cuts than the 16% approved by parliament's lower house the Bundestag, casting doubt on the likelihood of grid parity by 2011).
From panels to projects
With the pricing upheaval, venture capitalists have soured on module makers. But Deloitte's Feldmann noted that other links in the solar value chain, like project development, installers and retailers make potentially good investment targets. He likened the solar industry to consumer electronics, noting: “‘Best buy’ is still around 30 years down the road after we invented the computer and the television set, so in solar, the best one will also still be around in 20 or 30 years.”
One company that invests in project development is Spanish banking giant Banco Santander. Ricardo Diaz Gonzalez, the bank's Executive Director of Asset and Capital Structuring noted that global economic turmoil has changed Santander's approach so that it no longer finances projects on its own. “All deals now, or most of them in the market, are with a club deal structure, meaning three, four, or five banks put together the financing. No one is willing to take the syndication risk,” he said.
Solar to Africa
Meanwhile, if China is having one positive effect of driving the solar industry closer to grid parity, it's also having another in that it, more than any other country, is starting to bring clean power to Africa, according to several speakers.
Picking up on the cliché of Africa as a ‘forgotten continent,’ Cleantech Executive Chairman Parker noted: “It's certainly not forgotten in China. China is now the largest foreign direct investor in Africa, and it's pouring billions of dollars into things that are often related to cleantech.”
Parker implored Western investors to seize African opportunities. Speaking to a room full of primarily Europeans and North Americans, he noted: “Most of us don't see Africa as an opportunity. We're leaving that to our Asian friends to take advantage of. So that's a question mark decision point here for us.” He also said South Korea holds good investment potential for clean technology backers.
This article first appeared in Renewable Energy Focus, Volume 11, Issue 4, July-August 2010.