Perspectives on Clean Technology

In recent times, there is buzz on “Clean Technology” and everyone chasing to get their slice of the pie. I thought, it would be nice to share some perspectives. Shifting political incentives, credit concerns, funding pressures, persistent energy price volatility, capacity concern and pace of innovation would be the continued theme for 2009!

Climate change threatens to derail development, while business-as-usual development threatens to destabilise the climate. While the debate over climate change appears largely settled, managing this tension will involve a lot more reflection about the trade-off between growth, the mitigation of climate change, adaptation to its effects and delivering alternate/clean-technologies.

Clean Technology is often viewed as a euphemism for alternate energy (i.e. oil or fossil fuel substitute), the fact is “Clean-Tech” includes a wide range of industries and business models that could potentially benefit from secular trends in favor of more efficient use of resources. Effective and efficient use of natural resources are critical due to the global mega-trends such as population growth, climate change, high demand for food, water and energy etc. Chemistry is the essence of modern life and the key players in chemical industry could benefit significantly in “Clean-Tech” in supplying key components or technologies. The key areas to focus on: Solar, Biofuels, Bioplastics, Fuel Cells, Water, Wind, Green Chemistry in general, Battery Technology, Carbon Sequestration, nano-tech or nano-scale high performing materials, and project base financing model etc.

Clean-Tech is not similar to “internet or dot com” where each new user at low incremental cost added more value to whole (after the initial heavy capital deployment); in contrast, dominant players in Clean Technology will be the companies who can execute successfully on a “project basis innovation”. Of course, there are few exceptions life biotech traits or smart metering etc.

A few thoughts on the clean technology arena: (i) I believe, speedy innovation oriented companies will benefit more than manufacturing (high asset) oriented companies. For example, ethanol plant operators versus enzyme suppliers. (ii) Carbon sequestration is a long-term play and the success will depend more on political climate, competing claims on invested capital and available alternates of technology (iii) As a general rule, regulatory initiatives should be the main driver for the financial return or performance of “Clean-Tech” participants (iv) Consumers price of traditional energy (e.g. electricity, gas, diesel, coal price) would dictate the viability of alternate energy or “clean-tech” (v) Arbitrages of elevated commodity price and alternate new technology has to balance out. Government policy will play a key role in commodity price such as corn price to gold price to hydrogen price! (vi) New technology could seduce people like (or, you), “Clean-Tech” funding arrangement are highly uncertain due to high level of capital intensity or ongoing financial commitments for many of the focus areas (not much difference than the feed-in tariff subsidy model). Clean-tech industry and their investment are undergoing a period of transition. Capital markets providing financing to the industry have pulled back in light of ongoing global macroeconomic, credit and liquidity issues. For example, in the first quarter of 2009, they invested only $154 million in 33 young companies, a drop of 84 percent from the last quarter of 2008 when, despite the crumbling economy, they invested $971 million in 67 start-ups, according to PWC/NVCA National Venture Capital Association. This reversal has led to a debate about whether market forces see little future for alternative energy and other green technologies on a large scale, or whether the economic downturn is taking its toll on this industry as well. The debate comes down to this: has the green bubble burst?

The debate over regulatory initiatives in only the beginning and low-carbon or energy-efficient technologies could see an accelerated adoption cycle in the appropriate environment. The Senate Energy and Natural Resources Committee last month approved the American Clean Energy Leadership Act by a vote of 15-8, clearing the way for the bill to come to the Senate floor for debate. While the bill is unlikely to pass in its current form, a few changes found to be relevant for the clean tech industry (i) Overall renewable targets are the same as in prior versions, starting at 3% by 2011 and climbing to 15% by 2021. It appears that energy efficiency can still be used as an offset to renewable target obligations at levels close to those previously discussed (e.g., 26.67%), suggesting that the net renewable requirement for 2021 would be about 11%., next (ii) the Act that was reported out of committee appears slightly watered down from a prior version, which was already not very aggressive on renewable compared to the House bill (Waxman-Markey). However, the bill does include a key positive for energy-from-waste and its exit from committee does set the stage for a bill to move the debate to the Senate floor, where additional changes could strengthen renewables requirements, possibly with more concessions to
nuclear energy and fossil fuels. (iii) The issue on combining the bill with carbon cap-and-trade legislation and it would be interesting see the final outcome!

As we observe various players in “clean-tech” arena, some of the questions I would ask:
Ø Can the “Clean-Tech” companies deliver sustainable profit in absence of without ongoing government/regulatory support? (Note: Clean-tech companies bears most of the risk instead of the suppliers. Many chemical companies are component and technology supplier to the so-called “Clean-Tech” companies such as enzyme to ethanol supplier, Photovoltech or thin-film supplier to Solar Panel Manufacturers )
Ø Are the new clean technology companies competitive in absence of scalability or migration to next generation?
Ø How sustainable is their pricing power? Can they capture their fair share of value, volume and market?
Ø Can “Clean-Tech” companies de-risk project for high capital intensity? In absence of “de-risking” the project, can they continually originate their financing?