Perspectives on Clean Technology (Follow-on)

In 2009 I shared some thoughts here on clean technology development. After some positive feedback I thought it would be appropriate share additional perspectives to do a follow-on piece for 2012.

Clean technology is not a phenomenon that is going away, and that is becoming clearer with each passing year. A few pervasive fundamental drivers exist:

• The same motivating factors that were driving clean tech five years ago still exist, and some (emerging market demand and environmental stress) are even getting stronger
• Clean tech is an incredibly diverse industry and the term reaches into a broad array of business segments
• There is systemic inertia which continues to push toward greater efficiency and reduced environmental impact – not just in energy, but across the spectrum
• Need for sustained innovation and the effect of cost arbitrage
  

While folks are concerns about sovereign debt, regulatory changes, and increased competition, 2011 was a record year for clean technology deployments and I believe 2012 will be even a better year as capital flow increases and emerging dynamics continue to make the case for clean technology as a worthwhile industry. From energy, to materials, to natural resources, and even governmental and regulatory action, developing clean technology is a mindset that a host of players are caught up in. And one issue that is frequently misunderstood is the utter scale and pervasiveness of what this area encompasses. To put it simply, clean tech is in play virtually everywhere that matters (e.g. water, smart or renewable materials, clean transportation, electric vehicles, energy storage, etc.)

Energy issues do not seem to ever go away. Today, there is a lot of regulatory action which is setting out with the goal of correct arbitrage and imbalances between technological development and commodity pricing (think of the corn ethanol subsidy/drawdown). It serves as an impetus for new tech growth, and that is what is important here. Appropriate regulatory action is certainly not slowing down development, as clean tech is also a politically popular and viable economic movement.

As I have said before, this is a different animal that what we saw in the 90s with the dot-com era (high initial capital infusion followed by a network of low cost start-ups to develop value). Rather, the clean tech industry is one that driven by “tech innovation AND implementation.” That is to say – the dissemination of innovative technology on a broad scale and the ability to ramp up production and utilization sooner rather than later. It is important to balance that point by saying that technology is the driving concern here, and a capital-intensive asset-driven business is not. Technology developers should be implementing strategies which allow them to advance their developments with lighter asset burdens. Partnerships with manufacturers and high-infrastructure companies while focusing on research and development is a smart play – one which will see faster commercial realization. Once again, a savvy industry focused investor (e.g. specialty venture capital or private equity investment firms) should understand the difference of “asset plays vs. new technology play” and consider review both the immediate capital cost of deployment of a new technology as well as the long-term cash flows and liabilities that can be inherent in such investment consideration.

Nowhere is the implementation need more conspicuous than in sustainable and renewable energy. Traditional energy sources, especially fossil fuels, are creating incentives for their own replacement – both economic and environmental. To scale this sector to the point of wholly replacing traditional energy is far from a realistic proposition in the foreseeable future. What is important at the present moment is to scale deployment of new energy technology while reducing associated costs. The goal is to grow an important supplement to traditional energy, which will mitigate its costs. We are seeing this more every year (think of growth in wind and solar, as examples). Efficiency is another key theme in energy – one that can be addressed by clean tech advancement (but which necessitates the incentives to do so). Regulators can play an important role here.
Certainly one of the biggest areas for clean tech development moving forward is powered transportation. Here we see some of the greatest energy consumption (again, particularly fossil fuels) coupled with high environmental impact. This is particularly true for emerging markets, where we see exploding industrialization and associated demand. The impact of these areas cannot be ignored. Much can be done to improve the industry on a technological basis. Fuels, materials, drivetrains, and motors are all components that are ready for innovation. Again, incentives must be in place.

The central theme of my view on clean technology is that it’s an expansive industry, which will provide consistent economic development opportunities moving ahead and chemical and specialty materials industry players are at the forefront of this movement. An innovation in “business of chemistry” could translate into an innovation for “clean technology industry”, and vice versa. What are you views?

Chemical Industry Going Green By the day

Recently, chemical industry leaders BASF and Dow Chemical Company have received recognition from the U.S. EPA’s annual Presidential Green Chemistry awards for creating economically viable and sustainable technologies. Specifically, Dow and BASF won the Greener Reaction Conditions Award for their joint development of an environmentally friendly process for producing propylene oxide via hydrogen peroxide, which reduces waste water by about 75% and energy use by 35%. In the past, BASF has won the award 3 times, Dow Chemical 6 times, and other leading companies such as Merck & Co. have also received this award.

You may be asking why this is important and what impact does it have at all in the chemical industry? True, receiving this award will not likely have a significant impact on the companies themselves; however, it serves as an indication as to the direction of the broader chemicals industry and helps rectify pervasive misinformation about the industry. If you were to ask the average individual what they imagine in association with the words ‘chemical industry’, they will likely imagine immense factories spewing endless amounts of smoke. However, people fail to realize that the interests of chemical companies often align with what is best for the environment. Most importantly, folks fail to recognize that chemistry is essential to modern life;… sectors like pharmaceuticals/healthcare, electronics, personal & beauty care, home and building material, battery and energy storage system etc. depend on the basic science of chemistry. Many innovations that stem from this mentality often end up being beneficial for the environment in terms of fewer by-products, less usage of oil and gas inputs, and more. I am not saying that chemical industry processes are good for the environment in general, but that there is a conscious effort within the industry to become as efficient as possible and minimize impacts to the environment.

In essence, the industry has been ‘going green’ per se, and this effort by leading companies to innovate so as to develop environmentally sustainable and benign processes and products is exactly the mentality required, and will ultimately lead to greater efficiency and more sustainable/consistent growth within the industry, given the proper investment into these novel ideas.

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?