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Clean technologies alluring to venture capital

By Gary Rieschel (China Daily)
Updated: 2008-11-10 07:39

JUCCCE Chairwoman Peggy Liu (2nd from left) speaking on Ramping up Renewables at the 2008 Clinton Global Initiative with Wesley Clark (1st from left), retired US Army general and director of Emergya Wind Technologies, Marcel Brenninkmeijer (3rd from left), founder and chairman of Good Energies, Lester Brown (2nd from right), president of Earth Policy Institute, and Carol Browner, principal of the Albright Group.

Since 2000, venture capitalists (VCs) have invested $10 billion into clean tech companies, with the investment approaching $4 billion in 2008 alone. Where is this money going? Seventy percent of the investment to date is in the United States (US), less than 10 percent of that in China.

Clean tech will become the largest investment area for US VCs within 5 years. Sustainable power generation such as solar, wind and biofuels have captured the majority of venture capital dollars.

Where're the benefits?

The key question is will investors see the benefits of both products coming to market and financial return?

Clean tech encompasses a wide range from environmental clean up - water, industrial waste, recycling - power generation and management- clean coal, biofuels, solar power, wind power, geothermal, wave power, smart grid management- and energy storage- batteries and fuel cells.

Clean tech has become shorthand for anything that in some way improves energy efficiency and the environment.

Recent enthusiasm by the investment community for clean tech companies has not gone unrewarded. In solar energy, investors have seen significant gains from companies such as First Solar, Suntech, Sunpower, Trina Solar and LDK, among others.

Ten Chinese solar companies are publicly listed, with aggregate market capitalization of over $7 billion. The Chinese companies fabricate and assemble solar panels for export, primarily to Germany, Spain and the US.

The early returns in the solar industry spawned a surge of capital throughout the solar energy value chain, with over 40 percent of the VC clean tech money and over 80 percent of the clean tech investment in China going into this sector.

Wind power also has attracted a great deal of venture capital. Investments are primarily in wind generation equipment.

There are two Chinese public wind power companies - Goldwind, Chinese High Speed Transmission - but investors have yet to realize the returns on capital invested that the solar industry has generated.

The other major area of venture capital investment in power generation is biofuels, particularly biodiesel and ethanol. Biofuels use renewable feedstocks such as grains and grasses to create alternative transportation fuels. In biofuels the story for investors is one of tears.

The US has pursued poorly considered policies around corn-based ethanol driven by politics and farm subsidies rather than sound economic reasoning.

The production capacity of the US in corn-based ethanol has increased 4 times in less than 8 years, at the same time corn feedstock prices doubled and many of the new technologies have proven difficult to commercialize and scale.

The debt finance market collapse and the halving of oil prices sound the death knell for the first wave of biofuel companies. In the US alone, several billion US dollars of venture capital are at risk.

Where to go?

Solar energy will succeed as long as government subsidies encourage installation of current technologies and provide the incentive for future investment.

Wind offers the highest near term prospects for return on investment because it requires the least subsidy to be profitable for investors and providers.

Biofuels must be completely rethought with more emphasis on non-food feedstocks and will not be capital efficient for several years.

Venture capitalists will continue to invest in clean tech, moving more of their focus to energy storage, improving existing generation facility efficiency and improved conservation.

A focus on energy efficiency dominates discussion among investors today. Not only do energy efficiency investments provide the best short term environmental and climate change benefits, they will provide the best financial returns.

There is no "silver bullet" for climate change and energy efficiency. The energy industry is being reconstructed from the ground up with new ways of generating, distributing, managing, storing, and using power. This will take decades and trillions of dollars.

However, today's technologies in lighting, building materials, coal power plant efficiency and emission reductions, and smart grid management, are beginning the process of modernizing the energy industry.

The success in the US reducing sulfur dioxide emissions with market mechanisms in the 1970s has inspired many of the carbon tax and carbon trading schemes underway today.

Success in restoring salmon runs to rivers like Oregon's Willamette provide proof that government attention and policy can undo years of environmental neglect.

Where's China?

China's challenge is twofold. One is to ameliorate years of damage that rapid economic growth has left behind. Second is to provide the right intellectual property protection and financial incentives for both foreign and domestic technologies.

China will be one of the world's centers of clean tech innovation, but this is dependent on sound government policies. Recent changes in the IP laws, shutting down environmentally non-compliant factories, and large-scale wind power deployments show that the Chinese government recognizes both the need and opportunity.

As an example, over 15 percent of China's electric power capacity goes toward producing cement. Over 80 percent of this electricity is generated by coal-fired power plants. Making these industries more efficient and "cleaner" will bring large and immediate returns.

The reconstruction of the global energy infrastructure will require local, national, and global action. Sino-American cooperation in this area is not only vital, but represents the greatest investment opportunity of the 21st century. There is no time to waste.

The author is founder and managing directorof Qiming Ventures.

(China Daily 11/10/2008 page8)