A Stern response to the bubble question

One year ago, the UK Treasury published the Stern Review on the Economics of Climate Change to intense media interest. Unlike previous surveys or popular accounts of climate change, Stern put a financial cost on both action and inaction in cutting emissions of greenhouse gases and moving to a low-carbon economy.

The work was of obvious relevance to the clean energy industry, which can't always convince potential customers that its products and services make economic sense, and generally hailed as good news. Specialist financial information provider New Energy Finance welcomed the Review as "good news for investors in the renewable energy and low carbon technologies sectors", highlighting Stern's calls for a stronger price signal for carbon emissions, greater international cooperation, and increased funding for low carbon R&D, "all of which will boost clean technology companies". Stock tippers on personal investment websites also saw the Review as positive news, posting 'Buy' recommendations on selected clean energy stocks.

At the time, there were concerns about a speculative investment bubble in the sector, manifest in both venture capital activity and in the valuations of publicly listed companies. Such concerns continue to date. While some bubble-like behaviour is hardly unexpected in an emerging and potentially revolutionary sector, a bubble and burst would be likely to cause medium-term financial problems that could seriously damage the prospects of clean energy companies.

From an economics point of view, it's virtually impossible to say whether a market is actually in a bubble situation until some time after it's burst - not a very useful situation for current investors. Previous bubbles have however demonstrated the role played by the media in feeding 'irrational exuberance' and inflating bubbles, with stock prices moving in an irrational fashion in response to high-strength but low-weight news events.

The release of Stern Review can be considered as such an event. The Review did not contain any new information about the nature of the climate change problem or related policy or technological issues. Despite the NEF's comments, it also contained nothing that could meaningfully affect the prospects of individual companies or the clean energy sector as a whole.

So could the stock price response of listed clean energy companies to the Stern Review and its accompanying media hype shed any light on the much-debated clean energy bubble?

That's the question I addressed in some recent research (completed as my dissertation for a Master's degree in Economics & Finance), using event study methodology to test the reaction of a portfolio of AIM-listed clean energy companies.

The findings were largely negative, which is fairly encouraging. A small minority of clean energy firms (notably those dealing in carbon trading) did show abnormal returns around the release of the Stern Review, but there was no significant portfolio-wide response that would indicate irrational exuberance among investors. There is no indication of a runaway bubble of the kind seen in the dotcom era, a period to which the current cleantech boom is sometimes compared.

Although the research methodology can't claim to be conclusive (and is relatively untested in its application to a non-company-specific event such as this), its conclusions are encouraging for the sector. Investor interest in clean energy, and the broader cleantech sector, appears to be rational and reasonable. That can only be good for its longer-term prospects.

The dissertation, 'Evidence for a speculative bubble in the clean energy sector: an event study', is available as a 1.2Mb PDF here.

Clean Sweep 20

A round-up of recent news in clean technology and cleantech investment.

Deals
Energy-efficient electronics group CamSemi has raised a £13m third round. The government-backed Carbon Trust comes in as a new investor with a £2m stake, alongside existing investors 3i, Scottish Equity Partners and TTP Ventures.
The Cambridge-based firm is developing pwer-management circuits for mains converters and battery chargers than can potentially improve standby energy efficiency ten-fold.

Waste management business Credential Environmental has reportedly received a £6m package from socially-focused VC Bridges Ventures. Based in Newton Aycliffe, Credential specialises in recycling and safe disposal of tyres and other automotive waste.

Kent-based renewables contractor Cel-F Solar has secured £1m investment from Bank of Scotland Growth Equity. The firm designs, installs and maintains solar, wind and heat pump systems for councils, housing associations and property developers. BoS says the company has grown at over 30%pa over the past three years and is on track to double turnover in the current year, thanks in part to wider adoption of the 'Merton Rule' which mandates participating councils to include some renewables element in new developments (though as noted below, the programme may be being scrubbed).
It's more of a public-sector facilities-management deal than a tech-led one, but still worth noting.

Over in Ireland, tidal energy group Openhydro has completed a Euro40m fundraising. According to the Independent newspaper, the round was led by One51, an investment firm headed by entrepeneur Philip Lynch, and an IPO is on the cards for next year.
Openhydro is developing marine turbines for power generation, with tests underway at the European Marine Energy Centre off the Orkneys.

More deals, as ever, across the pond. In what some are calling the biggest solar venture deal yet, thin-film manufacturer Heliovolt announced its second round fundraising has reached a whopping $101m. The Texan company previously announced a close at $77m in August (see Clean Sweep 11). New investors include Sequel Venture Partners, Noventi Ventures and hedge fund Passport Capital. The money goes towards opening Heliovolt's first plant, with the initial capacity to produce 20MW worth of thin-film CIGS cells a year. The firm is planning a global string of 40MW-capacity factories, including some potentially in Europe.

And in a big battery deal, Massachusetts-based A123 Systems raised an extra $30m from General Electric and other existing investors. The round, the firm's fifth, follows a $40m fundraising in January.
A123 will use the funding to increase production capacity for its doped nanophosphate lithium-ion batteries, following contract wins for plug-in hybrid and other electric vehicle designs from industry primes including GM and BAE Systems.

Still in the US, East Coast VC Battelle Ventures and its Innovation Valley Partners affiliate have put a total $8m into three energy start-ups.
Energy-efficient traffic light firm Aldis gets $3.7m in two tranches; thin-film battery business Planar Energy Devices gets $4m in two tranches; and thin-film PV developer Ampulse gets $1m 'pre-seed'. Aldis and Ampulse are spin-outs from the Department of Energy's labs in Tennessee, while Florida-based Planar is out of the National Renewable Energy Laboratory.

Biofuel tech a-go-go! GM feedstock developer Mendel Biotechnology raises an undisclosed round from ZBI Ventures, Capricorn Investment Group, CFM, and Monsanto. Modular biorefinery business BioFuelBox takes a reported $9.5m from DFJ Element. And algal biodiesel start-up Solix Biofuels has raised at least $1.5m of a target $3.5m first round from Bohemian Investments and others.

In water purification, New Mexico's Altela secured a $7.1m first round led by Canada's CCS Income Trust. The firm develops desalination and decontamination systems based on thermal distillation, a tech it says is up to eight times more energy efficient than reverse osmosis.


Further reading
The cleantech boom continues in the US, according to the latest quarterly VC figures from VentureOne. Energy-related investment was up 28% from Q3 2006, to $590m. Total investments reached over $8m, the biggest quarterly total since 2001.
Two of the quarter's ten biggest deals were in cleantech - Heliovolt's $77m close (before this week's top-up, as noted above); and synthetic biofuel group Amyris Biotechnologies's $70m second round in September.

Australian VC Cleantech Ventures (catchy name!) and industry network Cleantech Group have released the first report on the sector in the lucky country. Headlines: A$539m VC into 75 companies over 1999-2007Q1, accounting for 4% of Aussie deals by number; agriculture, energy storage, transportation and water are the strongest sectors. Complete report, as 3Mb PDF, here. Cleantech Ventures announced a A$50m first close of its own Cleantech Australia Fund earlier this month.

Engineering giant GE offered an update on its Ecomagination cleantech investment arm. It says it's putting over $1bn in 'cleaner' R&D in the current year, rising to $1.5bn a year by 2010. Current projects include mammoth wind turbines 'with blades longer than the tip-to-tip wingspan of a jumbo jet': nimby groups are in a pre-emptive uproar.

Solarcentury ceo Jeremy Leggett launches a patriotic call-to-arms for more UK government support for the renewables industry.
His company has meanwhile helped kit out the UK's first solar powered pub for JD Wetherspoon. Solarcentury raised £13.5m from Zouk Ventures and Good Energies at the end of the summer, as noted previously. Cheers!

Something new for the tech-craze fans: after biotech, nanotech and cleantech comes... spookytech!

Investing in climate change

Deutsche Asset Management has released an interesting report on Investing in climate change. It's based on the belief that climate change, and all the economic and technological issues around it, is emerging as a 'mega-trend' that will shape the asset management industry in the near future. Ultimately, they reckon, most mainstream investment analysis will have to take into account the effects of climate change in terms of costs and opportunities for companies and markets.

The Deutsche team neatly summarises the scientific and economic issues, drawing on various well-known sources including the IPCC's Nobel-winning work, the report on the economics of climate change by the newly ennobled Nicholas Stern, and the McKinsey paper setting out a cost curve for greenhouse gas reduction. Some parts do smacks of boardroom bullshit, though - a prize to anyone who can convincingly describe exactly what the graph on p10 tells you.

So what does it mean for cleantech venture investment?

Deutsche reckon that the impact of climate change 'as a complex and enduring economic force' over the next 5-10 years should create market inefficiencies which offer significant gains for smart investors. For retail investors, that creates a limited role for small-cap cleantech stocks as part of a well diversified portfolio. For institutional investors, a less diversified strategy focused on pure cleantech companies 'might make more sense as it creates more diversification against other asset classes'. Good news for specialist VCs raising funds - and, of course, for the beneficiaries of those funds.

The report also focuses on the role of government policy on the carbon-cutting technologies at the top end of the cost curve - ie, things like industrial carbon-capture and large-scale biodiesel which are currently prohibitively expensive but which may still be needed to hit the necessary emissions targets. Government policy can dramatically alter the cost structure of these technologies, through R&D support and encouraging economies of scale. Experience with other alternative energy tech shows that a doubling of capacity can create cost cuts of up to 35%, bringing expensive techs into a wider market. As the report notes, while it may be tempting for an investor to focus purely on technologies that are currently low-cost, 'some seemingly prohibitively-expensive technologies are potentially very important investment themes and therefore represent another key area for analysis and return generation'. Again, that suggests real opportunities for serious risk capital.

The full report is available, as a 2.6Mb PDF, from here.

Clean Sweep 19

A round-up of recent news in clean technology and cleantech investment.

Deals
In what it's calling one of Europe's largest growth cleantech deals of the year, London's Zouk Ventures has led a Euro53.4m round in specialist waste management group SiC Processing. Merrill Lynch Corporate Principal Investments Group, CC Private Equity Partners, Masdar Clean Tech Fund, and Foursome Investments also invested, alongside existing investors and the founding Heckmann family.
Based in Bavaria, SiC runs recycling plants in Germany, Italy, Norway, China and the US for the solar and semiconductor wafer industries. The group's patented hydrocyclone technology takes the slurry used in the wafer cutting process and separates off valuable silicon carbide from its glycol base. The new funding goes towards further international expansion.

Otherwise, US companies dominated the week's investment. Norwegian VC Convexa Capital led a $28m investment in Californian thin-film silicon developer Innovalight. Norwegian tech developer Scatec also joined the round, alongside existing venture investors Apax Partners, ARCH Venture Partners, Sevin Rosen Funds, Triton Ventures and Harris & Harris.
Innovalight uses a proprietary silicon nanocrystalline ink to produce ultra-thin solar modules for residential and commercial use, potentially at a tenth of the cost of conventional cells. The new funding round, the firm's third, goes towards a new 30,000 sq ft manufacturing facility.

Solar power electronics firm SmartSpark Energy Systems raised an undisclosed first round from tech specialist Battery Ventures. The Illinois firm's SolarBridge product aims to simplify solar panel installation by integrating the inverter (used to convert DC from the cells into usable AC) into the panel itself.

Wind industry supplier TPI Composites raised a $22m first round led by specialist VC NGP Energy Technology Partners. The Rhode Island firm manufactures customised blades for wind turbines, with operations in Mexico and China, as well as products for transport and military vehicle applications.

Water filtration start-up Stonybrook Purification announced a $4.1m first round involving new investors Modern Water and TianDi Growth Capital and seed investors Battery Ventures and T2 Venture Capital. A spin-out from Stony Brook University, New York, the firm retains an intellectual vibe - their website is skimpy on details of their tech, which promises to increase liquid flow across filtration membranes, but does prominently feature a WH Auden quotation.

And 'intelligent grid' company GridPoint raised a $48.5m fourth round led by Goldman Sachs. The Washington DC business has developed an IT-based platform to help electric suppliers manage varyign supply and demand. The system also allows easy integration of new clean technologies such as plug-in hybrid vehicles and fuel cells.


Fund news
Nordic tech investor Provider Venture Partners has launched a new cleantech fund in association with Finnish state-backed investment agency Sitra. The fund will invest primarily in Finland and Sweden, and has a target close of Euro100-160m.

Clean Sweep 18

A round-up of recent news in clean technology and cleantech investment.

Deals
Micro-power group Perpetuum has closed a £5m second round led by Environmental Technologies Fund. The investment is the second from ETF's targeted Euro150m fund. Existing investors Quester and Top Technology also joined the round.
Southampton-based Perpetuum is commercialising a range of vibration-harvesting generators which can power wireless and battery-free sensors and other applications. The firm was spun out from Southampton University in 2004.

Carbon Trust Investments and Oxford Capital Partners have led a £1.58m round in biomass conversion business Green Biologics. Existing investors from the angel community also joined the round.
The Oxfordshire-based company uses thermophile microbes to convert biomass (from agricultural waste to purpose-grown crops) into butanol. The basic fermentation tech, using clostridial bacteria, was first commercialised in 1916 to produce acetone. By optimising the process and using cheaper waste feedstock, the firm aims to reduce production costs by a factor of two or three.
Elsewhere in microbial biofuels, California's LS9 (no, not a suburb of Leeds) raised a $15m second round from Lightspeed Venture Partners and existing investors Flagship Ventures and Khosla Ventures. The firm is using synthetic biology to engineer bugs capable of producing what it calls 'renewable petroleum'.
And in a loosely related deal (it's not biofuels but it is microbial), Luca Technologies raised $20m in a round led by Kleiner Perkins and Boston-based Oxford Bioscience Partners. The Colorado-based group is working with natural micro-organisms that can convert coal and other hydrocarbons into cleaner-burning methane. As 'clean coal' goes, it's an interesting approach.

While there's been a few water purification deals lately, there's been less happening in air purification. But now French group AirInSpace has raised a Euro6bn second round from Paris-based VC Matignon Technologies and investment bank Oddo et Cie.
Founded in 2002, the firm offers microbial decontamination products for healthcare applications, and is now moving into new areas including air transport. The tech was originally developed for the Russian space programme.


Fund news
French investor Emertec Gestion is reportedly targeting Euro80m for its second clean technology fund. The group's current Euro15.5m Emertec Energie Environnement (3E) fund targets seed-stage companies in the energy and environmental industries sectors.

California-based seed investor Greenhouse Capital Partners meanwhile closed its first fund at $11m. The firm is currently considering opportunities in solar, biofuel and green building tech.

At the bigger end, New York's Braemar Energy Ventures closed its $250m fund. The firm aims to back ' the best of the new breed of energy and energy-related communications companies'.

Clean Sweep 17

A round-up of recent news in clean technology and cleantech investment.

Deals
Thin-film solar firm Konarka announced a $45m private round from new and existing investors. New investor Mackenzie Financial, a generalist investment manager, led the round alongside existing investor Good Energies, a leading renewables specialist. Pegasus Capital also joined in, along with existing investors Draper Fisher Jurvetson, Asenqua Ventures, New Enterprise Associates and 3i; plus a string of minority investors.
Konarka is developing what it calls 'Power Plastic', polymer-based solar cells which can be printed on a flexible plastic base. The new round follows major fundraisings for some of its competitors – $77m for Heliovolt in August, and $50m for Miasolé just last week.

A couple of big US wind deals this week. East Coast windfarm developer EverPower Renewables raised $55m from Good Energies (yes, them again). The firm is currently developing 1.5GW worth of projects in seven states.
And California-based wind turbine manufacturer Nordic Windpower received an undisclosed 'significant investment' from Goldman Sachs. Nordic's low-maintenance turbines are based on Swedish state-backed research going back to the 1970s. The firm aims to start production in the US next year.

Biofuel group Ceres meanwhile raised $75m from private equity giant Warburg Pincus. Ceres is using genetic modification to develop a portfolio of biofuel feedstock crops with substantial environmental benefits over the usual ethanol feedstocks - a mix of technology and outcome which could cause a dilemma for old-school greens... Its first product, a high-yield switchgrass cultivar, is due for release in 2009.

Demand response group ConsumerPowerline has closed a $17m first round led by Expansion Capital Partners. Bessemer Venture Partners, Schneider Electric Ventures, the New York City Investment Fund and Vantania Holdings also joined the round.
The firm provides energy efficiency and management services, metering technologies, etc, to help customers reduce their energy costs by reducing demand at peak periods.


Fund news
Belgian tech specialist Capricorn Venture Partners has raised Euro50m for its new Capricorn Cleantech Fund, halfway towards the target closing. Investors include regional investment company LRM and energy group Electrabel, part of the Suez Group. Capricorn has already backed Dutch micro-filtration group fluXXion and Belgian algal biofuel company SBAE Industries from the fund.


Further reading
Third quarter figures from New Energy Finance show a sizeable drop in cleantech VC deals and IPOs. Deals totalled $2.7bn, less than half the value in Q2; while IPOs valuations totalled only $673m, down from almost $4bn. Hardly unexpected given the usual summer lull and the particularly unpleasant market conditions, and NEF remains as bullish as ever, forecasting 'another record year'. Total new investment up 25% to $94.5bn, with VC/PE funding up 31.3% to $8.8bn and IPO valuations up 31.7% to $13.7bn, is the forecast for year-end. More numbers in the press release, available here as a PDF.

News on a couple of big wave energy projects. The proposed Severn Barrage got the thumbs-up from the Sustainable Development Commission despite worries about its effect on protected wildlife sites. The proposed 10-mile barrage across the Severn estuary could supply some 17TWh of energy, 4.4% of the UK's current supply needs.
Meanwhile, off the northern coast of Portugal, the world's first commercial wavefarm is preparing to commence operations. The first stage of the project features three 'sea snake' devices from the UK's own Pelamis Wave Power (formerly Ocean Power Delivery).