We’ve kept that tradition alive here at Kachan & Co. We don’t claim a perfect track record, but we’ve been eerily prescient and nailed some biggies a year or more before they actually came to pass, like the growth of cleantech venture capital in 2011 and its decline in 2012, the rise of corporate and non-institutional capital, the emergence of energy efficiency as a leading technology theme, a decline in storage investment, the rise of China as cleantech superpower, and more. There have, of course, been misses. But we won’t dwell on those, will we?
As a cleantech research and consulting company that does business around the world, we’re close to the action. We publish research reports. We speak at conferences. We get constant pitches from companies seeking capital. We’re quoted in the press. We speak with investors, large corporations, governments and technology vendors, all informing a good, well-rounded perspective.
And to our analysis, 2013 will be something of a year of backtracking for the cleantech industry, a year that calls into question some of its traditional leading indicators of health, and one that surfaces long term risk to such cleantech stalwarts as solar, wind and electric vehicles. Does that mean cleantech is finished? Not at all. But much like young Skywalker learned in Episode V, cleantech is about to find out that the Empire sometimes gets its revenge. Details below.
Venture capital – down is the new up
Even if the global economy blusters along, and there’s no guarantee it will, we predict global cleantech venture capital will show a limp performance in 2013 and not even match 2012 levels. Which, as we foretold, were considerably down this past year from 2011. We will go so far as to predict that the salad days of cleantech VC are behind us, never to return to previous levels, and that the bloom is off the cleantech rose for the mainstream venture investor.
But that’s not because we think cleantech’s days are over (unlike this IDC analyst, who already writes about the sector in the past tense.) On the contrary, with the global economic slowdown, there’s more need than ever to do more with less—one of cleantech’s central tenets.
What it really means is that venture capital, as we know it today, is not proving itself suited to the unique characteristics of cleantech investments. Therefore, the amount of venture investment in clean products and services no longer functions effectively as a leading indicator of the health of the cleantech space as we and others have been using it for the last 10 years. Venture data is, and will remain, still useful for spotting technology and geographical trends—such as the recent decline of solar and rise of transportation and biofuels as current investor focuses.
Why are we pessimistic about the levels of conventional cleantech venture capital we’ll see in 2013?
- Lack of rock star IRRs. Much has been written about this in recent months, including our own analysis. But to restate: with IPO poster kids of cleantech declaring backruptcy, and relatively modest returns to date on cleantech mergers and acquisitions (M&A), large exit multiples bolstering VC’s internal rates of return (IRRs) continue to elude the space, and that’s weeded out many conventional venture capitalists and their limited partners who seek shorter term returns than most cleantech subsectors can offer at this point.
- Lag time of negative sentiment. We wrote this same point last year at this time, and it’s especially important now: it takes a few quarters for pullback to show in venture or project investment numbers because deals can take quarters to consummate. The disillusionment we’ve been hearing from investors through 2012 will still take several more quarters to manifest in deal numbers yet to post. So it’s not unreasonable to expect 2013’s cleantech venture performance will be even lower than 2012’s. It takes a while for a ship to slow down.
- Poor policy support. It’s a tough time for cleantech subsidies worldwide. With the exception of Japan (which has introduced one of the world’s most progressive feed-in tariffs for renewables—read Kachan’s free report on the subject here—and is starting to throw money around like China), and with its new energy bill, the UK, most developed economies are rolling back their economic support of cleantech. The U.S. at this writing is still mired after debating all summer to extend the production tax credit, or PTC, for wind that expires at the end of this month and can’t even get a binding federal energy efficiency policy in place. The re-election of Barack Obama for a second term gives some a little optimism for American policy favoring cleantech. Lack of policy support makes it hard for the private sector to feel enthusiastic about investing in cleantech. Especially when, rhetoric to the contrary, the reversal of perverse subsidies to the oil and gas “dark side” is unlikely to ever happen.
All that said, here’s our take on why it’s not such a bad thing if cleantech venture capital continues its downward trend in 2013:
- It’s now about more than VC. Family offices. Sovereign wealth. Corporate capital. All have now become more significant in cleantech as the sector has matured, playing where traditional VC has played in recent years … although we haven’t seen convincing roundups of just how MUCH they’re contributing from all the major data providers (i.e. Dow Jones VentureSource, Bloomberg New Energy Finance, PwC/NVCA MoneyTree, VB Research’s Clean Energy Pipeline and Cleantech Group). These are the sources of capital that should be helping cleantech companies overcome the “valley of death,” the catch-22 of “you can’t get funding until it’s proven, and you can prove it without funding.”
- Building factories isn’t what VC is about, anyway. Less venture capital available will hurt early stage innovation, yes. It’s a gap that angel and government funding shouldn’t, alone, be expected to fill. Yet on the other hand, to have meaningful impact, many clean technologies, including renewable energy, now need massive amounts of later stage and project funding. Some sectors like wind and certain biofuel innovations have been largely de-risked and now just need scale. And that takes lots of money. More than most ever thought it would. And that level of capital is never what VC was supposed to be for, anyway.
- Fewer cooks in the kitchen in deals. With many investors opportunistically chasing cleantech in its heyday now having departed, in theory only the strong and committed have remained. That should translate to fewer and more knowledgeable parties at the table.
- The skids have been greased for corporations. Fewer parties at the table should make corporate venturing and strategic investment more appealing to the world’s biggest companies, which, even today, continue to buy their way into cleantech (cleantech M&A is down slightly—approx. 50-75 deals per quarter globally to date in 2012—but it’s by no means out.) Significant players include Dow, Johnson Controls, Schneider Electric, Eaton, Honeywell, Hitachi, GE Energy, and many more. Anecdotally, at Kachan & Co., we’re doing more work than ever helping corporations find opportunities in cleantech. We just finished advising one of the world’s largest materials and chemical companies on cleantech sectors to consider focusing on and why.
Long term risk emerges for solar and wind
Put aside for a moment the margin erosion, allegations of corruption, international trade shenanigans and other unfortunate short-term realities in today’s solar and wind markets. There’s a bigger, more systematic threat to their growth rates looming.
Expect to see recognition in 2013 about the risk to solar and wind growth rates posed by disappointing progress to date in grid-level storage. Large-scale storage, whether chemical or mechanical, is turning out to be harder and more expensive than previously thought. And without it, intermittent clean energies like solar and wind can only be so useful and meet only a relatively small portion of power demand.
Solar proponents point to the falling silicon photovoltaic (PV) price per kWh and extrapolate the planet will be covered in the stuff in the future. But factor in the cost of flow batteries, molten salt, compressed air, pumped hydro, ice, moving mass or other technology to store that power today, and the effective cost of reliable, dispatchable solar and wind power is much higher.
When you also add into the equation continued progress in cleaner baseload power from sources like new nuclear technologies (see Kachan’s report on Emerging Nuclear Innovations), natural gas (see Kachan’s report The Bio Natural Gas Opportunity) and cleaner coal power, it feels to us like the projected growth rates of solar and wind might need to be revised downwards. Expect this reality check to be felt in 2013.
Clean coal technologies gain respect
As fashionable as it’s been to slag the phrase clean coal in recent years, we think 2013 will be the year a new set of technologies will emerge, helping the sector begin to shed its negative positioning and emerge as a legitimate sector for innovation, investment and even real-world trials.
Environmental lobbies, ironically, get the blame for slowing the development of innovations to reduce the adverse environmental and health effects of coal. It’s this faction that began disingenuously parroting, beginning in 2008, that “there’s no such thing as clean coal” and encouraging contempt for the coal industry because “clean coal doesn’t exist today.”
No, clean coal doesn’t exist today. But that doesn’t mean it shouldn’t.
With coal powering 40% of the world’s energy production, the world can be counted on to consume every last cubic meter of coal, questionable extraction and social justice issues notwithstanding. Like it or not, coal-based power is not going away anytime soon. The challenge—with opportunities!—becomes how to do so with the least environmental and health impact possible. There are solutions for most of the toxicity and particulate issues of burning coal; the biggest problem to date has been the phenomenal cost and power plant energy penalty of sequestering CO2.
At Kachan & Co., we’ve been privileged to learn about encouraging new technologies behind the scenes aimed at sequestering coal power plant CO2, new approaches which cost a fraction of those available today. Even one that claims a zero power plant energy penalty. The world may start to see these in 2013. Note that while America has been doing limited R&D in the area, China, which knows it has coal emissions problems, wants to dominate the clean coal equipment market, like it does already in many other cleantech equipment categories.
The internal combustion engine strikes back – EVs at risk
Electric vehicles (EVs) will sell well in 2013. But with the world’s imagination gripped by the promise of EVs, cleantech intelligentsia and even automotive industry insiders are likely overlooking important quiet innovations taking place in internal combustion engines (ICE) that could push the timing of an all-electric vehicle future even farther out than it is now.
In 2013, unheard-of fuel economy innovations in ICEs will enter the market. Some will be based on new engine designs. Some will be novel new natural gas conversion and heat exchange retrofits of existing engines aimed at dramatically lessening fuel needs. Some of these install onto existing diesel trucks in only a few hours, and, when combined, claim to be able to reduce fuel costs by up to 90%.
Lower emissions and save the planet. That’s how EVs are being marketed. But the fundamental gamble upon which the electric vehicle value chain is based is that the world’s transportation fleet can’t stay on liquid fuels forever—that liquid fuels will eventually become so expensive as to be prohibitive. But what if vehicles did continue to run on liquid fuels because of radically lessened fuel requirements, starting with the world’s largest fleets, with waning fossil supplies supplemented by drop-in fuels coming of age? That might obviate the need for a lot of the build-from-scratch EV charging and augmented power transmission infrastructure the industry is currently spinning up to deploy. This not only has negative implications for the EV makers themselves, but the advanced battery industry, the materials and commodities companies that provide battery components, as well as smart grid companies.
We think the electric vehicle industry has not been properly accounting for ICE innovation. We expect 2013 will be a further wake up call to electric vehicle spreadsheet jockeys that are currently forecasting (and missing to date) the timing of mass EV adoption. So expect more blood in the scuppers of the EV value chain. Bad time to be a battery maker, or Better Place, we believe.
Cleantech adoption in mining
We predicted a modest upswing in venture investment in the mining and recycling sector back in 2010, and we were right. Now, here at the end of 2012, we believe the year ahead will be an important one for cleantech in mining.
Mining has always represented one of the last holdouts of old, inefficient, dirty industrial tech. Miners are a conservative lot, and have generally been reluctant to embrace technological change, especially if economics are unproven. The good news is that many clean technologies are now less expensive than the status quo, and some—such as biological remediation of tailings ponds and recovery of trace minerals left there—even represent new net revenue opportunities.
Now that mining companies and their shareholders are starting to realize that the capital expenses of new clean technologies can be offset by reduced operating costs and the potential for new revenues, clean technologies are beginning to receive the attention they deserve. When engineering companies elsewhere in the value chain see this, and realize additional billable hours are to be made in incorporating these technologies, they’ll help usher cleantech’s adoption.
Look for more focus in 2013 on cleantech innovation in areas such as tailings remediation, membrane-based water purification, sensors and telematics, route optimization software intended to lower fuel and equipment maintenance costs, and low water and power hydrometallurgical and other novel processes for mineral separation.
Big ag steps up and cleans up
Last year we predicted increased activity and innovation in agricultural cleantech. Today it seems well underway, with a cornucopia of new agricultural investing conferences as one indicator. In a recent report, after evaluating hundreds of companies around the world, we found and profiled 57 with important new clean agricultural science aimed at improving crop yields and resilience, along with new controlled environment improvements (vertical farming systems, hydroponics and aeroponics), sustainable forestry, animal farming and aquaculture.
We predict 2013 will be the year the world’s leading agricultural companies embrace new innovation in significant ways. Indeed, one of the world’s largest agricultural companies, its genetically modified products having weathered intense consumer backlash, is already working with Kachan to identify bio-based and selectively bred yield improvements and pest control solutions. Where one goes, other leaders will follow.
Frankenfood activism is apparently working. Expect accelerated corporate investment, strategic partnership and M&A in 2013 as the world’s agricultural majors race to meet consumer demand for cleaner, greener ways of producing food.
And so concludes our predictions for cleantech in 2013. What do you agree with? What do you disagree with? Leave a comment below.
A former managing director of the Cleantech Group, Dallas Kachan is executive director of the international Clean Mining Alliance. He is also managing partner of Kachan & Co., a cleantech research and advisory firm that does business worldwide from San Francisco, Toronto and Vancouver.