Cleantech investment gets government boost

LATER today as he announces his comprehensive spending review George Osborne is expected to announce the creation of a £2bn green investment bank to fund sustainable projects in the UK. It follows Google announcing last week that it is to invest in a massive off-shore wind turbine project. And in China the government is trying to reduce emissions by 20 per cent by the end of the year. There’s no doubt any more than green investment is big business.

Investment interest from the private equity and venture capital communities in the cleantech sector has increased dramatically over the last few years. In the first quarter of 2010, global cleantech venture investment totalled $2.1bn (£1.34bn) across 189 deals, says publisher The Cleantech Group. The Stern Report said that governments had poured $400bn into cleantech by 2009. And business intelligence provider IntertechPira predicts that the amount of cleantech-generated electricity consumed globally will increase by on average 13.5 per cent each year until 2019.

Energy efficiency measures were given fresh emphasis in President Obama’s Green New Deal and other similar measures by governments around the world. Awareness of the potential returns to be made from investment in energy efficiency appears to have come to the fore in the current environment of cost cutting. This is also reflected in the trends of current legislation, particularly encouraging the implementation of energy efficiency measures within the built environment.

Earlier this year, we undertook a survey alongside Cleantech Investor that canvassed opinion from private equity and cleantech communities about how they see future investment in the sector. Seventy-seven per cent of respondents thought that the most likely beneficiary of investment over the next 18 months would be energy efficiency – which covers everything from LED lighting to electric and hybrid cars. Energy generation was second, followed at some distance by waste recycling, energy storage and water.

Within energy generation, wind and solar were expected to be the biggest sources of potential investment over the coming 18 months. They are viewed as the most exploitable technologies within the energy generation sector. Forty per cent of respondents thought that wind would attract most investment. Wind is considered a “mature” technology – forty-six per cent of respondents thought that investment in existing, mature technologies was preferable to start-ups. The high expectations for solar may have been influenced by the recent introduction of feed-in tariffs in the UK. When this comes in, government payments will be made for electricity fed back into the national grid.

Of course, cleantech investment is not without its problems. Some larger scale projects have been impacted by the downturn. For example, some solar power projects in Spain have been scaled back, partly because of uncertainty over the long-term levels of their own feed-in tariffs. Likewise some wind projects in Denmark have been affected. There is also a perceived paucity of investment available for genuine start-up technologies. There remains a great deal of hesitancy when it comes to putting money into less proven or mature technology, something that continues to cause concern within the sector. Just six per cent of people in our survey predicted increased investment in start-ups.

The task of developing technology in the sector is enormous. The question remains whether investors will exploit the sector to its full potential. Forty per cent of respondents thought changes in government policy are the biggest threat to cleantech. Investors should keep a close eye on government action and regulatory pressures that are sure to impact the sector in the coming years.

Ian Moore is a partner at Norton Rose LLP