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Clean Tech Investments Pull in 10 Percent of US Venture Capital


By John Timmer
Ars Technica
June 6, 2007


Investments in clean and efficient technology are skyrocketing, and only biotech
and software now attract more venture capital. But investors still fear that
inconsistent government policies leave them vulnerable to a bust.

Two groups that track and promote environmentally-friendly investments,
cleantech and E2, have released a report on the state of the market in what they
term cleantech venture capital. The report suggests that a combination of high
energy prices, governmental encouragement, and public awareness of climate
change have combined to cause this sector to explode. Investors who were
surveyed for the report, however, fear that inconsistent government policies may
leave the sector at risk of a future downturn.

The report defines cleantech as anything that uses innovative or novel
technology to make better use of natural resources in a way that provides
economic value. This definition is broad enough to include basic manufacturing
and shipping. The numbers, however, make clear that it means one thing in
practice: energy generation, storage, and distribution. This sector accounted
for nearly three-quarters of the $2.9 billion of venture capital that flowed
into the US cleantech field in 2006.

That total represented a staggering 78 percent growth over the total investments
in 2005 and shows little sign of slowing down: investments in the first quarter
of '07 grew by nearly 60 percent compared to the same quarter a year before. One
indication of how promising the field looks to investors is the fact that the
number of deals isn't increasing dramatically. Instead, individual companies
appear to be attracting more money, in part because more of them are using it to
prepare products for market. Those investments are not evenly distributed, as
companies in California and Hawaii pulled in nearly 40 percent of them; combined
with the Northeast, these two regions attracted well over half the investment dollars.

This growth now means that cleantech has surpassed the medical device,
telecommunications, and semiconductor sectors and accounts for 11 percent of the
total US venture capital market—only biotech and software remain ahead of it. In
contrast, the entire European market only directed $680 million to cleantech, a
figure that represents a decline compared to 2005. This may partly reflect a
more mature European market, as Denmark and Spain already have larger wind
capacities than the US, while Germany produces more solar energy (as does Japan).

The most obvious cause for this growth is the persistently high price of energy.
The report suggests that most cleantech energy sources are designed for
profitability only when oil prices are above $45 a barrel. Other major
contributors have been government programs, primarily at the state level. There
are now 23 states that have renewable energy requirements, and many have
mandatory energy efficiency standards for state facilities. The northeastern
states have also started a cap/trade system for carbon emissions. These
initiatives are presented as a net benefit for the state economies, as a number
of surveys have indicated that cleantech creates more jobs per unit of energy
than any of the traditional, carbon-based power sources.

So, what is there for a venture capitalist not to like? Anyone who lived through
the energy crunch in the 70s and watched energy efficiency drop off the map as
oil prices plunged in the 80s can hazard a number of guesses. Due to more mature
technology, efficiency in a number of cleantech fields now makes excellent
economic sense as a way to eliminate waste and expenses. But energy is the
largest sector, and many of the investors in it remained concerned about the
possibility of another drop in the price of fossil fuels.

To help foster long-term stability, the report calls for a number of major
initiatives, including a mandatory carbon cap, consistent national standards
that replace the current patchwork of state initiatives, and public investment
in cleantech research. At the same time, the respondents hammer similar programs
for fossil fuels, suggesting they're doing nothing more than subsidizing
yesterday's news: "respondents believe that conventional technologies (e.g.,
fossil fuels) regularly receive large government subsidies that give them a
price advantage, even though these technologies have been mainstream for decades."

To an extent, the recommendations of the report appear to be self-serving, given
that they are intended to support a market that the organizations that prepared
it are heavily involved in. Despite the rampant self-interest, however, it's
hard to imagine that the US would be well served by allowing this growing market
to wither in the face of any future drops in energy prices, given that such
drops are almost certain to be temporary.

 

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