Monday, March 19, 2007

U.S. Clean Energy Investments

In a previous post, I estimated Big Oil's investments in Renewable Energy, and concluded that total investments are still a small percentage of overall profits. Fortunately, the U.S. Venture Capital community is starting to invest Billions into Clean Energy. Before we dive into the numbers, a note about terminology: I've been noticing the use of the term "Clean" over "Green". Clean Tech is a term used to describe energy efficient and environmentally friendly technologies. VC's prefer it over Green Tech, since for whatever reason, they feel Green implies "... greater interest in the environment than in profit."

First we look at the annual survey of VC investments, from Nth Power and Clean Edge. In the graph below, we compare total VC investments (left axis), with total Clean Energy investments (right axis):

(To enlarge an image, click on it.) Total VC investments was still off 75%, from the high of $103B in 2000 -- last year's total was $25.5B. After a slow decline from 2000 to 2005, Clean Energy investing took off in 2006, growing 164% from 2005 ($917M) to 2006 ($2.4B). While total VC investments are still significantly lower compared to the levels seen during the dotcom era, Clean Energy is grabbing an increasing share of total VC investments:

From a mere 1.3% in 2000, Clean Energy accounted for close to 10% of total VC investments 2006! In terms of geographic breakdowns, I have seen estimates which suggest that 26% of all Clean Energy VC investments in North America go to California based companies. What technologies are VC's investing in? The graph below looks at investment levels for a few sectors -- note that for Wind Energy, the estimate I found was for North America:

Energy Intelligence refers to investments in energy efficiency and grid infrastructure technologies. $813M was invested in Biofuels, representing 34% of total Clean Energy investments. The large amount that went into Biofuels (ethanol, biodiesel), leads one to wonder whether there is a bubble in that sector. Exploding valuations would be a clear sign of a bubble. According to CleanEdge, overall, valuations are growing modestly: from a median valuation of $6.5M in 2005, to $8M in 2006.

Federal Investments
How do the VC bets line up against the Bush administration's Advanced Energy Initiative (AEI)? The goal of the AEI is to lessen America's dependence on fossil fuels. To uncover the AEI's priorities, I used budget reports from the DOE's Office Energy Efficiency and Renewable Energy (EERE). In the graph below, we look at the 2006 appropriations and 2007-2008 budget requests for some of EERE's larger programs:

Rising budget requests reveals the types of research the DOE will focus on over the 2007-2008 budget years. Biomass & Biorefinery includes research into biofuels, infrastructure, collection and other industrial processes. The growth in Solar Energy funding is primarily in the area of photovoltaics, which includes semiconductor materials research, and initiatives to promote the widespread deployment of solar PV systems. Hydrogen Technology focuses on technologies designed to lead to the commercial viability of hydrogen and fuel cell systems. Finally Building Technologies refers to techniques and technologies designed to make commercial and residential buildings more efficient and affordable. Declining levels of funding for Weatherization are planned for the same time period. Weatherization is the program which " ... develops, promotes and accelerates the adoption of energy efficiency, renewable energy and oil displacement technologies and practices by a wide range of stakeholders."

The amount of VC investments in Biofuels stands in contrast to the more balanced Federal budget requests, reflecting the private sector's belief that Biofuels is close to being commercially viable. In a previous post, I gave a brief introduction to some of the challenges facing ethanol in the U.S. Ethanol powerhouse Brazil needed twenty years before ethanol started gaining traction. While the U.S. will probably get to the same point in less time, it does face challenges. Besides the need to use feedstocks other than corn, the U.S. will need to overcome distribution and infrastructure problems to make Biofuels readily available.

Was 2006 an aberration, or will the amount of VC investments in Clean Energy increase in 2007? Based on recent media coverage, 2007 looks to be another banner year for Clean Energy investments. While valuations grew modestly, the rapid rise in VC funding for Biofuels does raise some red flags. Hopefully, we will see better portfolio diversification and less emphasis on Biofuels over the next year.

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