Financial turmoil and an economy on the brink of recession are testing US companies’ determination to reduce their environmental impact.
However, many researchers, advisers and investors say the green-business movement will have staying power. They point to skyrocketing oil prices fueling interest and investment in renewable energy and energy efficiency, government policymakers’ urge to combat global warming, and the desire of traditional, non-green businesses to embrace the “green” trend because it makes business sense.
“High energy prices, climate change and energy security are converging as the new engine driving the development of clean energy,” Daniel Yergin, chairman of Cambridge Energy Research Associates (CERA) and executive vice president of research group IHS, said in a speech addressing the 2008 National Governors Association (NGA) winter meeting in Washington, DC. CERA, based in Cambridge, Massachusetts, advises energy companies, financial institutions, technology providers and governments on energy markets, geopolitics, industry trends and strategy.
“There is a major shift in public opinion toward clean energy, which is being bolstered by the growing conviction that new carbon policies will reshape the competitive landscape of the global energy business,” Yergin said. Others agree that the public sector’s backing of green energy is playing a big role and will help overcome the effects of a softer economy. Frank Morris, founder of Ecologic Advisors, a New York–based investment advisory firm specializing in environmental investing, says: “Political pressure to engage global climate change is the main driver of growth in renewable energy. We see these trends continuing, even in a generally weakening economy.”
Governments are aggressively subsidizing the development of renewable energy to make it more price-competitive with conventional fossil fuels. And venture capitalists, private equity firms and big non-green companies such as Citi, Dow Chemical and a number of auto manufacturers have followed by pouring big money into green technology and initiatives.
Global investment in clean-energy technologies jumped 60% in 2007 to $148.4 billion, according to a recent report by London–based energy research firm New Energy Finance. This number was revised upward from the provisional estimate New Energy Finance made in December, forecasting a 41% rise in clean-energy technology investment.
The report found growth across all the primary categories of investment. Venture capital and private equity investment in clean-energy companies jumped 34% in 2007 to $9.8 billion. Equity finance provided by public market investors more than doubled to $23.4 billion, boosted in part by the smash-hit IPO of Spain’s Iberdrola Renovables. The financing of assets like wind farms and biofuel plants climbed 68% to $84.5 billion, according to New Energy Finance. Government policies around the world to promote renewable power and cleaner fuels, as well as the impact of soaring oil prices and rising corporate and investor awareness of clean-energy opportunities, fueled the investment growth, the report said.
While North America and Western Europe continued to see strong growth, investment momentum spread to include other regions, such as Eastern Europe and Australia. “Even more significant was the pick-up in activity in emerging economies, with China moving strongly ahead with projects in wind, biomass and energy efficiency, Brazil seeing huge investment interest in its sugar-based ethanol sector, and Africa starting to see renewable energy and efficiency as partial answers to its power shortages,” the report stated.
Michael Liebreich, chairman and CEO of New Energy Finance, said: “2007 was a very strong year, and the fundamentals continue to look supportive for 2008. However, the amount invested in clean energy technology and projects needs to grow much more. On our estimates a further fivefold increase is required for major countries to meet their own ambitious targets for reductions in greenhouse gas emissions.”
Other research reports are also painting a strong picture of growth. US venture capital funds invested $2.6 billion into clean-energy start-ups in the first nine months of 2007, up from the $1.8 billion they invested in all of 2006, according to Thomson Financial and the National Venture Capital Association. Among those receiving investments was GreatPoint Energy, a Cambridge, Massachusetts–based business that has developed a technology to convert coal to natural gas. The clean-coal company received more than $100 million from investors including Citi subsidiary Sustainable Development Investments, Dow Chemical and Suncor Energy.
GreatPoint Energy is using the money to build a demonstration plant and research center in Massachusetts and for plans to build natural gas manufacturing facilities near coalmines in Wyoming.
Investing in the Future
Clean-coal development has substantial future opportunities, say researchers. The coal resource base and utilization in the United States and China will create a powerful drive to develop clean-coal technologies, according to the CERA report, entitled “Crossing the Divide: The Future of Clean Energy.” Bankers have also jumped into the mix by financing alternative-energy projects. Morgan Stanley has agreed to provide SunPower, a Silicon Valley–based manufacturer of solar cells, panels and systems, with up to $190 million in financing for future commercial and public agency solar-electric-power installations. “This financing arrangement represents a significant commitment to the solar-power sector by Morgan Stanley,” says Aaron Lubowitz, managing director in Morgan Stanley’s Global Structured Products Group in New York.
Investor enthusiasm for all things solar was widespread last year. Shares of publicly traded solar-energy companies in the US jumped a collective 70% in 2007, boosted by higher oil prices, government incentives and hype about green technology. Solar stocks, along with the rest of the stock market, have faced a much bumpier ride so far this year, losing about 25% of their value in the first six weeks of the year.
Global solar-energy installations grew by 50% in 2007 and will continue to grow at that rate going forward, according to Ecologic Advisors. Wind-energy installations increased by more than 30% in 2007, and organic-food production grew by more than 20%.
Ecologic Advisors’ Morris doesn’t see a pullback in green investments by traditional big businesses. “I don’t believe companies are trimming their spending in ‘green,’ because they see the environment a public relations winner, in the case of energy efficiency a way to control costs, and perhaps most importantly a growing market in green products,” he says.
Morris points to banking powerhouses such as JPMorgan Chase and Wachovia that are building hundreds of new branch offices to meet Leadership in Energy and Environmental Design (LEED) certification standards and to reduce construction and energy costs. And auto companies are making a concerted effort to build more hybrid models and pursue hydrogen and fuel cells, as well as the electric models that consumers are seeking.
As evidence of the need for traditional companies to publicly embrace “green” these days, General Motors (GM) vice chairman Bob Lutz was forced to backpedal in February after making some controversial comments. In a meeting with reporters, he made the off-the-cuff comment that global warming is a “total crock of ....” The quote spread like wildfire on the Internet, and Lutz responded with a blog posting, reaffirming GM’s commitment and “actions” to produce cleaner-burning and more-efficient vehicles: “General Motors is dedicated to the removal of cars and trucks from the environmental equation, period. And, believe it or don’t: So am I. It’s the right thing to do, for us, for you and, yes, for the planet,” he wrote. He pointed to GM’s initiatives on biodiesel-powered vehicles, hybrids, hydrogen and fuel cells, and electric cars.
To be sure, despite much enthusiasm for green business these days, there are many risks. “There is a broad range of opportunities and benefits, as well as risks and pitfalls, as the modern energy industry increasingly moves to adopt clean technologies that will be part of the alternative, low-carbon pathway to the energy future,” CERA’s Yergin told the NGA conference.
Among the risks are concerns that publicly traded green-energy companies have become overvalued, potentially leading to a dot-com-like bubble and sell-off. There are also fears that cleaner forms of energy may be too reliant on government subsidies to get off the ground. And many green-energy businesses are capital-intensive, long-term bets that could take years to pay off for their investors.
Despite these concerns, analysts and investors say interest and investment in green energy and technology are not going away. “If you are looking for growth,” says Morris of Ecologic Advisors, “clean energy is the place to be.”