August 19, 2009

After Slowdown, Investment In Green Sector Heats Up

Investments in the U.S. green technology sector, which includes everything from renewable energy, electric vehicles and energy storage, to effective power transmission, are on the rise again after a slowdown during the early part of this year, according to a Reuters report on Tuesday.

Promising startup firms and cleantech companies who had postponed plans for public offerings are now seeing renewed interest and an influx of venture capital. 

In general, these investments are trending away from capital-intensive energy generating technologies such as wind and solar, and moving instead toward those in the areas of efficiency, energy storage and transportation, Reuters said.

Investors seem to be betting that makers of lithium-ion battery and startups in the smart grid sector will do well in the years ahead.

Such smart grid technologies help electric utilities operate more efficiently and reliably by allowing consumers to control energy use.

"Six to nine months ago, people were putting the brakes on everything," Gary Vollen, managing director of Robert W Baird & Co's clean technology investment banking, told Reuters.

"I don't think we are in that condition these days."

Experts and industry executives are predicting a significant pickup as early as this fall in green technology investments, with continued improvement through 2010.  However, the level of activity is not likely to hit the $2.6 billion peak seen in the third quarter of 2008, they warn.

"I would expect to see a meaningful increase in cleantech investment over the course of the next six months," Tim Carey, head of PriceWaterHouseCoopers' clean technology group, told Reuters.

"Will they return to levels that we saw in 2007, 2008? I am not so sure about that."

Stimulus funding from the U.S. government's Department of Energy (DOE), which has pledged about $100 billion in green technology grants and loans, is also adding a boost.

"There's a lot of excitement about money coming out of DOE," Carey said.

Total green technology venture investments surged 73 percent to $572 million in April to June from the previous quarter, according to the Reuters report citing data from Ernst & Young.

Additional money is on the sidelines waiting for the chance to jump in when the economy improves, analysts say.

"If the companies can hold on, can stay through this curve, then there will be lots of funding available," Awais Khan, director of venture capital practice at KPMG, told Reuters.

Some large institutions are already buying in.

Calpers, the largest pension fund in the nation, disclosed this week that it committed $60 million in June to Silicon Valley venture firm Khosla Ventures for a new seed-stage fund that will primarily focus on green sector companies.

Green technology companies had received record levels of funding in 2007 and 2008 amid heightened worries about global warming and soaring oil prices.  But investments slowed considerably last year as the economy slipped into a recession and oil prices plunged from their July 2008 peak of $147 per barrel.

Solar companies in particular, which had received the bulk of green investments in the past, were the hardest hit by the economic downturn. Indeed, solar venture investments hit a three-year low in the second quarter, according to a joint study by the Cleantech Group and Deloitte.

Investors now are more interested in less capital-intensive technology such as those associated with energy efficiency and smart grid technology, Vollen said.

"Everybody still recognizes that energy storage is the holy grail of the sector," he told Reuters.

Inventing in less costly ways to store energy has been a major hurdle in the widespread adoption of renewable energy.

That pursuit helped lithium-ion battery maker A123 Systems secure $69 million last quarter to expand battery manufacturing.  Meanwhile, residential smart grid firm Tendril received $30 million in funding in June.  Energy efficiency firms CPower and Grid Net, which makes software for smart meters, also raised money.

Some companies, such as A123 Systems and biotech firm Codexis, are actively tracking the markets to best time their initial public offerings.

Drew Clark, director of strategy at IBM's Venture Capital Group, said he spends about 90 percent of his time assessing smart grid investment opportunities.

"VCs, in this era of illiquidity, have been looking for lower capex cost plays in cleantech," he told Reuters.

"Plays that are more like a software kind of play. You want something that takes a few smart people and very little equipment, and produces a Facebook," said Clark, referring to the social networking Web site founded five years ago in a Harvard dorm room.  

Facebook has since grown into the world's largest social networking company with more than 250 million users.