Russell Read, PhD, CFA
Senior Advisor to the Mountain Pacific Group
John Preston, MBA
Managing Partner of TEM Capital
Russell and John are the authors of Chapter 11, “Effective Clean Tech Investing,” in Environmental Alpha: Institutional Investors and Climate Change.
Since the publication of our chapter “Effective Clean Tech Investing” over half a decade ago, the market and opportunity for investing in clean tech has undergone a significant and ultimately healthy transformation. Specifically, two distinctive classes of clean tech investment have emerged—(1) Income: those focused on generating project income, generally under long-term contracts with governments, utilities, or other companies, and (2) Growth: those company investments seeking to transform the production and utilization of the world’s natural resources. This short follow-on article is intended to elaborate on these important developments and is divided into the following four sections: Investments in Clean Tech, Emerging Trends and Technologies, Future Evolution of the Fuel Mix (Oil, Gas, Coal, Nuclear, and Renewables), and Implications for Future Investment.
Investments in Clean Tech
Despite the temporary slowdown in renewables and clean tech investments stemming from the global financial crisis of 2008–2009, the overall trend in investment has been largely sustained and significant. Investments in clean-energy opportunities, in particular, have increased by 17.8% annually over the decade from 2004–2014 (Figure 1). That said, perhaps the biggest surprise has been that such investment growth over the past half decade has been almost exclusively focused on the Asia-Pacific (APAC) region rather than either the Europe, Middle East, and Africa (EMEA) or North and South America (AMER) regions. However, persistent and increasing concerns regarding the potential for global warming, the impact of environmental pollutants of all stripes, and the depletion of the world’s natural resources in the face of sustained economic development across the world’s emerging markets have now focused the attention of policymakers and investors alike around the globe.
Figure 1: Global Clean-Energy Investment over the Past Decade
Note: Total values include estimates for undisclosed deals. Includes corporate and government R&D, and spending for digital energy-storage projects (not reported in quarterly statistics).
Source: Bloomberg New Energy Finance.
What has emerged are essentially two classes of investment geared to meet the distinctive portfolio needs of international investors—those project investments that seek to provide meaningful and regularized income, and those company investments that are geared toward providing meaningful capital gains growth over time through the introduction of innovative and transformative technologies. Of these two categories of investment, growth opportunities have remained largely concentrated in North America and Europe while income opportunities have developed globally with accelerating interest in the APAC Region. Importantly, Bloomberg New Energy Finance data also reveal that project investments have emerged as the dominant global clean tech investment, accounting for roughly two-thirds (or $257 billion of the $385 billion) of global clean-energy investments during 2014. Company investments (including mergers and acquisitions) account for the remaining one-third of clean-energy investment. Although clean tech investments generally had their origins among wealthy, developed economies, investments in the emerging markets now account for the majority of clean-tech project investments, a trend that is likely to continue. It is especially notable, for example, that both Saudi Arabia and Pakistan plan to displace Germany in its role as the most significant country deploying solar-energy projects.
Emerging Trends and Technologies
From a technology-performance perspective, it seems that the recent revolution in the efficiency of alternative-energy technologies, including solar and wind (and to a lesser extent biofuels and geothermal), has also generally failed to anoint specific companies as persistent winners. However, given the industry consolidation, experienced internationally along with the elimination of potentially disruptive country-specific subsidies, the prospects for the emergence of clear industry leaders have grown significantly. Such companies have further increased the global appeal of alternative-energy infrastructure by providing warranties and long-term service contracts. As investments, these projects have generally produced income streams under contract with utilities, governments, and companies. They trade or are offered at a slight premium to traditional infrastructure projects, and emerging-markets projects oftentimes offer double-digit yield opportunities.
Perhaps the most exciting innovations in new technology development will occur when battery storage becomes less expensive than peak power generation. This will likely occur when the cost of battery storage falls below $200 per kilowatt-hour of storage and efficiencies exceed 70% and cycle life exceeds 3,000 cycles. At the current pace of innovation, batteries are expected to reach this price/performance level within the next three years (by 2018–2019). The benefit of improved battery storage comes from running a baseload power plant at less expense than turning power on and off to match peak periods. If battery-power storage becomes cheap enough, energy will be stored in batteries at night and released during peak periods during the day, thereby eliminating the need for additional daytime power generation that uses fossil fuels. The power industry currently has about 33% excess generation capacity to handle peak periods. The capital cost and carrying cost of that excess capacity will become less important if battery technology continues to improve its price/performance. Trading peak generating capacity for battery storage will likely save power companies a significant amount of money in the process.
Another significant advantage to battery storage is that its development and deployment can remedy some key weaknesses in current electricity grid systems. For example, during peak hours, the grid bringing power to city centers is heavily loaded, increasing the temperature of power cables and decreasing the efficiency of transmission. Up to 50% of power generated can be lost on the grid before reaching the customer. With battery storage set up in the inner city, however, power could be transmitted and stored at night, when the grid is lightly used, and then delivered from the inner city batteries during the day, thereby reducing losses during peak times.
It should be noted that lithium-ion chemistry is the front-running technology for creating batteries of light weight and high-power density. These qualities make lithium-ion ideal for transportation applications, such as in cars and planes. However, it is likely that grid-based batteries, particularly those used in inner cities, will be based on a different technology because lithium is also highly flammable and burns more aggressively if dowsed with water. Other technologies, such as zinc-based batteries, may prove far safer and more scalable.
Finally, low-cost battery storage will reduce the primary problem of renewable energy from wind and solar—unreliability. With the advent of low-cost battery-storage systems, wind and solar power could be harvested when available, and the energy delivered when needed, rather than requiring windy and sunny conditions for power generation. This enhanced ability will enable significant growth in wind and solar power by shifting their economics and reliability.
Another technology-driven trend to monitor is the emergence of microgrids. Since the industrial revolution, the grids that deliver power to customers have grown dramatically. One of the determinants of a country’s economy has been the availability of reliable, low-cost electricity to industry. There are many similarities between our massive power grid and the telephone cable infrastructure that was necessary before the invention of cellular phones. If wind, solar, and battery storage continue to improve their economics, then smaller, less expensive local “microgrids” may replace massive grid structures.
This trend is in its infancy, but countries in Asia and Africa with less reliable power could experience faster growth through the adoption of microgrids.
Low-cost energy storage is critical to enabling microgrids, however, because intermittent renewable sources would be replacing steady base-load generation.
Materials (Including Cement and Metals)
Finally, we recommend watching the emergence of innovations that greatly improve the functionality of materials or use less energy and lower emissions to produce materials. Most people are unaware of the energy content and carbon emissions of materials. For example, the carbon emission from the manufacture of cement is equal to the emissions from half the world’s automobiles, or about 8% of total global greenhouse gas. Steel production accounts for approximately 5% of greenhouse gas. A final example of the energy intensity of materials: producing one ounce of platinum requires processing eleven tons of earth mined from up to 1,000 meters below ground.
New technologies that radically reduce the amount of materials needed for various processes and reduce the volume of their emissions are beginning to be commercialized. In some cases, the price/performance of greener processes is superior to current practices. For example, at least one company is making a superior (that is, stronger) cement at about half the cost of normal Portland cement and, in the process, is lowering greenhouse gas emissions by more than 90%.
Another example is the ability to make materials far stronger than normal by reducing crystal size to nano-metric dimensions or by eliminating crystal formation altogether by making metals amorphous (glassy). A glassy metal can be ten times stronger than the same metal in its normal crystalline state. For example, if aluminum were made ten times stronger, aircraft could be ten times lighter, thus resulting in significant fuel savings. Similar gains are expected to come from using fiber-reinforced materials, such as in the Boeing 787. Commercial activities are also finding uses for super-reinforcing materials made from carbon nanotubes and graphene.
Investments in materials are not generally thought of as green investments. However, just the elimination of greenhouse gas from cement production could have a greater positive environmental impact than the wind and solar industries combined.
Future Evolution of the Fuel Mix (Oil, Gas, Coal, Nuclear, Renewables)
A version of an old Danish proverb, “Predicting is difficult, especially as it relates to the future,” applies nicely to energy. Looking forward, we think that certain trends in fuels are easier to predict than others. Coal for example will continue to decline as a percentage of total power in developed countries. However, it will still likely constitute a major percentage of total power production in 20 years. Wind and solar will continue to increase, particularly if driven by improved energy-storage technologies, such as better batteries, and bolstered by subsidies. Nuclear energy is also unlikely to grow significantly. The Fukushima accident will make new licensing of nuclear power plants all but impossible in the developed countries. Any growth in nuclear energy will likely come in Asia, the Middle East, and Africa. Natural gas will see healthy growth in countries like the United States that embrace fracking technologies.
Technology remains a wild card for energy. Innovations in drilling technologies over the last three decades have caused the abundance of cheap natural gas in the United States. There is also a chance that new drilling technologies will enable growth in geothermal energy. If this happens, we could enjoy a major shift in sustainable power.
Steady improvements in solar energy are highly likely. The semiconductor industry has demonstrated the ability to constantly improve price/performance. Wind will likely innovate less rapidly than solar. Wind technology will focus on withstanding harsher environments with higher-quality winds, such as in offshore locations. Biofuels will continue to suffer from the low cost of oil, unless a major innovation occurs in microbial growth and processing. Biologically produced products will likely first attack other markets with higher-value products like cosmetics and proteins before moving to fuels. Successes in these other markets can thus become leading indicators that biofuel economics are improving and that scalable biofuel production could become achievable.
The other wild card is government intervention. Governments today make bold but oftentimes economically irrational decisions. It could be argued that Germany’s response to Fukushima is overly aggressive: It is attempting to replace nuclear power (18% of its current total power generation) by the year 2022. The replacement fuels will likely include coal, gas, and renewables, resulting in a net increase in greenhouse gas emissions overall.
Governments in Europe and the Americas will likely focus on regulations to reduce the use of coal. However, the cooperation of China will be needed to create real change. If the UK abandoned coal-fired electricity completely, for example, it would only equal the increased amount of coal burned in China for a single year. Technologies that utilize and sequester vast amounts of carbon dioxide will likely also be sorely needed in order to forestall potentially dangerous levels of global warming.
Implications for Future Investment
Although the investment landscape for clean tech opportunities has been rapidly evolving because of technological innovation, uneven interest from potential clean tech investors, high volatility, and the currently low prices among energy commodities, the following six distinctive implications can be discerned:
- Clean-energy investment across the Asia-Pacific Region (particularly China) is growing and now accounts for the majority of clean tech investment worldwide, while the rest of the world is exhibiting relatively small increases annually.
- Wind and solar opportunities are (and will continue) dominating clean-energy investments overall—as biofuel opportunities drop rapidly.
- Clean tech investing has underperformed in the public markets (particularly among publicly traded stocks), so effective marginal investment has shifted largely to project investments (which are able to produce attractive income) and asset acquisition/merger opportunities (with specifically identifiable and credible growth potential).
- The strategy of sacrificing short-term profitability in anticipation of earning long-term gains has generally not been viewed as credible by the public-equity markets, and has resulted in the underperformance of publicly traded stocks that took such an approach.
- Fracking technologies will likely keep natural gas prices very low in the United States, causing a further drop in green-project investments across North America; however, because natural gas prices should remain higher outside of North America, clean-energy project investments will likely be concentrated elsewhere around the globe.
- Batteries are the next enabling technology likely to propel long-term investment into wind- and solar-project opportunities.
Although recent, the significant and sustained drop in global oil prices deserves particular attention, despite its impact not yet being fully captured in clean-tech investment data. Indeed, in combination with persistently low U.S. natural gas prices, the economics of U.S. wind and solar will likely continue to suffer. Government subsidies in the United States have evened the field somewhat but have proved in the past to be unreliable over the long term. The recent renewal of wind and solar tax credits will prop up investments through artificial economics—but will they last only through the life of the investments? Recently, the UK government slashed the subsidies for solar, citing, among other things, the stress that intermittent power generation puts on the grid.
Wind and solar account for 90% of clean-energy investments, and both are more expensive than power generated from fossil fuels—especially when the price of natural gas in the United States is below $2/million BTUs. Regardless of the availability of subsidies, the low prices of fossil fuels will drive investment money away from wind and solar in the United States. International investors, particularly those capable of investing across Asia, will likely not respond in the same way as U.S.-focused investors, however. Natural gas prices in Asia are much higher than in the United States. The government of China seems to be willing to continue a major bet on renewable energy driven by a desire for energy independence, the creation of new export businesses, and a reduction of the stifling air pollution in northern China. Asia in general is also becoming the core geography for the deployment of new battery technologies, owing largely to the intermittency of wind and solar power.
Although international investment has thus evolved substantially over the past decade, its future landscape and milestones have likely become much easier to discern and forecast.
“Global Trends in Clean Energy Investment.” 2015. Bloomberg New Energy Finance 9, January. Available from http://about.bnef.com/presentations/clean-energy-investment-q4-2014-fact-pack/content/uploads/sites/4/2015/01/Q4-investment-fact-pack.pdf.
Read, Russell, and John Preston. 2009. “Effective Clean Tech Investing.” In Environmental Alpha: Institutional Investors and Climate Change, edited by Angelo A. Calvello, 245–263. New York: John Wiley & Sons.
Russell Read is currently senior advisor to Mountain Pacific Group, which is the exclusive manager of FTSE World Parity Unit (WPU), a currency unit used to manage and minimize the currency risks for international investors. Until recently, Dr. Read served as CIO and deputy chief executive of the Gulf Investment Corporation (GIC) based in Kuwait City. In that capacity, he led 70 investment professionals and 190 total staff charged with transforming the Gulf Cooperation Council (GCC) Finance-Ministries-owned enterprise into the development investor for the Gulf region and partner of choice for international organizations seeking to allocate business to the Gulf region. During his leadership tenure at GIC, he played a central role in reestablishing the mission effectiveness of the organization, substantially improving its profitability, and attracting country-level investment partnerships from Japan, Korea, and Germany to the Gulf region, thereby also enhancing GIC’s credit rating by three notches, from BBB (Baa2) to A (A2).
Previous to his role at GIC, Dr. Read founded and led C Change Investments (later merged into New York City-based TEM Capital), a private-equity investment firm dedicated to profitably transforming the production, distribution, and consumption of the world’s natural resources. He was also CIO of the California Public Employees’ Retirement System (CalPERS), North America’s largest pension system. While at CalPERS, he internationalized the portfolio and developed its new programs in infrastructure, commodities, forestland, and sustainable technology investments. Before his work at CalPERS, Dr. Read was deputy CIO for Scudder Investments/Deutsche (bank) Asset Management, and director of Investment Product Design, Commodities, and Quantitative Strategies for OppenheimerFunds in New York City, where he designed and managed the first commodities-based mutual fund (the Oppenheimer Real Asset Fund) and related institutional products.
Dr. Read has been a resource for international regulatory agencies, state governments, and the U.S. House and Senate for over two decades and served as chairman of the Investors’ Committee of the President’s Working Group on Financial Markets under Treasury Secretary Henry Paulson. He is currently a board member for both the Hedge Funds Standards Board (London) and the New York Academy of Sciences (NYAS). SmartMoney (November 2007) named him one of America’s 30 most influential players in business and finance, and Institutional Investor listed him as #35 of the 75 most effective chief executives.
Dr. Read received his undergraduate degree in statistics and his MBA in finance and international business, both from the University of Chicago, and his master’s in economics and doctorate in political economy from Stanford University. His doctoral work, The Politics and Policies of National Economic Growth, focused on the particular economic roles of natural resources in economic development. He has taught graduate-level courses at the University of California at Davis, the University of Maine, and Stanford University and has been a guest lecturer/class instructor at Columbia University, New York University, and the University of California at Berkeley.
John T. Preston is the managing partner of TEM (Transformative Energy & Materials) Capital, former managing partner of C Change Investments, and former head of the MIT Technology Licensing Office. (CET). His primary expertise is in energy, environment, technology, and entrepreneurship.
Before starting CET, Mr. Preston was the director of technology development (and licensing) at MIT, where he was responsible for the commercialization of intellectual property developed at the university, which generates roughly two inventions per day on a research budget of about $750 million. During his career at MIT, Mr. Preston oversaw activities that led to the creation of hundreds of new technology-based companies; the negotiation of thousands of licenses with existing companies; and many complex consultations, including one as MIT’s representative on the HDTV Grand Alliance, which created the U.S. standard for high-definition television. Mr. Preston also taught entrepreneurship at MIT as a senior lecturer.
Former President Francois Mitterrand of France awarded Mr. Preston the rank of “Knight of the Order of National Merit of France.” In the United States, he received the “Hammer Award for Reinventing Government” by Vice President Gore. He chaired President George H. W. Bush’s conference announcing the president’s technology initiative and co-chaired a conference for HRH Prince Charles, the Prince of Wales Technology Awards Conference. He also advised the Clinton White House in preparation for the Kyoto Summit on climate change and spoke at President Reagan’s White House Conference on Superconductivity. Mr. Preston testified before Congress seven times as an expert on technology innovation and has been on advisory boards for the U.S. Department of Defense, NASA, the U.S. Department of Commerce, and numerous others.
He is the recipient of many other awards and honors including the Thomas Jefferson Award, given to the leading American in technology transfer and the Renaissance Engineering and Science award from Stevens Institute of Technology. Mr. Preston is an Honorary Alumnus of the Massachusetts Institute of Technology.
Mr. Preston received a BS in physics from the University of Wisconsin and an MBA from Northwestern University.