x Abu Dhabi, UAESaturday 22 July 2017

Eco-Money: Clean energy industry makes a comeback

Smart energy schemes, including household initiatives, are just one part of the sustainable energy comeback.

Smart energy schemes, including household meters like the one shown here, are just one part of the sustainable energy comeback. Pat Sullivan / AP
Smart energy schemes, including household meters like the one shown here, are just one part of the sustainable energy comeback. Pat Sullivan / AP

Sustainable energy is enjoying a rebirth. After cold-shouldering sustainable-energy stocks after the global recession in 2008, investors are now starting to return to the sector.

Mergers, acquisitions and other deals in the energy-efficiency sector in 2010 were worth US$3.7 billion (Dh13.5bn) worldwide, according to PricewaterhouseCoopers (PwC), the consulting firm. A year later, in 2011, that figure had mushroomed to $10bn.

The resurgence of activity in this sector closely parallels the dotcom boom and bust of more than a decade ago, when internet investors threw money at internet companies only to turn their backs on the sector when the market overheated in 2000. With no recourse to venture capital or raising money from investors, many dotcoms, which had no realistic prospects of turning a profit for years to come, went bust almost overnight.

Just as investors once tried to elbow each other out of the way in the race to throw money at dotcom ventures, such as companies selling pet food over the internet, clean-energy companies saw their boom years from 2005 to 2008.

But the global economic downturn resulted in reduced state subsidies, leading to a lack of ready investment for largely unproven energy technologies with little prospect of making a profit anytime soon. Just as jaundiced dotcom investors returned to "old economy" stocks in 2000, so investors closed the cash pipe on sustainable energy.

According to Michael Butler, the chief executive of Cascadia Capital, a Seattle, US-based investment bank that specialises in sustainable industries, some big phoenixes may be about to rise from the funeral pyre of sustainable-energy stocks.

Mr Butler believes the sector is in the process of developing a new generation of sustainable-energy giants. Just as today's internet giants such as Google and eBay began as struggling Silicon Valley start-ups, Mr Butler says the sustainable-energy sector has benefited from a core of dedicated technologists and investors who have worked hard to create truly commercial businesses.

He points to the increasing involvement of large companies such as Boeing, Walmart and Schneider Electric in sustainable energy through investments and acquisitions.

The reasons for the renewed appeal of sustainable energy are similar to those that have drawn investors to companies such as Google. Just as internet giants use a combination of computer software and electronic communications to reach as many customers as possible while keeping a low overhead, so clean-technology companies rely on computer technology to drive high profits while maintaining a low-cost base.

In the US, the $20bn in investment arising from the 2009 Stimulus Act has also begun to help pump life into the sector.

Over the next 12 months, Mr Butler says the renewable-energy sector will start to see "superior" investments emerge as a "second generation" of sustainable-energy companies begin to emerge from the ashes.

Just as in the case of companies like Facebook, whose initial public offering later this year is expected to value the company at $100bn, investors are being drawn to a sector that is software reliant and has few physical assets.

Environmental legislation in places such as the US and Europe is also making conventional energy sources more expensive. For example, the US Environmental Protection Agency has just issued new rules for carbon emissions designed to make the construction of new coal-fired power stations uneconomic in the future.

At the same time, nuclear energy, once the great white hope of many governments, is also seeing costs going through the roof. After the disaster at Japan's Fukushima Daiichi reactor, stringent new safely rulings are rapidly pushing up costs in the nuclear industry.

The sustainable-energy sector has also developed new technologies capable of saving large amounts of money, but also having a far more positive green footprint.

According to a study conducted by McKinsey & Co, the global consultancy, a determined push to implement energy-efficiency measures across the US could result in $1.2 trillion of savings by 2020. In carbon-emission terms, this would, McKinsey says, be tantamount to taking all American cars off the roads. But when McKinsey conducted the research for its report in 2009, it concluded that this was unlikely to happen in a sector that was still firmly in the grip of recession. The introduction of workable technologies would then have cost $520bn and the deployment of "smart" power meters and other technologies in roughly 100 million buildings across America.

But industry watchers such as the investment bank Cascadia Capital are beginning to see light at the end of tunnel because the savings to be made by deploying sustainable energy technology start to make sense to a growing number of organisations. Although householders may baulk at the initial cost of installing expensive new technologies, commercial companies can see the sense in a small short-term investment that results in a long-term reduction of overheads.

It is likely that some clear leaders will start to emerge in the sustainable-energy sector over the next year - and green investors should continue to watch the sector closely.