Back to the future: investing in clean energy

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Sylvie Lemmet, Director, Division of Technology, Industry and Economics, UNEP

Investments in clean energy reached new heights in 2006 with over US$100 billion financial transactions in the global sustainable energy sector. Looking back from 2050, researchers might see this investment-high as the tipping point for the future energy market; the point where renewable energy and energy efficiency technologies not only moved to the mainstream, but became the fundamental components of the global energy system.

Mother and child sitting on cracked earth Historians in 2050 may see the year 2007 as a watershed period; the time where leaders and citizens accepted the imminent threat of climate change. This acceptance would come after several concurrent events. First, the Intergovernmental Panel on Climate Change released its 4th Assessment Report confirming there was a 90 per cent probability humans were changing the climate. Then along came a man named Stern from Britain who found the costs of addressing climate change were less than the costs of not doing so. And a former US Vice-President by the name of Al Gore won the Nobel Peace Prize and an Academy Award for his documentary on climate change called An Inconvenient Truth.

In a year of somewhat gloomy predictions, however, they would also see something very positive: a signal that an alternative future was possible to today’s fossil fuel dominated energy markets and the threat of severe and unpredictable climate change. That signal was financial transactions of more than US$100 billion in the global sustainable energy sector, setting a new record that was more than three times the amount just three years earlier. Those researchers might conclude that this was a ‘tipping point’ where renewable energy and energy efficiency technologies started to become the fundamental components of the global energy system.

Although such a scenario is just that, the information is real and comes from a report by the United Nations Environment Programme (UNEP) called Global Trends in Sustainable Energy Investment, 2007. In addition to a rapidly increasing US$70.9 billion of new investment and US$29.5 billion of mergers and acquisitions in the sustainable energy industry in 2006, the report found investments occurring in sectors and regions previously considered too risky to merit the attention of the institutional investment community.

SIGNALS

Signals move markets and these are important signals, particularly for governments beginning the next round of climate negotiations to replace the Kyoto Protocol. Although climate change issues generate a lot of discussion about the technologies of tomorrow, the data in Global Trends clearly show that the finance sector believes the technologies of today can and will change the energy mix and begin to eliminate ‘fossil carbon’.

Sure, some of this investment is being driven by the price of oil. The 43 per cent increase in investment in sustainable energy from 2005 to 2006 came in a year when oil prices averaged more than US$60 a barrel in 2006 and in October 2007 the price is up over US$90 a barrel. But oil price is only part of the picture and really only has a significant impact on the biofuels industry, the renewables sector that competes most directly with gasoline and diesel. Looking beyond the price of oil, the capital mobilisation now underway indicates that we are beginning to experience full scale industrial development, not just a tweaking of the energy system. Underpinning this development are climate change concerns, energy security, the price of oil and a widening array of clean energy and climate policies at the federal, state and municipal levels. The challenge for governments, energy planners and policy makers is to build off this positive market dynamic, turning near term advances into long term frameworks and continued sector growth.

Many financiers see investments in current renewable energy and energy efficient technologies as key opportunities to profitably address climate change. The general greening of industry is another related driver, with more companies than ever reporting their environmental performance. Growing public cynicism about greenwash, lip service paid by companies to their sometimes non-existent environmental credentials, is fostering an underlying shift towards companies practicing what they preach.

If the current market signal remains and is strengthened through policies to lower carbon emissions, this sector will far surpass the predictions of conventional energy analysts, which have mostly assumed a very minor role for these technologies.

BEATING PREDICTIONS

Today, analysts say new renewable energy sources (excluding hydro) only account for 0.5 per cent of the global energy sector and two per cent of the power sector. Since the capital stock turnover is very slow – most generating facilities having 40 to 60 year operating lives – these figures say little about today’s technology choices and even less about the future energy mix. Mostly, they give a picture of the technology options that were available in the 1950s through 1970s, when most of today’s plants were built.

A better perspective on the current and future role of sustainable energy technologies in the energy mix, however, is today’s investment trends. In 2006, US$110 billion – US$125 billion was invested globally in about 120 GW of new power generation capacity. Of this investment, US$30.8 billion was in new renewable energy power generation, which includes US$21.5 billion of asset finance in new generating plants, and the remainder in small scale systems, such as rooftop solar arrays. The US$21.5 billion of financing in renewable energy plants represents about 18 per cent of total power sector investment in 2006. Such numbers are hardly trivial.

On top of the US$30.8 billion invested in 2006 in new generating capacity, a further US$25.2 billion was invested in new renewable and efficiency technologies and manufacturing facilities, essentially investments in the future prospects for the industry. This significant capital influx would not have happened if investors had been expecting growth to drop from over 20 per cent last year down to the single digits that conventional analysts are continuously predicting for the sector.

TRENDS

Sustainable energy investment was US$70.9 billion in 2006, an increase of 43 per cent over 2005, with total turnover toping US$100 billion when mergers and acquisitions are valued in.
Investment in sustainable energy is widely spread over the leading technology sectors of wind, solar, biofuels, biomass and waste. Overall the wind sector attracted the most investment, 38 per cent of the total, followed by biofuels, 26 per cent, and solar, 16 per cent.
Asset finance – the capital going into energy generation projects – dominated the funding mix although the US also attracted significant venture capital and private equity investment, which was equivalent to half its asset finance investment. This was a far higher proportion than in either the EU-27, 11 per cent, or other OECD countries, 28 per cent.
Solar dominated the list of initial public offerings on stock exchanges in 2006. It experienced US$5.7 billion of this sort of investment activity, putting biofuels in second place with US$3.1 billion, and wind in third place with a relatively modest US$1.4 billion. The solar IPO boom has continued into 2007, including several Chinese companies listing on the Nasdaq exchange in New York.
The Wilder Hill New Energy Global Innovation Index (NEX) of clean energy stocks was up 33 per cent in 2006 and a further 56 per cent by end of October 2007.
OECD dominance is being challenged by Chinese, Indian and Brazilian companies. Overall investment in developing countries was 21 per cent (US$15 billion) of global sustainable energy investment in 2006 as compared with 15 per cent (US$4.2 billion) in 2004.
Chinese companies were the second largest recipient of venture capital in 2006 after the United States and China took a healthy nine per cent of global investment, helped by significant asset financing activity in the wind, biomass and waste sectors. In the same year, India was the largest net buyer of companies abroad, mostly in the more established European markets.

DOT COM BUBBLE OR REAL BOOM?

The surge in sustainable energy investment activity has led some commentators to compare it with the technology boom of the late 1990s and early 2000s. It is true that some specific renewable energy sub sectors might be somewhat overvalued, but overall the fundamentals of the sustainable energy sector are sound. In fact, the sustainable energy sector shed its similarities with the dot com bubble in 2004, when wind and solar companies in Europe and Japan began to generate a lot of revenues and be perceived by investors not as technology players for the future, but profitable energy sector investments for today. Further, renewable energy and energy efficiency are underpinned by real demand and growing regulatory support, which the dot com boom did not have, as well as considerable tangible backing of assets by manufacturers and project developers. Banks formerly interested only in mainstream financing for renewable energy, such as the wind sector in Germany, have begun to innovate in the forms of financing they provide and broaden their exposure to other renewables and energy efficiency.

Even so, there are still significant challenges ahead. Investment is unevenly distributed, not all markets are efficient and many regions and technologies are still fighting to get noticed. Many parts of the developing world have significant sustainable energy resources to exploit, but lack the investment and technology to convert these resources into the energy that can power their development. In all countries, opportunities to improve energy efficiency are being missed, and new investment approaches are needed to upgrade and reengineer how and where we use energy.

The shift from a global economy based on limited and polluting fossil fuels to one based on limitless renewable energy and increased energy efficiency, requires a transformation in the attitude of investors and governments. Clearly that trend is underway and there will substantial profits to be made. Financiers, however, will not be the only ones to profit. Communities will take their returns in cleaner air and water, and new cleantech jobs.

In 2050, historians will see this as a very good thing.

Author

Ms Sylvie Lemmet has been appointed as the new Director of the United Nations Environment Programme (UNEP) Division of Technology, Industry and Economics (DTIE) located in Paris.
Ms Lemmet, a French national, has had a distinguished career in the field of management and environment. She has held a series of senior management positions and has led large teams to success. In leadership roles, Ms Lemmet’s responsibilities have ranged from general management to project, budget and financial management. She has been the Chief Financial Officer and, later, a member of the Executive Board of Médecins sans Frontières working in the field of humanitarian emergency assistance.

Organisation

The UNEP Division of Technology, Industry and Economics (DTIE) strategy is to influence informed decision making through partnerships with other international organisations, governmental authorities, business and industry and non-governmental organisations. It also supports implementation of conventions and builds capacity in developing countries. It encourages decision makers to develop policies and practices that are cleaner and safer, make efficient use of natural resources, ensure environmentally sound management of chemicals, reduce pollution and risks for humans and the environment, enable implementation of conventions and international agreements and incorporate environmental costs.

Enquiries

Sylvie Lemmet
15 rue de Milan
75441 Paris Cedex 09
France
Tel: +33 1 4437 1450
Fax: +33 1 4437 1474
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