Venture Capital Firms Pump Record $4.6 Billion Into Cleantech

Jan 5 2009 | 12:39am ET

Venture capital investment in cleantech companies reached a record US$4.6 billion in the first three quarters of 2008, an increase of 82% compared with the same period last year, according to a new report by Ernst & Young.

The U.S. continues to be the main driver of global venture capital investment in cleantech companies.

According to E&Y, a total of US$3.3 billion was invested in the first three quarters of 2008 in 135 financing rounds, surpassing the figure for the same period last year by 71% in terms of capital raised and 4% in terms of financing activity.

By cleantech segment, energy/electricity generation companies attracted the most investment during the first three quarters of 2008: US$1.8 billion in 47 rounds of financing. Solar companies were by far the largest component of this segment with US$1.7 billion invested in 35 rounds – an increase of 152% in capital and 17% in financing over the same period in 2007.

Alternative fuels received US$455.5 million in investment, growing 7% over the same period last year, while the energy efficiency segment grew 32% to US$186 million.

Several U.S. regulatory developments in 2008 supported the continuing development of the cleantech market. The Housing and Economic Recovery Act of 2008 extended tax credits for wind energy, geothermal, biomass and other renewable energy projects, continuing and expanding an important source of financing for renewable projects. The Regional Greenhouse Gas Initiative, a mandatory cap-and-trade program to reduce CO2 emissions from the power sector in ten Northeastern and Mid-Atlantic states became operational, which will likely drive long-term demand for efficiency and emissions-reduction technologies. Missouri and Michigan joined the growing number of states with binding or voluntary renewable portfolio standards.

In the first three quarters of 2008, venture capital investment in European cleantech companies reached €481.8 million in 53 financing rounds, a 67% increase in capital raised but a decline of 15% in the number of rounds. As in the US, Energy/Electricity Generation attracted the largest share of European cleantech investment with €371.3 million raised 1Q-3Q 2008, a 220% increase. Wind was the largest segment with €182.7 million raised in 7 rounds. Solar was also a major contributor to growth in this category with 7 rounds totaling €139.0 million.

Other major European cleantech investment categories in this period include Environment with €49.9 million raised and Energy Storage with €24.8 million raised.

European climate change regulatory developments in 2008 were also favorable to the further development of the cleantech market. The United Kingdom passed legislation to reduce greenhouse gas emissions by 80% by 2050, becoming the first country to impose a legally binding national emissions-reduction target. Despite the global economic crisis, European Union leaders reaffirmed their commitment to the targets of cutting EU CO2 emissions by 20% by 2020, and obtaining at least 20% of energy from renewable sources and achieving an overall 20% reduction in energy use.

China

Chinese cleantech investment grew quickly in the first three quarters of 2008, raising US$165 million compared to US$29.1 million during the same period last year. The Energy/Electricity Generation category received US$95.8 million, up from US$4.6 million. Solar was largest component of investment in this category, raising US$85.2 million. The next largest category of investment was Industry Focused Products & Service, which raised US$54.5 million for companies focused on agriculture, consumer products, materials and transportation.

China has rapidly emerged as a cleantech manufacturing center, particularly in solar and wind, and is poised to benefit from the growing adoption of cleantech globally. Energy efficiency is an emerging segment due to the country’s large-scale construction activity and energy consumption. Makers of energy efficiency technologies see in China an opportunity to achieve scale quickly. Multinational corporations increasingly view China as a test market for intelligent network systems and sensors.

Israel

Israeli cleantech companies received US$76.5 million in venture capital investment in the first three quarters of 2008, up from US$31.5 million in the same period last year. The Energy/Electricity Generation category, consisting entirely of Solar companies, received US$46.5 million. Water was the other main focus of Israeli investment with US$18.2 million raised.

Market Drivers And Related Developments In Clean Energy

Broader investment activity in clean energy alone – that is excluding the non-energy sectors of cleantech – remained strong in the first three quarters of 2008, supported by healthy asset investment activity in the first half of the year.

Total new energy asset finance during the first three months of the year rose from US$74.2 billion during 2007 to US$89.7 billion in 2008, an increase of 20.9%, according New Energy Finance, a provider of information and research to investors in renewable energy, low-carbon technology and the carbon markets.

New Energy Finance reported a total of US$14.7 billion of venture capital and private equity invested in clean energy companies during the first three quarters of 2008, up from a total of $10.0 billion in the same period last year. However, clean energy IPOs during the first three quarters of 2008 dropped to US$9.4 billion, a decline of 33%, according to New Energy Finance. This reflects the impact of the financial crisis and rapidly falling value of clean energy stocks. At the same time, clean energy M&A transactions declined 17.3% to US$15.8 billion, primarily focused on targets in the Equipment Manufacturing and Developer & Power Generator companies.

Analysis of the carbon markets by New Energy Finance shows that in spite of the global economic turmoil the carbon market has continued to grow. Although carbon prices have come off the highs of May 2008, liquidity remains strong and substantially above the levels seen in 2007. The carbon market grew 81% over the first nine months of this year to reach US$87 billion (€68bn) by the end of Q3, and is forecast to break the US$100 billion barrier by year end to reach US$116 billion (€90bn). This growth is expected to continue to 2012 buoyed by higher prices and volumes, by when it should reach US$550 billion (€429bn).

This is “Global venture capital investment in cleantech accelerated in 2008 as a number of companies, particularly in the solar and wind market, entered the capital intensive stage of commercializing new technologies. This increase in activity has been stimulated by a strengthening corporate commitment to tackling climate change,” said Gil Forer, Ernst & Young’s Global Director of Cleantech, IPO and Venture Capital Initiatives. “However as the global financial crisis continues and the time from initial investment to exit gets longer, venture capital investors will likely moderate the pace of investment across all sectors, including cleantech,” added Forer.


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