Global Economics

Where Smart Money Is Going in Cleantech


Investment by Europe's cleantech venture capitalists is shifting from energy generation to such energy-efficiency plays as smart electric meters

The scenic Geneva lakeshore—complete with luxury houses and boutique fashion retailers—seems an odd place to tackle climate change. But in a five-star hotel on the Avenue de France in the center of the Swiss city, clean technology entrepreneurs, venture capitalists, and bankers gathered on June 17 and 18 to do just that. The agenda: Identify Europe's leading cleantech startups and make deals to fund the fight against global warming.

The summit, organized by the nonprofit European Tech Tour, comes at a tough time for the nascent green sector. Global venture capital investment in cleantech, which encompasses everything from solar panels to energy-efficiency lightbulbs, fell by almost half in the first quarter of 2009, compared with the same period a year earlier, to $1 billion, according to researcher The Cleantech Group. If broader mergers and acquisitions activity is included, consultantcy New Energy Finance calculates that investment in green energy similarly halved year-over-year, to $13.3 billion in the first quarter of 2009.

"This year could be considered the first down year for cleantech," says Richard Youngman, Cleantech Group's managing director. "That's not surprising after the growth we've seen over the last six years, but the long-term drivers [for cleantech investment] remain in place."

Cleantech: A Stimulus Favorite

The global downturn may have cut spending, but policymakers on both sides of the Atlantic have targeted cleantech spending to jump-start domestic economies and tackle climate change. U.S. President Barack Obama's $787 billion stimulus package puts aside $80 billion for green energy projects. That includes subsidies for infrastructure investment, tax breaks for new manufacturing, and government cash for green energy research and development. In Europe, politicians in Brussels, as well as in capitals across the Continent, similarly are expected to spend roughly $54 billion on everything from clean coal technology to more energy-efficient cars by the end of 2010.

With politicians singing the praises of cleantech, entrepreneurs and venture capitalists meeting in Geneva remain cautiously optimistic. The credit crisis has unquestionably dampened prospects for profit in the short term, but there are still opportunities to score big. One theme many of the summit's participants highlighted during coffee breaks was the shift in where people are targeting their investments. With many renewable energy technologies, such as wind and solar, becoming more mainstream, investors are changing gears toward energy efficiency—such as smart electric meters that allow people to control the amount of energy they consume—in search of new profit opportunities.

"The trend had been around for a while, but in the last six months it has really picked up," says the Cleantech Group's Youngman, adding that the multimillion-dollar investments now needed to fund traditional green energy projects had put off many venture capitalists.

Consumption Cuts: Faster and Cheaper

The move from energy generation to energy efficiency was evident among the entrepreneurs in Geneva schmoozing with venture capitalists. They included such companies as Britain's AlertMe, a startup that uses smart-meter technology and Internet-connected home appliances to provide minute-by-minute updates to customers on how much energy they're using. Chief Executive Pilgrim Beart says AlertMe technology can cut electricity consumption eight times more cheaply than building new renewables such as wind farms and solar parks. That's because it reduces household energy use instead of requiring costly new energy infrastructure.

Venture capitalists, particularly those who fund early-stage investment, are switching investment strategies, but larger green energy projects are still pocketing big bucks from utilities worldwide. European renewables giants Iberdrola Renovables (IBER.F) and EDP Renováveis (EDPR.LS) are planning to spend roughly $13 billion by 2012 in the U.S. on new wind farms. Denmark's Vestas (VWS.CO), the world's largest wind turbine manufacturer, intends to spend $1 billion on new manufacturing plants in Colorado. Unlike VCs, though, these companies have deep pockets to fork out the necessary capital for green energy projects.

Without similar piles of cash, private investors now are focusing on quick, easy-to-implement energy-efficiency companies that won't take many years—and billions of dollars in funding—to turn a profit. Says one VC in Geneva, who declined to be quoted: "Why would we spend lots of money to fund a technology that may only break even in 2020? That's not a smart way to make a profit."

Scott is a reporter in BusinessWeek's London bureau .

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