Cleantech 2012: clouds gathering

Is cleantech investment headed for decline? That's the prediction from advisory group Kachan & Co, as sector confidence and policy support diminish amid a global macroeconomic maelstrom. But there are some silver linings.

It's that time of the year again, when cleantech industry experts publish their reviews of the ideas, companies and investment trends for the year that was, and their predictions for the year to come. One such report is the annual 'reflection' on cleantech VC invetsment by US research and advisory firm Kachan & Co. And this year, they're predicting stormy weather, with the chance of decline.

"There are eggshells across the sector for 2012," writes managing partner Dallas Kachan, a former managing director of the Cleantech Group. "Global economic uncertainty in particular is leaving some sceptical about the chances for emerging clean technologies. And those who watch quarterly investment data, or who look only in a single geography (e.g. North America) may have seen troubling trends brewing this past year. But the true story, and the global outlook for the year ahead, is – as it always is – more complicated."

Kachan says that, while sector investment has risen for the first three quarters of 2011 – already at $6.876 billion and heading to an expected $8.8 invested into cleantech globally – as the firm predicted this time last year, Kachan & Co expects it to fall in 2012. "Not dramatically," he qualifies, "but we expect cleantech venture in 2012 as measured by the data providers ...to show its first decline in 2012 following the recovery from the financial crash of 2008." And while there are factors the company expects will contribute to the health of the cleantech sector, they're outweighed by causes for concern.

So what are those factors Kachan expects will help boost growth in cleantech investment? They are:

– China: "We put a lot of faith in China’s central government and the seriousness with which it views this sector as strategic," says Kachan, pointing to the country's pledge to create 9 million new green jobs in the next five years, as well as its good track record in executing its five-year plans.

– Rise in oil prices: Not just because oil is running out, but because of what Kachan calls a "little-known fact: there’s been a decline in the quality of oil the world is seeing on average. And the poorer the quality of the oil, the more it costs to refine it into the products we require. Oil prices are headed up."

– Corporations playing leadership roles.

– Solar innovation.

– Persistence of the fundamental drivers of cleantech investment and innovation, not least of all "that climate thing."

And the causes for concern:

– Investor fundraiser climate tightening: VC limited partners have been "grousing about cleantech for years," says Kachan. "But the politicising of the Solyndra bankruptcy has amped the rhetoric higher than ever, and will foster a self-fulfilling prophecy in 2012, particularly in America."

– Waning policy support in developed nations. The obvious example here is the US, but references to the UK, Germany and Spain are also made.

– Lag time of negative sentiment

– Perennial concerns about exits and IRR

– Macro-economic turbulence: see Arab Spring, Peak Oil, Occupy movement, food vs fuel, debt crisis.

As for the trends we can expect to see in the cleantech sector in 2012, Kachan says to watch for "even more cash-laden companies to continue to buy their way into clean technology markets in 2012, supplementing the role of traditional private equity and evidencing a maturation of the cleantech sector;" and points to this year's examples of General Electric, Schneider Electric and BP. He also says to look out for a retreat in investment in energy storage technology; for marine energy to begin its coming of age; and for increased water and agriculture sector activity.

Interestingly – and in sharp contrast with the IEA's recent predictions on solar – Kachan says that the reason his firm is not bullish on storage is that finding solutions to the intermittency of solar and wind power might soon turn out to be less important. "We believe that utility-scale renewable power storage might be obviated if utilities embrace other ways to generate clean baseload power," he says, pointing to "safer forms of nuclear power," renewable natural gas, "or even geothermal (gasp!)" or marine power.

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