Don’t worry, this is not another polemic on climate change, but an attempt to give a high level understanding of the sector. There is so much in the media about the environmental crisis, and it’s become highly politicised, but what exactly are the new technologies, who is investing in them, what are the drivers and how does it impact the South West?

Even the name of the sector is varied – sustainables, green, low carbon, ethical, renewables, eco businesses – but from the US we have a moniker, Cleantech,  that is gaining acceptance. Abbreviated from ‘Clean Technology’ the sector is defined by Library House as ‘products or services that reduce or eliminate the environmental impact of currently available technology’. Its main divisions are energy, industrial, chemical and materials, and IT. This is good, because in turn they are investment areas that are familiar to VCs and the public markets.

Investment in Cleantech has soared to over billion p.a. in the last few years and is set to grow substantially: the sector has definitely gone mainstream. It’s a sector that is going to keep expanding for the next several decades, and it is full of opportunities for innovation and investment. In particular for us in the South West, it’s an area that holds great promise in terms of substantial inward investment and for start up prospects.

So what comprises Cleantech? Essentially there are two distinct levels in terms of investment quantum: the higher level multi-million pound funding of major sustainable projects such as wind farms, wave/tidal generation, waste processing and biofuel plants, and then the lower level of more modest investment into those areas that are the realm, typically, of the entrepreneurial SME. This lower level, from around £200k to £2 million, is focused mainly on the following areas -
    

• Heating – biomass, ground source heat pumps, solar panels   
  
• Micro-generation – wind turbines, photovoltaic panels, hydro turbine, fuel cells
• Ecobuilding and materials – insulation, glazing, paints, recycled material, efficient structures
• Other – for example waste, food

In aggregate, the value of the smaller ticket projects will grow to several billion pounds, and apparently some technologies such as fuel cells ‘could propel an SME to big ticket very quickly if the technology was particularly disruptive’ (Shell Springboard Report). Some of the minnows are already showing success: there were 30 Cleantech companies on AIM at the end of 2006, with a total market cap of £2.5 billion, ranging individually from £7 million to £400 million.

Many of the sector’s technologies have now reached the point where they are much more economically viable and practical. However, there is a long way to go before the world can, for example, rely purely on renewable energy. There are some interesting statistics that illustrate this –  the entire US grain harvest would provide only enough bio-ethanol to run 16% of US vehicles for a year. In the same breath you can also point out that the grain used to make one tank-full of fuel for a 4X4 would feed a person for a year.

Global energy demand will rise nearly 50% between 2005 and 2030, largely driven by China and India, partly because we now expect them to manufacture most of our goods (have we outsourced our industrial pollution?). The media has been focusing on climate change but many forget that the parallel crisis is the depletion of fossil fuels, which is actually the main driver of Cleantech investment. In addition to the depletion of these resources, we are being impacted by the political risks of gas and oil (think Iraq, Iran, Russia) and of course by the ever rising cost of fossil fuels. We all need to reduce energy consumption, and increase its efficiency at the same time.

Amazingly, one third of global energy consumption is used just to generate electricity. This is why it’s so important to generate more through renewable methods, including nuclear. The other two thirds of consumption is in transport, industry and buildings. Each of these has its own investment drivers; for instance transport has electrification, e.g. fuel cells, and biofuels.

In the UK, there are now some 300-400 Cleantech companies. The public sector has been involved in 45% of all investment, for example Oxford-based Green Biologics, a developer of bio-butanol, raised £560k which included £250k from the DTI – the rest was from Business Angels. A few specialist Cleantech investment funds have been established including Climate Change Capital (a £1 billion fund), Low Carbon Accelerator (£45m AIM listed) and the Sustainable Technology Fund (an Enterprise Capital Fund). However, mainstream funds such as 3i are also investing, particularly in wind farms and alternative fuels.

For the SME, the opportunities are being partly driven by a Government that has Kyoto and European emission targets to achieve, leading for example to tightening of building efficiency standards, which is encouraging the development of better insulation and heating products – in fact the emissions compliance market alone could be worth billions in the UK over time.

Back to the South West, there is a substantial amount of activity. On the big ticket side, it’s estimated that the region could provide 1000MW of onshore wind farm power (whether we like them or not, they’re going to multiply) and plenty of wave power. We have seen the launch of major projects just in the last few weeks. At the lower level, some examples: our firm has a number of clients in Cleantech, and I will mention three of them, to illustrate the diversity of the sector. Each has attracted investment, from sources such as Finance Cornwall –

Cloud Nine – modular eco-housing - www.cloudnine-living.com

Naturepaint – non-toxic, safe, oil free paint - www.naturepaint.com

Continental - underfloor heating, heat pumps and solar panels – www.continental-ufh.com

So is this all another dot.com bubble, with a risk of overheating? I don’t think so, and we’re not seeing the easy money associated with 1998-2000. Investors are more wary and there is a lot more realism, with robust due diligence and a demand for investment readiness. Investors want to see defensible IP, management strength, and scalability and longevity of product.

It is essential that we as business advisers have a good understanding of the sector and its dynamics. The Cleantech sector is quite diverse, not an easy option for investors but very exciting, and for the South West there are some great opportunities!

© The Mill Consultancy 2007

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