This article excerpt is taken from the July/August issue of Renewable Energy Focus magazine. To register to receive a digital copy click here.
Around a decade ago, renewable energy/cleantech emerged as a recognised investment class distinct from the broader power and technology sectors. Since then, the vast majority of investment into the sector, both quoted and unquoted, has been deployed in wind and solar, encompassing project assets, technology and the manufacturing/supply chain.
According to data compiled by Clean Energy Pipeline, more than 73 per cent of all cleantech and renewables investment since 2009 has flowed to wind and solar.
This is not an unreasonable outcome given the relative maturity of those technologies. However, the fact the overall allocation of investment to the sector has been very limited compared to other industries (i.e. oil & gas, traditional power, etc.) means there has been significant underfunding of other parts of the cleantech and renewables universe.
The concentration of money in wind and solar has contributed to overvaluation of many investments in those sectors, particularly in the solar technology and manufacturing supply chain. When combined with structural changes in those industries, primarily the entrance of Chinese manufacturers, the result was significant losses for some investors (although early entrants did enjoy a number of notable successes).
More recently, this has been exacerbated by the under-pricing of political risk, as manifested in unanticipated changes to regulation and levels of government subsidy: prominent examples include the Spanish renewables sector (effectively changing tariffs retroactively) and the UK solar sector (last minute policy change).
This experience has caused a number of investors to reduce or discontinue their investment across the cleantech/renewables sector as whole.
False perception of risk
Those investors who remain committed to cleantech and renewables, as well as new entrants to the asset class, should recognise the existence of a diverse range of other sub-sectors outside wind and solar and that the risk profile of investments in these areas is not as great as has been generally perceived.
A number of other technologies are now reaching maturity and, in many cases, enjoy strong commercial drivers that are independent of direct Government support. Investment in them brings the benefits of diversification and risk reduction across the portfolio.
In this series of articles, we explore some of the many areas in which Turquoise sees significant growth potential. These opportunities can be broadly grouped together as:
- Renewable energy generation (including associated supply chains) outside wind and solar; and
- Resource efficiency, including energy, water and materials (including both manufacturing and recycling).
1. Geothermal heats up
On the energy generation side, one exciting area is geothermal. While this is not a new technology, and has been widely deployed globally, it remains underexploited in some geographies and in certain applications.
Turquoise has been involved in raising funds for a project developer targeting deep hot water reservoirs for combined heat and power in southern Germany, where there are significant proven geothermal resources yet to be developed and an attractive tariff.
In addition, the Low Carbon Innovation Fund is finalising an investment in a developer of geothermal heat projects in the UK, targeting medium-depth hot water resources to feed district heating networks to be built out by a leading utility and benefiting from the Renewable Heat Incentive. Although both business models do depend to a large extent on public subsidy, they are operating in niche areas where the total cost to the relevant Government is very limited, making radical change unlikely.
There is a perception among some investors that geothermal is a high-risk activity because of the need to drill wells. This ignores the vast pool of expertise that exists within the oil & gas industry, as well as specialist geothermal service providers, which substantially de-risks what are, by oil & gas standards, technically straightforward wells (being onshore and not excessively deep).
Moreover, the insurance industry is able to provide a range of risk mitigation options for drilling. Lastly, for heat applications, there is less resource risk as heating networks can function with lower water temperatures than are required for electricity generation.
2. Marine motion
Marine energy is another sector that holds significant potential even though financial investors have, to date, found it to be extremely challenging. The main issues surround the cost and timescale for bringing a complete marine energy generation system to market, as well as difficulties in evaluating the best technical approach among the huge variety of different designs being proposed.
However, a considerable amount of money has already been spent across the marine energy sector in finding out what does work, what might work and what doesn't work. These learnings can be capitalised on by later entrants to produce more effective designs at lower development cost.
Particular areas of opportunity include specific components or sub-systems, such as platforms or other infrastructure, which reduce the cost of both the initial installation and on-going maintenance of the core energy generation system. Examples of companies active in this field are Oceanflow Energy and Sustainable Marine Energy. This approach translates into a play on the industry as a whole by addressing one of the key cost barriers to large scale deployment of marine turbines whilst avoiding the need to pick the winning generation technologies.
There is also potential in niche generation applications such as Trident Energy, which attaches to existing offshore platforms and harvests wave energy to supply power to oil & gas and wind farm installations.
3. Beyond food vs. fuel – sustainable biofuels
There are interesting investment opportunities in the biofuels sector, created in part by a lack of understanding of the complexity surrounding different categories of biofuel, sources of feedstock, process technologies and regulation. As with the marine sector, significant amounts of capital have been lost in biofuels in the past, predominantly in European biodiesel and US ethanol.
However, for new investors to the sector, there is an opportunity to learn from this experience and exploit new areas of opportunity.
In terms of first generation biofuels, the main opportunity is in European bioethanol where, despite proposed changes to regulation, current installed capacity is inadequate to meet mandated blending requirements for road transport fuel. Project developers such as Vireol, who have secured prime locations in large petrol markets and that are close to feedstock and transport hubs, are well placed to benefit in the period through to 2020.
In the biodiesel sector, which has experienced the greatest pressure on feedstock prices and food-versus-fuel conflicts, there is a pressing need for second generation technologies that use non-food feedstocks.
There is also a large opportunity in cellulosic ethanol in the US and Brazil in particular for the retrofitting of new technologies to existing first generation plants in order to significantly improve yields and/or convert them fully to second generation processes. A range of companies in the US and Europe are now developing biofuel and renewable chemicals technologies, some of which have reached commercial operations.
In part 2 out soon - Resource efficiency, Water, and The importance of data.
Turquoise International is a merchant bank specialising in Energy and the Environment. Established in 2002, it is active in corporate finance advisory, including fundraising and M&A, as well as venture capital investments through the Low Carbon Innovation Fund (LCIF) and Turquoise Capital.
About: Ian Thomas is a managing director of Turquoise International, a London-based merchant bank specialising in Energy and Environment.