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The Observer: The greening of the markets

With clean energy now attracting 10 per cent of venture capital cash being invested in Europe, David Teather looks at how the markets are moving into low-carbon technology

December 09, 2007

Dr Steve Mahon, chief investment officer at the venture capital business Low Carbon Accelerator, has a fixation that some might find slightly odd. ‘I am particularly excited about algae right now,’ he says.

Algae, he quickly goes on to explain, is one of the many alternatives to fossil fuels currently being explored, and has the potential to become a significant source of renewable energy. The slimy substance can be used to produce biofuels, and in theory will have a vastly higher yield per hectare than more conventional biofuel crops, such as sugar cane or rape seed. It also doesn’t compete for land with food crops.

‘There are a lot of crops for sugar cane or maze to produce bioethanol, but you are using land that has intrinsic value and that is always going to make the economics difficult,’ says Mahon. ‘With algae, you are not displacing arable land. It can have up to 70 per cent oil content and grows in a matter of days. You can also use saline water. So I think algae is extremely exciting and we are looking very hard at a number of companies.’
Low Carbon Accelerator is one of a growing number of venture capital or investment funds getting behind the clean technology or renewable energy market as issues around climate change and rising demand become more pressing, and as the political landscape has become more favourable.

It has made 13 investments to date, including a company called HelioDynamics, which is able to produce steam for industrial use with solar energy; Proven Energy, which provides small-scale wind turbines for the likes of Shell to power its offshore gas platforms; and Turbine Developments, a company spun out of Queen’s University, Belfast, which has developed a gas turbine engine that generates power from landfill gas.

Low Carbon Accelerator was listed on AIM, the junior London stock market, in October last year, raising £44.5m to invest in early-stage businesses. In the next couple of months it expects to have committed around 75 per cent of its cash, when it will begin to work on a second round of fundraising. ‘If you look at this market – how much money is coming in – people realise there are great growth opportunities,’ Mahon says. ‘The market drivers are here to stay.’


As little as five years ago, the renewable energy market was not seen as a place for sensible investors to put their cash. But in the past two or three years there has been a huge influx of private sector money pumped into the market.

According to forecasts from New Energy Finance, which publishes a monthly bulletin on the clean tech investment market, around $94.5bn will have been invested worldwide in clean energy during 2007 – a 25 per cent increase on last year. That includes $8.8bn of venture capital and private equity funding, $13.7bn raised on the public markets through initial public offerings or secondary offerings, and $46bn of investment in assets. The remainder is government and corporate spending on R&D and smaller scale projects, such as a warehouse installing solar panels.

The largest share of the cash is still going into wind, the most mature part of the renewable energy market, followed by biofuels and solar. The industry can offer a broad range of risk to meet any appetite. Many of the wind power companies and some solar companies are already profitable. Some of the more cutting-edge technology is still years away from commercial application, like algae, wave power or fuel cells, but could be the next big thing.

‘The primary issue is that companies have become a lot more profitable,’ says Ian Simms, who runs the environmental investment company Impax. ‘The cost of generating electricity from wind has fallen by 80 per cent in 25 years, so it is now competitive with new-build coal. We started tracking quoted stocks, and in 1999 there were 180 around the world. Today there are 600, and there has been a huge increase in the average size of those companies.’

There is something like $250bn a year of aggregate revenue, he adds. ‘This isn’t just about doing the right thing for the environment. We sometimes tell people that we are red-blooded capitalists to get across that we are here to make money for investors.’

If there were any doubt that renewable energy is moving into the investment mainstream it would have been dispelled by the rush of the large investment banks to get into the sector. In May, Citigroup, the world’s largest banking group, committed to an investment of $50bn in clean energy and alternative technologies such as wind farms, biofuels and solar panels over the next decade, including a $10bn investment to reduce its own carbon footprint. It is already backing a housing project on the Baja coast of Mexico where all of the electricity will be supplied by wind turbines.

Earlier this month, Deutsche Bank announced the launch of the DWS Climate Change Fund. The bank described the shift from a carbon-based economy as a ‘mega-trend’. Others to target clean energy with investment funds include Merrill Lynch, Schroders and Jupiter. Clean energy is also attracting more maintsream private equity and venture capital groups, including Europe’s largest, 3i.

Angus McCrone, editor of New Energy Finance, says growth in investment is running at 25-30 per cent per annum. ‘The first year that we saw really strong growth across the board was 2004. Then in 2006, the message got through in the US, which is the biggest market, that this is a real issue that has to be tackled, and at that point you started getting the investment banks committed to spending billions on renewable energy and the carbon market. So late 2006 was probably a second tipping point.’


Adam Workman, a partner at Carbon Trust Investments, says renewables have changed from ‘technology push to market pull’ – instead of new technologies being developed and looking for markets to penetrate, the market is now demanding low-carbon alternatives. ‘There has been a continual flow of events from Kyoto, to the Stern Report, to the oil price now heading toward $100 a barrel, to market leaders such as Tesco and Marks & Spencer saying they want to do something about this. Collectively that gives investors like ourselves confidence.’ The Carbon Trust has invested £8.8m across 11 businesses so far.

Climate Change Capital, a London banking group focused on renewable energy, closed a €200m fund in September with investors including HSBC, Alpinvest and Alliance Trust. Bruno Derungs, one of the partners managing the fund, says the market has changed significantly. ‘It had been very difficult to make money in this sector in the past, but the environment has improved in the past three or four years. The regulatory situation has been clarified and more long-term frameworks put in place. It is a more stable situation for investors and global warming has become a political issue, which is good for us as well.’


HgCapital closed a £300m fund almost a year ago and has committed a third of the money. Tom Murley, who runs the fund, says that the institutions backing the likes of HgCapital have become more comfortable with renewable and clean energy, even as recently as the past 18 months. ‘In pre-marketing, the first tranche of investors came in June 2006, and we had to spend a lot of time talking – there was a lot of education. By the second closing, people had accepted the premises and we were over-subscribed. It had clearly become a lot easier. People were much more up to speed on the market and the opportunities.’

The Carbon Trust suggests that clean energy is now attracting 10 per cent of the venture capital cash being invested in Europe, putting it on a par with semiconductors, biotech and IT. Among private equity deals in the third quarter, an infrastructure fund managed by Prudential M&G paid £145m to increase its stake in the UK’s largest wind farm owner Zephyr Investments to 66 per cent. Some 42 per cent of private equity investments across Europe over the past three years were made in UK companies, where there is a lot of entreprenerial activity, followed by Germany and France.

Private equity and venture capital firm 3i began actively targeting renewables and clean energy about two and half years ago, and has invested in companies including Solar Direkt in Germany and Spanish wind power group Gamesa. The majority of venture capital and private equity money is currently being pumped into solar. Much of the money going into wind is now larger-scale project financing from banks and utilities. Energy efficiency is another hot sector, particularly firms producing technologies that reduce the demand for power.

Hansjerg Sage, a director at 3i, says the firm was attracted to clean energy as the ‘returns became more visible’. The potential for profitable exits has risen as other investors look to take stakes and investment banks clamour to take clean energy companies to the stock market. At the more mature end of the market, in wind power, trade buyers have also started to appear in the shape of the large utlities. E.On recently paid $1.4bn for the Airtricity wind business in north America, while Energias de Portugal bought Horizon Wind Energy. In August, International Power paid £1.2bn for the Italian wind assets of Trinergy, outbidding specialists HgCapital and Babcock and Brown. ‘Clean technology has the chance to become an era-defining trend like the internet or mobile phones, so it is something that no real investor can close its eyes to,’ says Sage.


The rate of venture capital investment in Europe has lagged growth in the US, but that is partly explained by the number of companies raising money on the public markets in Europe, particularly London and Frankfurt. Companies are especially attracted to AIM because of the lighter regulatory regime and an investment community with an appetite for climate change stocks. There are around 75 clean tech companies listed on AIM (41 are UK-based businesses) with a combined market capitalisation of nearly €7bn.

One of those companies, XL TechGroup, has signed a licensing deal with Arizona State University for its algae-to-biofuels technology. Others on AIM include Climate Exchange, a market for carbon trading; and Clean Energy Brazil, a producer of bioethanol from sugar cane. The rate of IPOs has slowed because of turmoil in the markets, yet in the third quarter of this year, three new clean energy companies joined the market: IdaTech, producing fuel cells, energy efficiency firm Vphase and solar company Jetion holdings. Ten of the 18 IPO filings around the world in the third quarter were solar companies.

Investors on AIM have in many cases had a bumpy ride, some company share prices showing huge gains, and some dramatic losses. Investors who bought shares in Clipper Windpower when it joined the market in September 2005 are sitting on a gain of 1,078 per cent. Investors in Climate Exchange, who invested at its IPO in September 2003, have a gain of 1,178 per cent. Investors in China Biodiesel (down 67 per cent) have not been so fortunate.

The amount of money pouring into renewables has raised the spectre of a bubble, similar to what happened to dot.coms in the late 1990s. There has already been nervousness around the biofuels sector.

McCrone of New Energy Finance says: ‘One of our recent themes has been that perhaps the amount of venture capital being raised is increasing faster than the number of opportunities to invest.’

Derungs from Climate Change Capital says: ‘A fundamental difference here is we are talking about real assets being rolled out. If it is a solar plant, it has assets that produce electricity … and because you have real assets, they can be valued much easier, whereas with the internet and software it was much more difficult to value and people tended to get over excited.’

Murley at HgCapital notes just how high some of the valuations currently are. ‘Traditional utilities are trading around 18.8 times… I don’t think this is a bubble in the sense that the market will fall away, but I think it is a bubble in terms of expectation. Is there some irrational exuberance? Maybe a little. But I am a big believer in this industry.’,,2223966,00.html and its sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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