President George Bush’s announcement in the State of the Union Address in 2006 no doubt echoed in the minds of many; America was going to look for a more stable and sustainable source(s) of energy. This soon pored over into great enthusiasm for alternative forms of energy; anything that was green was soon going to flourish.  Governments had long made promises to invest into renewable energy, however due to other energy interests mainly that of big oil, subsidies and funds had often been cut off abruptly. This had left many companies burned and feeling that they may not be able to rely on the government to make plans in the long term. Private Equity and venture capital even though sometimes also short sighted, could perhaps thereby offer a better alternative to this more traditional form of funding.

 

Energy experts have also pointed to other distinct advantages, such as a more profit and result driven orientation as well as more discipline.  There are indeed many other synergies to be exploited as well. Silicon Valley investors had invested in semiconductor plants in the 90s, a technology with a great similarity to that of the silicon wafers needed for solar cells.  Also the know how of running technology oriented firms dependent on innovation and research has made it easier for firms to evaluate the prospects of ventures and projects. Investors have however become more shrewd about how to invest their money and are less prone to follow the hype of a new industry as opposed to 10 years ago.

 

On the one hand some are saying that there has been a flurry of firms emulating the out of the garage like start up story, with more then enough to go around.  A good number of fairs for venture capital have been set up with serious firms attending to evaluate and scope out the best the projects on the market. But voices are already being raised saying that there is too much money chasing too few projects. There are indeed lots of start ups; however more mature firms have already turned to another form of financing available with a great deal of success.  European companies which make up over half of the top 20 wind and solar firms worldwide for example are part of a market which has already raised $4.4 billion USD by issuing stock on European exchanges. Part of the reason for this is that the regulatory environment in Europe has made it easier for renewable energy firms to issue stocks on European exchanges.

 

 

One example of where private equity has had a tougher then expected time making inroads was existing biofuel plants. Throughout the summer of 2006 ethanol prices were at all time high levels and as a result farming co-ops and other industrial companies who owned biofuel processing plants were making very healthy returns on their investments sooner then they had expected.  Soon investors showed up offering to buy the plants, however farmer co-op boards and other ownership structures more common in the Midwest of the United States made this a difficult undertaking. The challenge is two fold in such an industry, owners of these plants have traditionally been active in a market (agriculture) which is used to cyclical down periods and long term drops in crop prices.  The farming community in particular is slow to surrender control of local plants which can act as mills or silos in some cases and are very happy to take a long term approach.  Archer Midland Daniels who operates the largest number of ethanol plants in the United States and is the world’s largest producer of corn, soybeans, and wheat has also announced plans to increase capacity, a company of this size which is already releasing great economies of scale with its experience and can ensure a constant supply has also meant that more focus has to be put into the science of biofuels for smaller firms to carry a unique advantage.

 

Structural barriers in industries such as biofuels have focused attention to the wind and solar as well as R&D for the moment at least. The key differentiator here amongst firms is often the processes they have developed or scientific knowledge they have to give them a leg up over the competition. Other technologies such as hydro surely are not nearly as attractive, due to their either small scale and or large scale requiring established players and intricate deals with national governments to bring projects on stream.  Organizations such as the World Bank or Chinese government who fund mainly large scale hydroelectric projects have also made the technology more of their own domain. Hydro startups also remain destined mainly for the third world and other nations with energy shortages. Venture capital and private equity at the moment seem more focused as such on developing solutions for nations which are highly industrialized and developed and need help replacing their heavy C02 producing power plants with cleaner more revolutionary clean technologies. This is where more often then not wind, solar, wave, and hydrogen can come into play. These technologies are where the potential for zero emissions can be realized and at less externality costs to the environment.

 

Part 3 tomorrow…..