Global recession and cheaper oil have slowed growth in green start-ups but economic stimulus plans may aid the transfer to a sustainable green economy with the environment a key sector in the future global economy.
The current financial crisis, coupled with the volatile nature of the commodities market, has greatly reduced opportunities for clean tech start-ups. While this uncertain time has caused venture capitalists to withdraw support for such emerging eco-enterprises, freezing of credit has further exacerbated the situation.
A result is investors losing their appetite for early stage green ventures. Cleantech noted in April 2009 that investment in clean technology had fallen to €75 million. This represents a decrease of 41% on the previous quarter, and a drop of 48% from the same time in 2008. Clean technology has now declined for last two consecutive quarters.
The WilderHill New Energy Index, which tracks the stock performance of selected clean tech companies, is down more than 60% since it peaked in November 2007. Up to that point, it has outperformed the Dow Jones Industrial Average (DJIA) by about 50% in 2007. Since then, the fall in the WilderHill index has been more severe than the DJIA.. This is indicative of the general cooling of interest in green start-ups and typical for an emerging new technology sector in times of recession.
Global recession, frozen credit markets, risk aversion and lower crude oil prices have brought venture capital investment in green companies and clean technology to a virtual stand-still. As certain investors do not appreciate the specific requirements of clean tech start-ups, many have shied away; a shortcoming that has led to a funding gap.
While there is a willingness on the part of investors to support clean techs, many set the bar too high for developing enterprises looking to enter the market. "We were approached by one venture capitalist that wanted to invest €44 million but was only willing to do so in a company with over €1 million in turnover," says Dave Raval of the UK Carbon Trust TTP Incubator investment fund. "Wind and solar companies of that size are pretty rare."
The resulting drop in investment has already affected the development of important eco-innovation projects. The construction of the world's largest wind farm in Texas was cancelled in November 2008 because of lower oil prices and the change in global economics. This scheme would have supplied 1.3 million homes.
However, while experts agree that investment interest in green start-ups has waned, they are quick to point out that this is only a short-term blip. "No industry in history has kept up the kind of 40% compound growth rates ascribed to clean tech," points out Michael Liebreich, CEO of UK-based New Energy Finance. "Share prices had run up too far and it was time for a correction."
Patrick Sheehan of the Environment Technologies Fund - supported by the European Commission's Multiannual Programme (MAP) for enterprise and entrepreneurship - views this in a positive light, as what he describes as clean tech investment `tourists' have been replaced by astute bankers. "There are some funds now that will do early stage, but many still underestimate how much it costs and how long it takes to build these companies."
Lower oil prices have undoubtedly had a negative impact on clean tech start-ups. However, there are a number of reasons why this will only delay, and not prevent, the emergence of sustainable societies. For instance, silicon needed for the production of solar panels has fallen in price, making production cheaper.
The case for a green economy is as present as ever. The global recession has predictably lowered demand for oil and its price, but the challenge of finite fossil fuels and climate change is just as threatening. Once economies and industries begin to recover, the need for resources will rise and, in turn, drive up oil prices. The International Energy Agency (IEA) estimates that, once this growth resumes, fossil fuel demand will rise by 45%, pushing the price of oil up to €135 a barrel.
Moreover, the collective global concern regarding carbon emissions will continue to push the development of renewable and sustainable energy sources, regardless of the price of oil or the current economic crisis. The movement towards a more just burden-sharing of the costs of environmental degradation will decrease the price disparities between energy based on fossil and renewable resources. Equally, the financial and economic insecurities being felt around the world have brought into focus the question of energy security. The present situation has highlighted the advantages of renewable energy over foreign oil imports.
The global recession has necessitated a shift in the world's economic model. Such a change could benefit the environmental sector, particular as policy makers look to place a heavier emphasis on environmental technologies.
A March 2009 report from Boston University states that collectively the global stimulus packages account for €2.2 trillion. A high proportion of funds have been earmarked for green investments to reduce carbon emissions and enhance economic revival through job creation - so called green-collar jobs.
The €585 billion US recovery programme has set aside €75 billion for a variety of green measures, such as building retrofitting, expanding mass transit and freight rail, the construction of a `smart' electric grid transmission system and the increase of renewable energy supply. These investments will not only benefit the environment, but will also create over two million jobs.
In addition, a study carried out by the Peterson Institute of International Economics and the World Resources Institute indicates that, for every €750 million invested through the US green stimulus package, €335 million annually will be saved in energy costs.
In Europe, programmes to expand energy conservation and renewable energy supply, such as the EU Economic Recovery Plan, the Climate Action and Renewable Energy Package and the Sustainable Energy Europe Campaign, could create between one and two million new full-time jobs.
Furthermore, the stimulus packages introduced by the EU Member States are set to protect the development of renewable energy and clean technology start-ups across Europe. Denmark, Germany and the UK have all adopted initiatives to expand renewable energy supply. The UK's €110 billion Renewable Energy Programme is expected to create 160 000 jobs from 2008 to 2020.
Further afield, China has committed 12% of its €435 billion stimulus package to energy efficiency and other environmental-protection measures. And South Korea's `Green New Deal' will provide €28 billion for low-carbon projects, water management and recycling.
A new vision is critical to make the global economic recovery sustainable. Eco-innovation and a growing green industry are essential elements of this vision. Reviving growth, ensuring financial stability and creating jobs are essential objectives for all governments. But lack of vision and failure to tackle the imminent threats posed by environmental degradation and worsening global poverty any economic recovery will be short lived.
Boston University stimulus plans survey: http://www.voxeu.org/index.php?q=node/3156
Carbon Trust TTP Incubator investment fund: http://www.ttpgroup.com/carbontrust/
Environment Technologies Fund: http://www.etf.eu.com/
EU Climate Action and Renewable Energy Package: http://ec.europa.eu/environment/climat/climate_action.htm
International Energy Agency: http://www.iea.org/
New Energy Finance: http://www.newenergyfinance.com/
Peterson Institute of International Economics and the World Resources Institute study: http://www.petersoninstitute.org/publications/pb/pb09-3.pdf [358 KB]
Sustainable Energy Europe Campaign: http://www.sustenergy.org/
UK Renewable Energy Programme: http://www.berr.gov.uk
WilderHill New Energy Global Innovation Index: http://www.nexindex.com/
Performance of clean tech stocks in 2007: http://www.energyandcapital.com/articles/investing-cleantech-renewable/586