2011: What is in Store for Cleantech?

Date:   Wednesday , February 02, 2011

CleanTech is not a new phenomenon; it has been with and around us for some time now and is now a quite substantial industry. Its growth was a natural and evolutionary one, and has now attained heights no one would have thought it would a few years ago. The global warming, scarcity of resources, and the desire to be energy independent has made more and more companies wanting to go eco-friendly and unlike its cousin ‘GreenTech’, CleanTech proved to be a practical option for them as it helps them to reduce their environmental foot print without disrupting their business models. Governments, Investors, and Venture Capitalists around the globe have also seen and understood the relevance of the industry and supported it in its different stages of growth. The Treasury Grant Program, Section 1603 and the Advanced Energy Manufacturing Credit, Section 48C are examples for the U.S. Government’s participation in the sector, whereas, with the Renewable Energy Certification and Energy Saving Certification, the Government of India played its part. The $7.8 Billion investments by the VC in the U.S. CleanTech sector in 2010 has marked the second highest since the $8.8 Billion is 2008, shows the value VCs have assigned to the segment. Likewise in India in 2010 Private Equity firms invested $7.974 billion over 325 deals in the CleanTech space. While all these stands, let us not forget 2010 has passed and we are now in a new year, a whole new decade. What is there in store for the CleanTech industry in this year? What does its future look like? These seem to be the right questions to ask.

U.S. CleanTech Space
It is not an easy task to foresee the future of the industry. The CleanTech industry in itself is a combination of several industries, like semiconductor, energy, waste management, and so on. This means any disturbance in those industries, let it be economic, regulatory, or technology, will have their ripples in the CleanTech industry. A prediction by National Venture Capitalist Association (NVCA) and Dow Jones Venture Source also showed that only 28 percent of VCs are now interested in making an investment in this space, whereas another report by Dallas Kachan of Kachan & Co. refutes this and predicts 2011 to be a great year for the CleanTech industry and expecting a sustained worldwide VC investment, there seems to be a lot of confusion in the industry regarding its prospects in 2011. There are even people who compare the boom in the industry to that of the DotCom boom in the 90’s and are expecting a similar burst. Could this be true? “No,” says Sagar Gubbi, Co-founder and Managing Partner, Ecoforge Advisors. “There are three main things in CleanTech that makes sure this will never happen. Firstly the CleanTech companies are not over evaluated like the DotCom companies were, secondly the industry primarily deals with energy, water, and waste management all these are utmost necessity for the society, and finally the government and international policies are supporting the development in this industry,” he adds.

The global CleanTech product and service market is above $250 Billion in size and this is expected to grow exponentially in the coming years becoming four to five times bigger market by 2017. The market is large, the growth rate is high, and still the last two quarters of 2010 saw a dip in the VC funding in the sector, especially Q4 where there was a 17 percent drop from that of Q3. But there is nothing to worry about says Arati Prabhakar, Partner, USVP. “CleanTech has carved out a world for itself with in the venture capital space. And 15 percent of the whole VC investment last year, was in this industry and this is a huge number when compared to the one percent and two percent a few years back,” adds Arati.

According to VCs 2011 will provide the CleanTech industry with a more financially stable environment and they are expecting to see more positive outcomes. “Something I am looking forward to this year is the Power Fee Alignment. There is huge potential in these companies, but the national and global impact is not going to happen with Power Fee Alignment,” says Arati. She considers that the support from the government so far have been substantial, both funding and policy wise, and this need to continue for the sustained and smooth growth of the industry.

Indian CleanTech Space
When we look at the Indian CleanTech market we can see vast difference from the U.S. or the European or the Chinese CleanTech markets. To begin with, the market structure is different, the number of VCs investing in the space is comparatively less, people are less aware of the power quality and its role in energy efficiency, the major investments in energy sectors goes into the wind sector unlike the U.S. where the major investments are in the solar field, and so on and so forth. “In the last one year more VCs came to me that they did in the three years before. The Government is also spending a lot in the CleanTech industry. Then new technologies like Micro Hybrid inverters, which can be used to capture different sources like wind and solar and provide uninterrupted output, are emerging. All these together are going to change the whole scenario,” says Shwetank Jain, CEO and Founder, P2Power Solutions. “With automation of more and more equipment, the grid pollution, quality distortion in power, in the country is on a rise. Companies like ours are trying to put a check to this and so we have a huge market and future here,” adds Jain.

“It takes 15 – 20 years for us to achieve 100 percent electrification. Here both renewable energy and fossil fuel based infrastructure development are happening simultaneously as there is so much growth left in the industry. This gives us the great opportunity to be green in the very stage of building the infrastructure rather than replacing the existing fossil fuel based infrastructure with clean energy solution like in the west,” said Gubbi while talking about how different Indian CleanTech industry is from its western counterparts. Government support is very crucial in the CleanTech industry. The renewable energy, particularly solar, wind and hydro are supported by government policies both in India and in the U.S. and this is also a large criterion for the VCs to invest says Gubbi. He believes without the government support the VCs would have been much more cautious to invest in the industry.

The Renewable Energy Certification mechanism introduced in India November 2010 is expected to provide a large support to the CleanTech energy industry in the country. This mechanism mandates utility companies to buy a certain portion of their energy every year from clean energy sources. “Such initiatives from the government not only support the growth of the industry but also make them more commercially attractive for the investors,” claims Gubbi.

Role of Entrepreneurs in this Industry
Great initiative, innovative product, good customer service, to the point marketing campaign, all these are necessary factors for a company to be successful, but ultimately it comes down to the entrepreneur. It is according to his vision that the company goes forward and develops. Arati says, “Entrepreneurs are the reason VCs are funding in the space. To me the creativity of the entrepreneur is the most optimistic thing in the industry.”

No, the CleanTech industry is not a bubble like DotCom, it is not slowing down or fading or is going to burst, and it is not looking ahead for a bad year. VCs and CleanTech companies are expecting 2011 to be a promising year for the industry. The need of the hour is for the Governments to give the right amount of support to the industry, VCs to continue their support and participation in the industry, and the companies to come up with more innovative and creative technologies and products. If all these fit together properly the industry might just be in for an all time high in the space.