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Finance report

Solar dominates VCPE investment

Ashwini Bindinganavale, 29 Aug 14
After failing to crack the USD 1 billion mark for three successive quarters,venture capital and private equity investment in clean energy companies is on the rise again. Strong interest in energy-smart technologies and solar energy push VCPE investment to USD 1.6 billion in the second quarter as early-stage investors scent a turnaround in sentiment.

Venture capital and private equity investment in clean energy companies totaled $1.6 billion in the second quarter of this year, up 42 percent from 1Q and 36 percent from 2Q of last year. Bloomberg New Energy Finance recorded 52 deals that made up the $1.6 billion, compared with 76 deals and $1.2 billion of investment over the same period a year earlier. The lower deal count but higher investment from venture capital and private equity deals over April, May and June meant that the average transaction size was greater.

U.S.-headquartered battery manufacturer Boston-Power Inc. led the list of big deals in the latest quarter, with a $250 million expansion round. Venture capital and private equity investment in clean energy in the second quarter was dominated by two sectors – solar, at $720 million, and energy-smart technologies, at $695 million.

Biomass and waste-to-energy was a distant third at $123 million, while other sectors such as wind and biofuels hardly registered. The solar fiure was three times higher than in any other quarter in the last two years. Energy storage Lithium-ion battery maker Boston-Power raised more than a third of the total raised in 2Q by the energy-smart technologies sector, which includes energy efficiency, power storage, digital energy, electrified transport and fuel cells. Its $250 million expansion round by the company came as Elon Musk, founder and chief executive of electric car-maker Tesla Motors Corp., is pressing ahead with plans to build by 2020 a $5 billion battery manufacturing plant – dubbed the “giga factory.” According to Sonny Wu, chairman and acting chief executive of Boston-Power:“

The EV battery space is a $60 billion dollar market and getting bigger. Tesla addresses the high-end niche market soon to be crowded with BMW, Mercedes and many high-end electric vehicle cars targeting to enter the space. The global eco-EV market will be 100 times – if not 1000 times – bigger than the expensive (albeit nice-design) Tesla market.” Boston-Power, which has venture capital fims such as GSR Ventures, Foundation Asset Management AB and Oak Investment Partners invest in it, moved its mass operations to China while being headquartered in Massachusetts.

Wu, also the managing director of GSR Ventures, said that he is confient the battery manufacturer will be able to scale to a much bigger size. “We see demand for 50 gigawatt-hour factories in China alone in the next fie years and similar sizes in demand in the U.S., Latin America and Africa and Europe,” he said. Bandel Carano, managing partner at Oak Investment Partners, took a similar view. “

The reason Boston-Power can compete effectively in the long term is that it enjoys dramatic benefits due to the preferential logistics and supply chain advantage of scaling best-in-class mega factories in very close proximity to by far Solar leasing A third of the 52 clean energy venture capital and private equity deals in 2Q were in solar. Within that, there was a clear trend towards equity rising by financing specialists, with U.S. residential solar leasing companies SunRun Inc, Sunnova Energy Corp and Sungevity Inc raising $150 million, $145 million and $70 million respectively as they sought to capitalize on the rapid growth in their market.

Is this an indication of investors moving away from manufacturers and developers and more towards financing mechanisms? “I think it’s a trend,” said Alex Betts, partner at Climate Change Capital Private Equity, whose LED [light emitting diode] business Nualight has just received additional capital. “We have a business in the U.K. called Climate Energy which is doing energy efficiency projects for the residential market but also looking at the commercial market. The financing of installations is something we think is going to be a significant growing part of our business.”

He added: “We are thinking of raising capital for the installation only therefore offering an infrastructure-style return for the financier of the installation as opposed to raising the capital on the balance sheet of Climate Energy itself.” Earlier in April, SunPower Corp., the second-largest U.S. solar manufacturer, joined hands with Google Inc. to create a $250 million program to finance residential solar systems. The program will support solar leases for rooftop systems that use SunPower panels. Leasing is driving a boom in solar sales, especially in the U.S., because most require no money upfront for systems that cost thousands of dollars.

That’s made solar affordable for more people, helping spur a 38 percent jump in U.S. residential installations in the past year. Andrew Birch, chief executive of Sungevity, said in an interview with Bloomberg News in London on May 15 that the company doesn’t need fresh capital following its latest $70 million fundraising, which it completed on April 4, but that it may in time consider an initial public offering. It sees interest from investors in a market that’s set to accelerate. “It’s an exciting space,” he said. “Investors want multiple opportunities to play the theme, so it’s going to be an interesting time for investors and companies.”  

Sungevity, based in Oakland, California, offers photovoltaic systems in nine U.S. states, Australia and the Netherlands. It has raised more than $200 million to date from investors including General Electric Co. and German utility EON SE to drive expansion into new markets. The new interest in solar on the part of early-stage investors represents a sharp turnaround in sentiment from two years ago. “The solar sector on the manufacturing side was an absolute blood bath,” said Betts on why Climate Change Capital made the move away from renewable energy and towards energy efficiency. “The whole industry got exposed to massive amounts of capacity increase especially in China.

That sort of dynamic you have got to be careful about. When you’re investing in the efficiency sector, often the business models are more local – they’re more services orientated – and so as long as you’re getting your own market assessed correctly, you shouldn’t be exposed to the same kind of risks,” he said. The U.S. is currently already a bustling rooftop PV market, with companies such as those mentioned above offering commercial and residential customers long-term power purchase agreements for solar below t retail price of power, and securitizing the portfolios of assets created.

The U.S. federal and state policy support makes this extremely attractive, which also pushes up capex for PV systems as legal and financial firms arrange the incentive and take some of the benefit. Bloomberg New Energy Finance has modelled an Investment Tax Credit of 10 percent of system capex in the U.S. to 2020, after which the incentive is likely to be removed on the basis that it is no longer needed, but even this is not required for PV to compete in most of the northeast states. By 2030, Bloomberg New Energy Finance expects to see a 27-fold increase in U.S. solar power, from less than 6 gigawatts installed by end-2013, to 156 gigawatts, or 11 percent of the U.S. capacity mix. The research company’s recently published 2030 Market Outlook says that solar penetration would be even higher than this by the end of the next decade, but for the resistance from utilities, concerned about the loss of electricity sales as homes and businesses generate more and more of their own power from small-scale solar systems.

This resistance could lead to changes in net metering policies and the imposition of local charges on rooftop solar owners. Outlook The intriguing question following the uptick in venture capital and private equity investment in the second quarter is whether this is the start of a new trend, or just a blip. Venture capital and private equity interest in clean energy peaked in 2008, with $12.3 billion raised, but slipped to an eight-year low in 2013, at just $4.3 billion. If a new uptrend is to unfold, much is likely to depend on the energy-smart technologies sector, particularly areas such as storage. Wu sees a big EV battery market, but an even bigger storage battery market. CCC’s Betts, however, remains a tad more skeptical. “We’re looking to invest quite late-stage and we haven’t seen many businesses in energy storage which have gained significant commercial traction.

There are still a lot of technologies that have been going on to try and bring the cost of energy storage down so that it is more affordable and therefore able to be commercialized,” he said. A vital issue for venture capital and private equity funds will be whether they can achieve exits with some of the investee companies in their existing portfolios, to free up money for fresh opportunities. These exits have been in short supply in recent years, but with clean energy share prices on average double what they were at their lows in July 2012, this may be changing. Climate Change Capital’s private equity fund sold its investment in Orege SA, a wastewater technology company, in 1Q of this year. The exit gave CCC an internal rate of return of in excess of 30 percent – “2.2 times on our money which is perfectly respectable and a good news for our investor base,” according to Betts. The fund is looking to do a couple of partial exits this year, and has entered into an agreement with its parent company to enable the raise of another fund for which it is awaiting regulatory approval.

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