The regulatory and political pendulum is definitely swinging in favor of clean tech companies offering solutions to environmental issues. Truly new industries are being born.

The world population is set to increase by nearly 2 billion people between now and 2020, largely due to the growth of emerging countries. The direct implication is obvious: demand for natural resources will keep growing. We now consume two to three times as much oil as we produce. Over the past 30 years our planet has lost 30% of its natural resources and demand for fresh water could outstrip supply two times over by 2020. When supply is short, prices go up. Soaring commodity prices are the first indicator of overheating: in two years the price of gold and corn has risen by over 40%, while copper has gone up by over 70% and oil is now almost USD 100 per barrel.

Carbon is the answer

Over time, rising prices should help regulate demand, but not all natural resources carry a price tag. The most obvious example is air. What will make society preserve that particular asset? Carbon could be the answer. The European Union has already established a CO2 emission trading scheme attributing a de facto price per metric ton issued. CO2 quotas are trading at futures prices of around EUR 20 per ton, which ought to be high enough to penalize the big emitters. So companies are now facing a challenge on two fronts: availability of natural resources and carbon emissions.

It is time to innovate

Achieving sustainable growth in a world of finite resources seems difficult given current technology, production methods and consumption habits. Innovation thus seems vital to provide cleaner technologies that will help us solve this conundrum. We need innovation in three traditional areas: energy, water, and waste. Fortunately, investors are supporting ventures aiming to develop these new solutions. In 2006, the research provider New Energy Finance estimated investments in clean technology at USD 70.9 billion compared to USD 27.5 billion in 2004.

Renewable energies are still underused

The advantage of renewable energy is that once the initial investment has been made, the cost of producing the electricity is fixed for the next 20 years.

Today, eolian, solar and biomass energy only account for 2% of global electricity production (15% including hydraulic energy). The potential offered by these energies is therefore still under-exploited: in the case of wind power, just 0.2% of global capacity is currently used, while in the case of solar power, the percentage is much lower still. The aim is thus to bring more renewable energies into the mix.

The European Union has set itself a target of 20% of electricity production from renewable sources by 2020. Each member state must evaluate its natural resources to see which one is the most efficient. This is because all renewable energies are not suitable to every country. In Switzerland, for example, hydraulic energy is widely available and exploited to the maximum. Geothermics for the residential sector is also being promoted as an energy source. Wind-generated energy, on the other hand, is not seen as a future growth area as it takes up a large surface area.

Waste prevention: a market in its own right

The growing scarcity of oil and gas resources is an issue in the energy sector. As a result, waste prevention has become a market in itself coming under the umbrella of energy efficiency. The insulation of buildings provides an initial source of savings: a passive energy house consumes around five times less energy than a traditional home. Then comes the optimization of industrial processes, which allows a near 20% reduction in energy consumption, and the development of energy management and measurement systems for electricity producers. A specific example of a company in the energy efficiency sector would be the Schulthess Group,  which is based in Switzerland and best known for its washing machine technology, but Schulthess has also invested a lot of effort in providing heat pumps to residential customers. In fact heat pump sales increased 62% over the previous year.

Generating electricity from waste

Ever increasing amounts of waste are putting a growing strain on resources. The urbanization of emerging countries is one of the main reasons for this growth. The ideal solution to a growing volume of waste in tandem with growing energy demand is to use the waste as fuel. In the United Kingdom, the plan is to increase the proportion of waste thus used from 9% at present to 27% by 2020. China is heading in the same direction, with a target of 30% by 2030 compared with 1.5% at present. Covanta, an American company, is specialized in this sector with 20 years’ experience of the American market. They convert 15 million tons of waste into electricity every year.

The transport challenge

The European objective to persuade automobile producers to attain an average emission for their fleet of 140 g of CO2 per km is encouraging the development of more environmentally sustainable cars. Reducing average consumption, weight and design are the main factors which initially influence emissions. But the real challenge lies in adapting the engine to make it cleaner. This requires optimizing those engines currently in use and researching tomorrow’s model. Hybrid cars are coming on the market, as are engines running on hydrogen and liquid petroleum gas. The difficulty of these technologies remains the need to develop a new distribution infrastructure, which is a long and costly process… Another alternative transport fuel to oil derivatives is biofuel, which includes biodiesel produced from rapeseed or ethanol from corn. The issue here is to find raw materials that do not compete with food products. Second-generation biofuels should compete less with food as they are based on cellulose biomass.

A very favorable environment

Today clean tech companies have a clear picture of the future. The regulatory and political momentum is very much on their side, as public opinion is now more convinced than ever that ecological sustainability is a necessity.

Truly new industries are being created. Germany, which has been involved in renewable energy for a long time, has a first snapshot of the industry. Almost 214,000 clean tech jobs have been created, many of which are in unemployment black spots. This has cost the state EUR 3 billion in subsidies but has resulted in EUR 9 billion savings (less oil imports, cheaper electricity, etc.). This proves that environmental and social sustainability is compatible with economic performance.

César de Brito
Fund manager investing in clean tech companies