Renewables and cleantech: picking a winner is still an uncertain ...

Renewables and cleantech: picking a winner is still an uncertain business 07 August 2009 When waste processing outfit Bioganix plc ran into funding trouble earlier this year it became the latest in a string of businesses to find itself on the compost heap.

Despite pumping several million pounds into designing and building plants that turn household waste into compost using anaerobic digestion technology, Bioganix struggled to get many local authorities to embrace the idea.

While a handful of customers agreed to deliver truck-loads of organic rubbish to the company’s industrial-size composters, most were taking far too long to make a decision – despite looming government rules forcing them to cut back on landfill. Those customers were simply not ready, it seemed, to start sorting out piles of rotting banana skins and last night’s vegetable curry.

The twist in the Bioganix story is that last month the UK government laid out plans for how it will reduce the country’s CO2 emissions by 34% on 1990 levels over the next 12 years. Five per cent, it declared, will be achieved by cutting emissions from agriculture, land use and waste – and a big part of that is support for anaerobic digestion.

Whether or not the new government backing would have changed things for Bioganix is a moot point. But in a wider context it emphasises the fact that while renewable energy and clean technology have emerged as hot topics for investors in recent years, picking a winner remains perilous. Not only are many companies developing technologies that may or may not prove to be the next big thing, entire industries can be made or killed off by the decisions of government.

Market uncertainty

In an interview with SmallCapNews.co.uk in January this year, Peter Linthwaite at CT Investment Partners, the investment arm of government-backed low carbon economy cheerleader, Carbon Trust, spelled out the problems faced by investors.

He said it was critical to be able to identify when the technology development and the market demand were coming together. “It is no use having a great piece of technology if the market is very conservative and companies are afraid to buy it because they are unsure whether or not it will work,” he said.

As a seasoned VC investor, Linthwaite’s investment approach towards infant companies in emerging market sectors echoes the lessons learned from mistakes made by other investors during the dotcom boom of the late nineties. While many argue that the tangible benefits of renewable and cleantech technologies companies are much easier to identify, others point to the fact that finding a company able to deliver long-term profits is a tricky business – and that makes investing in one of these businesses a particularly risky proposition.

A case in point is AIM and Nasdaq listed wave power specialist Ocean Power Technologies plc, which last month unveiled record losses – doubling in two years to $18.3m. Despite never making a profit, the company’s PowerBuoys, which generate electricity from waves, are in use in Hawaii, Spain and the UK and the company has some big defence customers, not least the US Navy.

More importantly for Ocean Power is the fact that key governments are making the right sounds about its technology. In its domestic market it has attracted US federal grants and is now piling more resources into making sure that its existing projects also get government support. In the UK, the government has earmarked up to £60m for wave and tidal energy projects, which includes up to £9.5m in the Wave Hub sub-sea socket off Cornwall, where Ocean Power is playing a key role.

It is a similar story at Tanfield Group plc, the British engineering group that makes electric vehicles. Last year it slumped to an £88.5 million loss because of the economic downturn following after three successive years of profits. Despite that, the company has received government funding support on both sides of the Atlantic. Indeed, this week it picked up US$10m from the US Department of Energy as a subsidy for private sector procurement of up to 100 electric vehicles.

While government support is underpinning interest in some sectors, others are being fuelled by mergers and acquisitions activity. Last month Solar Integrated Technologies plc, an American company that builds roofs with built-in solar panels, agreed to be taken over by Nasdaq-listed solar specialist Energy Conversion Devices. Energy Conversion’s £6.8m offer valued the company’s shares at 6.75p – close to its then trading price, but someway off its 90p per share value 12 months earlier. It appeared that shareholders had lost interest but a US group with an eye on the potential for solar power saw an opportunity.

It wasn’t the only one. In June, AIM-listed cleantech investor Low Carbon Accelerator Ltd increased its stake portfolio company Quantasol Ltd, investing £1.175m as part of an overall £1.975m funding round with Imperial Innovations. The move took Low Carbon’s investment in the company to £2.375 million for 41.4% of the equity. Quantasol is behind a third generation system of solar photovoltaic cells for use in concentrating photovoltaic systems.

Low Carbon’s shares have been on a rollercoaster during the last 12 months – starting at 50p last August, they have since dropped to 16.5p, jumped back to 50.5p, slumped to 18.5p and are now trading at around 30.4p.

Investment headache

While wild share price movements and feverish activity in the renewables and cleantech sectors has got some investors jumping for their wallets, others have been left rueing their misfortune. Just ask those that took a punt on Biofuels Corporation plc a few years back.

Biofuels was behind the construction of a massive biodiesel processing plant at Seal Sands in Middlebrough, which was officially opened by then Prime Minister Tony Blair in 2006. The company’s share price once hit 300p-plus before tumbling back down to 5p shortly before it self-combusted. Despite the good intentions, Biofuels never made a profit and was labouring under nearly £100m of debt before Barclays put it out of its misery.

Elsewhere and more recently US fuel cell developer PolyFuel Inc had its AIM shares suspended last month after failing to attract any more investment. Despite securing US$5m of grant aid from the US Department of Energy, the company behind energy saving laptop batteries was still scrambling for cash. Its shares endured a year-long decline from 10p to 4.4p, leaving it to claim that raising equity capital for AIM listed development stage companies was very difficult in the current economic environment. That was despite the fact that AIM companies raised a very healthy £1.4bn in secondary fundraising during the first half of 2009.

According to Niki Dixon, the head of technology at business advisory firm Grant Thornton, companies in the cleantech sector can still rouse the interest of investors despite a slowdown in the sector.

“Looking to the future, clean energy will become a crucial component of our global energy infrastructure and portfolio,” she said “Despite there being only a 5% growth in the sector between 2007 and 2008, where previously there had been a 56% level of growth between 2006 and 2007, interest from a range of investors remains strong.”

These views are reinforced by findings on the other side of the Atlantic which show that US venture capital investments in cleantech companies improved to $572m in the second quarter of 2009, up 73% over first quarter investment totals. Of note, however, is that while investors are showing a keener interest in the sector, the US venture capital numbers are still down on a year earlier.

Back in the UK, and Grant Thornton’s analysis indicates that despite the uncertainties of the renewables and cleantech markets, it is clear that a great deal of opportunity exists for running and investing in companies in the space. In particular, it reckons that UK businesses have the chance to exploit trends in the cleantech sector despite the economic slowdown.

Dixon said: “UK businesses have the opportunity to take advantage of new trends but must be ready to deal with global competition for investment.

“The UK government commitment to creating a low carbon economy will reinforce the appetite for investment in wind, biomass and waste to energy projects at home but UK business also has the expertise to benefit from the global focus on low carbon technologies such as carbon capture, energy efficient building technologies and energy storage and distribution.”

Meanwhile investors will be left pondering which of those sectors will offer the best gains. With markets widely expected to start settling down during 2010, and government support for renewables and cleantech companies beginning to build, there are bound to be some big winners and some equally big losers in the years ahead.

Ben Hobson, SmallCapNews.co.uk