The financial returns in clean technology

What is CleanFinTech?

The future of clean energy and technology is not only about R+D, science, or technology; but how to achieve access to finance. The fossil fuel industry continues to be subsidised and has been for decades. With large tax breaks, geopolitical interests and government backing. Renewables have had a hard time competing against this backdrop of hidden incentives. Combine this with a reduction in VC investments since the 2008 financial crisis. Many financial institutions, pension funds, mutual funds and government investments shone away from cleantech, back towards the internet industry, telecommunications and healthcare. To place this in perspective the value of venture capital in the third quarter of 2018 amounted to 10.65 billion U.S dollars in the internet industry compared against 271.24 in energy & utilities (only a part of this in clean technologies). So is Cleantech a safe bet for investors? Does Fintech help?

So is Cleantech renewable energy

Cleantech is much more than just renewable energy. Cleantech is the creation of sustainable environmental solutions, green products or services and clean energy with a focus on profitability. This includes areas such as electric cars, hydrogen fuel cells, high capacity batteries, harvest energy, wind, solar, biofuels and water purification. Cleantech began to be the turn to industry for investors after the 2001 tech bubble crash.

What do we mean by Fintech

Fintech is the development of financial services which helps institutions, companies and individuals manage their financial operations and lives through software and algorithms either on computers or smartphones. Financial technology began with the large back end development of software of the traditional global banking industry with the creation of SWIFT transfers, online account viewing and electronic share trading. However a shift towards the consumer with increased innovation or automation has led to the creation of: online banking, financial advice, new payment methods, wealth management, automated accounting, new lending and borrowing, fundraising or crypto currencies. Financial innovation has led to blockchain, decentralised ledger systems, smart metering to dynamic ways to create asset backed securities, green bonds, carbon credits, and environmental minded derivatives.

Size of Cleantech and Fintech

Global investment in renewables surpassed $200 billion in 2017, with $2.9 trillion invested in sources like solar and wind power since 2004. China a huge investor in the world in the sector, invested $126.6 billion in 2017. The United States on the other hand continues to decline its investment in the industry which fell to $40.5 billion in 2017. The largest investment segment in 2017 was project finance, at $216 billion. Institutional investors contributed around $10 billion of this, divided between direct investment, project bonds and investment in specialist infrastructure and private equity funds.

The Frankfurt Stock Exchange (FWB), London Stock Exchange (LSE), Madrid Stock Exchange (BMAD), New York Stock Exchange (NYSE), as well as (NASDAQ) and (OTC) as well as the Toronto Stock Exchange (TSX) and the TSX Venture Exchange boast numerous clean tech and renewable energy companies.

Fintech startups received $17.4 billion in funding in 2016 with 26 fintech unicorns globally valued at $83.8 billion. North America produces most of the fintech startups, with Asia a relatively close second. Global fintech funding hit a new high in the first half of 2018 led by a significant uptick in deals in North America. $57.9 billion were invested in 875 deals and Asia could soon surpass the United States in fintech deals.

Classifying clean technology as an asset

Increased concerns in climate change has drawn headlines again back to renewable energy. Clean energy infrastructure provide, long term contracts and cash flows against maturing liabilities. These investments can be inflation linked, create calculated yields, stable income returns and dividends. Alternative energy is definitely here to stay and provides stability against merchant sales into wholesale power markets while offering a logical transition to a low carbon economy and carbon neutral credits.

Holding onto assets in low risk, low volatility jurisdictions such as Europe, Japan and North America creates a steady and predictable asset. Cost reduction continues to dominate the clean energy market with a 90% reduction in the past decade alone. As oil prices rise from their recent lows, gas and electrical prices will see increases once again. And traditional energy companies are still heavily invested in petroleum, coal and nuclear solutions offsetting large amounts of their carbon simply by purchasing carbon credits. As battery storage improves, smart metering continues and demand data grows the cleantech industry looks set to support the investors.

Renewable energy asset holder include energy utilities, insurance companies, pension funds and asset managers such as Blackrock and Brookfield. Increased renewable targets in Europe increases the profit potential in the primary market.

Financial risk adjusted returns

Returns remain attractive between 6-10% between solar, wind and biomass. In calculating risk asset resource quality, project construction audits, resource volume and prices are the main risk items to address. Each technology requires prudential asset management and understanding of the asset risks from resource volatility in wind to fuel prices and supply in biomass. One should also manage risk by avoiding highly levered transactions. Low leverage removes one source of income volatility, reducing the impact of a tariff cut such as what happened in Spain.

Some technologies are still testing profitability, tidal is expensive, battery business models are not yet cost-effective. Both critical mass and scale need to be achieved in these emerging technologies, to create an industry which supports the investor. Will they become infrastructure assets or opportunities for investors. Battery storage is a game changer for the renewable energy sector but the expected pace of price reductions challenges the model to cover the amortised cost plus residual value. Again risk mitigation is more about achieving asset management optimisation. 

Cleantech offers secured return expectations which suits pension funds very well while institutional investors becoming comfortable with the asset class. Also ethical related company investments are on the upside and remains attractive as a stable, long-term cash-flow.

Cleantech safe bet for investors?

Yes they are after more than 30 years of continual investment. Al Gore’s documentary An Inconvenient Truth released in 2006, who we met in 2008 focused on climate change and took the topic main stage with the investment world following the clean technology sector. That same year venture capital funds invested $1.75 billion into cleantech startups, dwarfing the hundreds of millions invested in previous years. With higher oil and gas prices and favorable U.S. government policies the market grew. By 2011, VC funds alone had invested over $25 billion in cleantech startups.

Having experienced a whole set of policy developments and proven technology yield will depend more on purchase price, project lifespan and other factors underpinning net asset value (NAV). Average lifespan of hydro is 40-years, solar 30-years and onshore wind 25-years. NAV also depends on the reliability of cash flows and the balance of merchant versus contracted income. Typically, wind and solar assets derive revenues both from support regimes, per megawatt hour of generation and from electricity sales on wholesale power markets.

Where cleantech investors need to be cautious is with evaluating new technologies, prototypes, science innovation combined with entrepreneurial know how of the individuals or company who are creating these new technologies. The product might not have market fit or be transformed into a profitable venture and this is key to analysing new ideas.

Does Fintech help?

Yes. The sector requires a more diverse set of actors and innovation models. First early-stage cleantech startups need high amounts of upfront capital. A lot of this funding goes towards research & development to address the technology and market risks of the solution. This research & development takes time, does not guarantee success, and may require years to reach the market. Universities are excellent research centres and government support in research and universities mitigates the risk to investors.

Fintech also address the desires of newer generation who may be more risk-tolerant and provide patient capital with a longer term objective and social returns from cleantech. Funding like this can be created through crowdfunding, government support grants, philanthropic investments, angel investors and distributed funding sources.

Fintech also creates innovative funding models which unlocks early-stage funding. Projects in distributed solar funding in countries such as Pakistan have seen how a household may install solar panels on his roof even though he may not be able to finance the investment due to interlinked houses purchasing the energy and backed financing on the number of houses in that interconnected smart community. More fintech investors geared towards cleantech are needed.

Each investor has his own investment model thesis with unique objectives and goals. Fintech provides new opportunities to consumers with different investment thesis looking to support cleantech long term.

Traditional investors driven by short-term above-market returns, may not dedicate the time needed to cleantech incubation or the wait time required to achieve long-term success. A dynamic community of investors brings their own business contacts and technical know how to support their investees.

If current investments in existing cleantech solutions doubled, fossil fuels would still provide two-thirds of our energy needs by 2030 so there is plenty of growth potential. As global energy demand grows so does the cleantech sector. Fintech provides the opportunity to diversify funders and provide innovative approaches in targeted support. If we can provide the right capital and support a 100% clean energy future will be possible.