As funding for coal- and gas-fired power generation continues to decline, investors long leery of so-called “clean tech” plays are taking a shine to renewable-energy start-ups and other carbon-reducing technologies.
more than 100 globally significant financial institutions have implemented policies restricting investments in carbon-intensive fossil fuels like coal.
That’s got investors — from major global investment banks to billionaire philanthropists such as Bill Gates, Jeff Bezos and Jack Ma — looking at renewable energy differently than they did just a few years ago. Shifts in energy market trends, investment patterns and the global mindset toward climate change are creating new rationales for investments in companies and projects in the clean energy space.
But the technologies themselves — which range from more efficient means of generating renewable energy to distributed grid storage systems and better battery technology — have also evolved substantially since the last renewable investment boom tapered in the wake of the 2008 financial crisis.
“In the last few years, the number of technologies ripe for investment has expanded dramatically,” said Ravi Manghani, research director for energy storage at Wood Mackenzie, an energy research and consultancy firm. “It’s no longer just three or four technology verticals.”
That’s why Gates, Bezos, Ma and dozens of other high-net-worth individuals (including Michael Bloomberg and Richard Branson) launched Breakthrough Energy Ventures (BEV). The $1 billion fund will forgo near-term returns on investments, providing much-needed time and operating capital to researchers and companies solving difficult technical problems in the capital-intensive renewable energy space. The fund currently lists 14 companies in its portfolio, ranging from startups working on battery and grid storage technologies to companies developing better geothermal and even fusion energy generation systems. Investments range from $200,000 to $20 million, depending on each company’s needs and stage of development.
In a February research note, UBS analysts pointed to trends in urbanization and population growth, technological progress driving cost advantages in the renewable space and an improved regulatory environment as factors driving the long-term viability of renewable-energy investments. Globally, cumulative investment in renewables will surpass $9 trillion by 2050, they say, while cumulative investment in energy efficiency and clean-air technologies will balloon to $35 trillion by 2030.
Meanwhile, investments in coal dropped by a third in 2017 (IEA numbers for 2018 are not yet available), the second year in a row that coal- and gas-fired investments experience a pullback. And while global investment in clean energy technologies was down slightly last year when compared with 2017, the $332.1 billion that poured into renewables and grid technologies marked the fifth year in a row investment topped $300 billion.
Institutional investors such as UBS are following the same trend lines start-ups and private project financing firms have been following for some time. “There are a number of trends that we see,” said Ramya Swaminathan, CEO of Malta Inc., a maker of distributed thermal electricity storage, and a former public finance banker in the energy sector. “For the first time in [10 to 15 years], renewable-energy sources are cheaper than carbon-intensive sources of electricity.”
“At the same time, we’re seeing electrification of a variety of [industry] sectors worldwide,” she added. “Then there is an increased focus on sustainability, carbon footprint and climate change.” For firms like Malta looking to bring renewable-energy-enabling technologies to market, “circumstances are about as favorable as we can imagine,” she said.
Malta’s technology allows energy grids to store excess electricity during times of peak production for redistribution to the grid when production decreases, a key enabler for weather-dependent clean energy sources such as wind and solar. The company has been a beneficiary of renewed investor interest in renewables and a shift in thinking about how they are funded. Breakthrough Energy Ventures led a Series A funding round for Malta in December that raised $26 million for the company.
BEV has promised “patient capital,” hoping to mitigate one of the key issues hampering renewable energy companies and project developers. Developing and scaling new energy technologies has historically proved time-consuming and capital-intensive — not to mention technologically risky — characteristics that have in recent years made investors looking for quick exits and near-term return on capital wary of the space.
By putting an emphasis on bringing new and disruptive technologies to market over near-term returns, BEV hopes to prove the long-term viability (and profitability) of its portfolio companies, enabling them to scale.
Historically, start-ups developing new renewable energy-enabling technologies or developing clean energy projects have experienced difficulty raising funds from institutional investors, in part because of long development timelines and sizable technical risk. But particularly on the project financing side of things, renewable-energy projects suffer from a lack of familiarity. Institutional fund managers simply don’t have a thorough understanding in the renewable energy industry and the potential returns to be had there.
“There are huge opportunities, but it looks completely unfamiliar if you’re a pension fund — it just doesn’t look like the project finance you’re used to,” said Rob Day, managing partner at Boston-based investment firm Spring Lane Capital. “They see these trends, and they take a step back and say ‘we have to figure out how to play this from a 30-year investment perspective.’
“And I would say they’re actually frustrated by the paucity of good options being shown to them right now,” he added. “There are literally trillions of dollars sitting on the sidelines trying to be shown a good way to be put to work.”
Deals are often too small, as well. For major funds looking to deploy $50 million at a time, financing a $5 million renewable energy project or sinking $12 million into a grid storage start-up can seem trifling. Firms like Spring Lane Capital use their expertise to help connect financing dollars with meaningful projects, Day says, but a fundamental disconnect remains, necessitating new funding models. “If you have some of the world’s fastest-growing markets, and the existing investment models haven’t show that they can reliably make great returns off of that, you have to blame the investment models and not the markets.”
The models are coming around, however. Earlier this month, BEV invested $12.5 million in Baseload Capital, itself a project investment firm that provides financing to develop geothermal energy projects using new modular technology developed by Baseload’s Swedish parent company, Climeon.
Climeon’s core technology is a small, modular thermal energy generator that can be deployed singularly or in groups to quickly scale the amount of energy that can be produced from a given heat source (each unit produces around 150 kilowatts of electricity, enough to power between 200 and 300 homes). Unlike traditional large-scale geothermal projects — which generally tap deep sources of very hot water readily accessible only in volcanic regions — the small units can generate power off lower-temperature geothermal sources, making them deployable in far more geographic locations. The small generators (just 2m3) can also run off low-temperature industrial waste heat, turning waste heat from a ship’s engines or a steel plant’s furnaces into electricity.
At roughly $400,000 per unit, however, even an entire fleet of Climeon systems clustered at a geothermal site might only cost $10 million, a sum too paltry to attract the interest of major banking institutions, says Alexander Helling, Baseload’s CEO. “The big players want to write larger tickets,” he said. “It’s hard to find an international bank to finance $20 million” for an energy project, much less the abundance of much smaller projects in the renewable energy space currently seeking capital.
Baseload bridges that gap, pooling smaller projects together into financing packages more palatable to massive pension or infrastructure fund managers. But those financial institutions, sensing they are missing out on some potentially meaningful investments in the renewable space, are changing their cultures as well, Helling said.
“I would say the ticket sizes have come down,” he said. “Ten years ago, a major international bank wouldn’t look at a project less than $50 million U.S.
“Now it’s coming down to more like $30 million,” Helling said. “They are setting up funds within funds specifically looking at renewables, and they want to sit there long term.”
That shifting perspective on investments could create the kind of positive feedback loop renewable technology companies need to finally capture the capital they need to bring critically-needed technologies to market and then scale, thus proving to wary investors that investments in the renewable space can pay off handsomely.
“I happen to believe if you want to unleash trillions of dollars into this, you need to show mainstream investors they’re not sacrificing returns if they do this right,” Spring Lane’s Day said. “That creates a good signal to the rest of mainstream Wall Street capital that ‘hey, the water’s fine, jump in.'”
Correction: An earlier version listed Marc Benioff as an investor in Breakthrough Energy Ventures. He is a member of the BEV coalition.