As the third quarter closed, we went to our favorite watering holes and did what we do best in such circumstances—we celebrated our successes or looked for someone who was to buy us a double to ease our pain.  On balance the Cleantech Group reports that 2010 YTD is shaping up to be a good year.  Not the record for deals that marked 2008 before the crash but at total investment of $5.7 billion YTD it is about even with last year and could still end up just behind 2008 at its current pace of $1.53 billion for 3Q:2010.

Given the uncertainties in the market this should be regarded as a good report card.

But bears always see their glass half empty and this report was no different.  Overall cleantech investment was down 30% this third quarter compared to the second quarter ($1.53 billion vs $2.18 billion) and 11% below last year at this time ($1.53 vs $1.71 billion).  Deal flow is expected to beat the 158 deals in 2Q by the time all the paperwork is done but 152 are in the bag.  There are two schools of thought on why deal flow is down.

  • The bulls view see sustained growth citing the volume of deals in 1Q was so big that is took some of the steam out of the last two quarters but it will come back especially given the rush to year end approval for big solar projects in California in order to qualify for Federal support.   The bulls see renewable energy power purchase agreements (PPAs) up 39% in 3Q10 because California utilities are driving the market forward to meet a 33 percent RPS target by the end of 2020.
  • The bears are still worried they are living on borrowed time the weak recovery and the uncertainty of tax rates, change of control in Congress and other factors that should worry any sector dependent upon government subsidies.  When you dig into the numbers the weakness for the third quarter hit hard in solar but that weakness was offset by expansion in transport, biofuels, smart grid and growth in Asia. The bears also are waiting to see what happens in the election especially in California with Proposition 23 which would suspend the global warming law and take the steam out of a 33% RPS target.  California utilities are rushing to the finish line to secure Federal funding and keep the state regulators happy that they will meet or exceed the 20% RPS target and keep going toward the 33% goal.  Since California utilities make up 87 percent of the total renewable capacity additions through PPAs announced in 3Q10.

Consolidation and the Growing Power of the Big Boys

The other trend that remained apparent for good or ill is that the consolidation across the cleantech sector is not only continuing but accelerating.  The bigger players flush with cash are on a buying binge to scale their market share, pick up great bargains, and freeze out competitors.

3Q10 corporate investments in cleantech were up significantly in 1Q10 and 2Q10 driven by closing of some very big transactions including Nissan’s $1.7 billion big bet in electric vehicles, the $1.6 billion Shell/Cosan biofuels joint venture and $1.1 billion binge by General Electric as an outgrowth of its Ecoimagination dating contest.

Smart Grid. There was deal flow of $163 million in 7 transactions in 3Q focused on smart grid including:

  • One of my clients Nexant, the San Francisco-based spin-off of Bechtel software now focused on products and services for the smart grid that raised $43 million from Oak Investment Partners, Intel Capital, TeleSoft and Beacon to accelerate its go-to-market strategy for TrackSmart, GridSmart, and FlexRate solutions.
  • Trilliant, secured $106 million from Investor Growth Capital, VantagePoint Venture Partners, ABB and GE for its wireless equipment and smart grid communication networks solutions.
  • eMeter, won a new round of $32 million investment from Sequoia Capital, Foundation Capital and Northgate Capital for its scalable smart grid software solutions.

Renewable Energy Deals.

  • Exelon acquired John Deere Renewables, the wind energy subsidiary of engineering firm Deere & Co., for $900 million.
  • NRG Energy paid $350 million in cash to acquire Green Mountain Energy Company, a retail provider of clean energy products and services with its home base in Austin Texas in order to more tightly link its merchant generation portfolio to the competitive retail energy markets in ERCOT.
  • Sharp paid $305 million to acquire US-based solar project developer Recurrent Energy, but there was a big drop in solar investment for 3Q with $144 million in 18 deals down from $874 million from 25 deals in 2Q.

It was the best of times and the worst of times, as we have learned many times.  There are both significant opportunities for growth, market share gain and profits with good products, great timing and the ability to execute deals.  But there are also big and growing risks especially in the smart grid and renewable energy spaces—and time is not an ally.

Smart grid has been focused on meter deployment but there are few benefits in that for customers despite growing costs.  Once the flush of funds from stimulus money is past utilities will have to focus on distribution automation, critical infrastructure protection and optimization strategies that extract value from this digitizing of the grid.

The hype about the promise for smart grid will end up being its biggest public relations problem.  Minding the gap between smart grid promise and smart grid results and being able to demonstrate to Main Street as well as Regulators and Silicon Valley that real benefits are achievable is the key to long term success.

But there are also two big pot holes in the smart grid freeway ahead.  Will we build the additional transmission needed to bring all the renewable energy we’re building to market in time and will regulators really impose dynamic pricing to subject customers to real-time pricing sufficient to get us to change or energy use behaviors—that is what keeps the bears at the bar well after happy hour ends.

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