A recent headline from Business Insider proclaimed, “Cleantech Market Could Surpass Oil Market Value by 2030.” While this forecast is noteworthy, it shouldn’t be surprising, given global efforts to expedite the energy transition and the escalating costs of fossil fuels amid the conflict in Ukraine and persistent supply chain disruptions.
Private equity funds, especially in the United States, are keenly observing this trend. In 2021, U.S. funds collectively invested over $27 billion in cleantech. The first half of 2022 witnessed funds dedicated to natural resources raising an impressive $110.7 billion, marking a substantial 73% increase from the same period in the previous year.
As this momentum gains traction, investors looking to capitalize on the cleantech surge must recognize that the landscape in 2023 differs significantly from just a few years ago. The cleantech sector has evolved into a diverse and nuanced ecosystem that extends beyond conventional renewable energy investments, incorporating new regulations, technologies, and business models.
To optimize their capital investments, private equity investors must grasp the intricate dynamics of cleantech operations, identify value creation opportunities and challenges, and stay abreast of emerging technologies. The following insights offer a starting point for navigating this evolving landscape.
Evolution in the Clean Energy Landscape
When people typically envision clean energy, their focus often gravitates towards large-scale renewable projects. However, beneath these assets lies an increasingly dynamic ecosystem of supporting technologies and infrastructure that demands the attention of investors.
Consider the following breakdown:
1. **Traditional Utility Infrastructure:** The foundation of a functional power grid, inclusive of transmission lines and efficient power distribution, is crucial for the success of cleantech and renewables. With the rise of electric vehicles (EVs), substantial investment in utility and charging infrastructure is essential to facilitate widespread adoption. Additionally, grid-scale storage capabilities become vital for accessing clean energy when demand is at its peak.
2. **Proven Renewable Energy Assets:** Technologies like wind, solar, and battery energy storage, along with their associated supply chains, are undergoing rapid transformations, affecting availability and cost-effectiveness. Investors must possess the knowledge to evaluate the financial attractiveness and sustained returns of existing assets or portfolios. They also need to assess the viability and commercialization prospects of new greenfield developments, aided by emerging AI technologies that enhance the accuracy of predicting intermittent renewable source output.
3. **Technology Orchestration Layer:** As renewables and Distributed Energy Resources (DERs) gain prominence, the orchestration of numerous assets impacting the grid becomes crucial. Software platforms are essential for registering, assessing, dispatching, and measuring these assets, facilitating participation in traditional energy markets and supporting Environmental, Social, and Governance (ESG) reporting.
4. **Emerging Technologies:** The economic viability of technologies such as EVs, energy-as-a-service providers, DERs, and advanced building electrification is on the rise. While offering growth opportunities, the nascent nature of these technologies requires thorough due diligence to assess associated risks. The convergence of Operational Technologies (OT) running the energy grid and Information Technologies (IT) supporting business functions presents new opportunities to enhance grid operational efficiency.
5. **Distributed Energy Resource Management Systems (DERMs):** Essential in smart energy grids, DERMs integrate multiple energy sources dispersed across various locations. They improve control and management, allowing real-time monitoring of energy consumption, including EV chargers and other DERs. This facilitates energy load balancing and redirection, enhancing efficiency and minimizing energy waste.
6. **OT and IT Convergence:** The alignment of Operational Technologies (OT) and Information Technologies (IT) is gaining prominence. Systems like DERMs contribute to efficient grid operation. In the realm of smart cities, a DERMS monitors real-time energy consumption for all connected assets, balancing loads and redirecting energy as needed to improve efficiency.
7. **Secure Communication Infrastructure and IIoT:** A resilient and efficient energy grid relies on secure communication infrastructure and a unified data source. The convergence of OT and IT builds on the Industrial Internet of Things (IIoT), automating processes and creating a holistic energy ecosystem that fosters greater opportunities.
Investment Avenues in Cleantech Platforms: A Comprehensive Overview
This year, private equity (PE) firms armed with available capital find themselves in an advantageous position to make strategic investments in various cleantech sectors, including platforms, infrastructure, and physical technology supporting transmission and distribution.
Here are the primary factors propelling these investment opportunities:
1. **Rising Energy Costs:** The surge in energy costs, exemplified by record-high gas prices in 2022, persists due to the intersection of rebounding demand and geopolitical events like the Russia-Ukraine War. Although costs may stabilize in 2023, ongoing economic volatility ensures that they won’t experience a significant drop. Investing in clean energy, new technologies, and electrification offers a solution. According to the Center for American Progress, such investments could lead to an annual savings of $500 per household in reduced energy costs.
2. **Government Incentives:** The Inflation Reduction Act (IRA) and the Infrastructure Investment and Jobs Act (IIJA) collectively allocate nearly two trillion dollars in federal funding for grid infrastructure modernization, greenhouse gas emission reduction, and the accelerated deployment of clean energy. The 10-year horizon for tax credits in wind and solar, along with investment tax credits for standalone energy storage and hybrid projects, provides the stability needed for long-term clean energy initiatives.
3. **Regulatory Changes:** The Federal Energy Regulatory Commission (FERC) has instituted significant policy changes to address challenges in integrating renewables and Distributed Energy Resources (DERs) into traditional markets. Order 2222 levels the playing field for DERs in various markets run by regional grid operators. FERC’s plans to address grid interconnection backlogs will streamline clean energy project finance, increase deal volumes, and expedite the implementation of cleantech infrastructure.
4. **New Business Models:** Energy-as-a-service models have gained popularity, particularly in commercial real estate and small to mid-size retail businesses, universities, schools, and hospitals. These models, offering packaged clean energy solutions for a recurring fee, provide price certainty and enable consumers to benefit from energy efficiency improvements without managing complex devices directly. Power purchase agreements (PPAs), facilitating the purchase of electricity from renewable sources at fixed prices, present opportunities for regulated utilities and corporations to meet decarbonization goals.
5. **Market Consolidation:** PE firms are advised to explore opportunities for market consolidation in the cleantech sector. This could involve firms specializing in designing, implementing, and supporting cleantech solutions, solar products, and portfolios of DER assets or renewables. As the demand for renewable energy grows, particularly from corporations committing to climate goals, such consolidation presents strategic opportunities for PE investment.
Navigating Cleantech Opportunities Amidst Challenges
While abundant cleantech opportunities beckon, a host of challenges present themselves on the horizon.
Despite the significant reduction in the cost of renewable energy over the past decade, thanks to sustained government investments and maturing technologies, recent increases in prices are evident. Factors such as escalating material costs, shipping expenses, labor charges, and the supply chain disruptions induced by the pandemic have contributed to this shift.
This trend extends to Power Purchase Agreements (PPAs), which experienced a nearly 10% spike in Q3 2022. The surge in demand for renewable energy faces hurdles stemming from supply chain limitations, transmission constraints, and a finite number of projects in the pipeline.
Several constraints, including the interconnection queues currently under scrutiny by FERC, have the potential to impact the effectiveness of projects catalyzed by the Inflation Reduction Act (IRA). Another challenging aspect involves the variability in state-by-state regulations, the outlook of which can prove challenging to predict. These obstacles add a layer of complexity to the landscape of cleantech initiatives.
Therefore, investors need to conduct thorough due diligence to comprehend the regulatory environments of the state and local governments they aim to engage with.
Taking Initiative
With the momentum of the energy transition on the rise, the cleantech market is positioned for accelerated growth in the upcoming year. Investors, whether in private equity or other sectors, are aptly recognizing this trend and actively pursuing opportunities in the field.
The potential for growth is fueled by government incentives, regulatory shifts, advancements in technologies, and the emergence of new service models. However, challenges loom large, including varying state regulations, price fluctuations, and the growing intricacies of the cleantech ecosystem. Now more than ever, achieving success hinges on a comprehensive understanding of the technologies, operational dynamics, and market forces at play.
When executed with precision and supported by the right resources, cleantech stands as a promising realm for investment well into the future.
