Cleantech: no longer a dirty word

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Smart grid and biomass are two sectors investors in renewables might consider if they are looking beyond the more traditional headline-hitting solar and wind energy. Nina Röhrbein reports

When investors think of cleantech, images of wind and solar pop into their heads, maybe in combination with a shiver when they recall their respective bubbles. These days, however, cleantech is about more than just the headline-hitting big two - smart grid has slowly but surely crept up on investors, some of whom unknowingly may already be invested in it.

Smart grid investments are driven by the same factors as other renewables: climate change, energy demand, security and efficiency.

Long-term growth in electricity demand, combined with ageing electric grid networks and new sources of intermittent electricity supply such as wind and solar, create a global need for substantial investment in a more efficient and reliable electric grid. "Institutional investors can benefit from this upgrade to smart electric grids by investing in a variety of companies active in areas all the way from advanced metering companies to the companies constructing the electric cable systems," says Michael Riley, analyst for smart grid at Swiss-based asset manager SAM.

"Considering that around 10% of the electricity sent over the US electric grid can be lost before it reaches its final destination, upgrading inefficient and ageing grid infrastructure while combining it with more intelligent methods for routing electricity will result in improved energy efficiency. Smart grid is also essential for enabling the connection of significant amounts of the intermittent wind and solar power to the electric grid.

"In addition, advanced metering technology allowing two-way communication will allow variable electricity pricing and more transparent billing, which should lead customers to focus on energy efficiency. Beyond infrastructure, smart grid comprises new software applications and communications protocols, which are needed to help manage a more complex and interactive electricity transport system. Data management and storage solutions will also be necessary for utilities to handle the increasing information load from a smart grid."

But the sector is not that new. Nicola Donnelly, fund manager at London based sustainability specialist WHEB Asset Management, says: "Smart grid components and technologies have been around for a while - but it is only now that metering, demand response solutions and better grid infrastructure are being looped together under this classification," says.

Problems with network stability, tighter regulations, stimuli packages, the quest for energy efficiency and a decline in costs have all helped push smart grid into the spotlight.

James Hook, director of Climate Change Capital's private equity fund, says: "Smart grid has industry momentum behind it now, as smart meters have already been rolled out in a few European countries and the EU directive requires every member state to follow suit by the end of this decade. In the US, it is a similar story."

Pension funds can get exposure to smart grid by investing in cleantech or renewables funds, which average a 10-20% exposure to the sector. Direct investments in smart grid companies are hampered by a lack of pure-play companies - which include US-based growth company EnerNOC - and the technological expertise required.

Another way to get exposure with minimal liquidity risk is to invest in large industrial companies, such as Siemens, ABB, Cisco, IBM and Microsoft.

Chiew Y Chong, managing director at the Living Planet Fund Management Company, estimates that smart grid makes up around 10-15% of some of the big players' businesses today. "If you are an investor in Siemens you expose yourself to a number of different markets, not just the smart grid market," says Hook. "While only a handful of firms are pure players there are a lot of venture-backed private companies in the market, which address different parts in the supply chain and aim to go public within the next few years."

While smart grid as a concept is very simple, the complexity and risks arise with regard to which technologies will be adopted. "However, at the metering end of smart grid, these risks are relatively low, with established companies having carved out niches," Donnelly says.

Other risks include adverse changes in government legislation and regulations, energy prices, renewable energy development and energy demand. But generally the risk/return profile depends on the specific investment, which the investor selects. "For us, smart grid is one of the biggest growth themes of the next 10 to 20 years," says Donnelly. "We estimate that total smart grid revenues among listed companies currently are $47bn (€34.1bn) and by 2014 this figure will have almost doubled to $86bn. Smart grid is on a sustainable growth path, which is not as dependent on subsidies as solar and wind. At present, the growth rates are very well supported, with companies trading on 12-20 the price earnings ratio. A bubble scenario is only likely once investors catch on and many of the private companies' IPO and PE ratios move to 35-40 times."

Riley adds: "The traditional infrastructure construction-related companies are less likely to create a bubble than developing metering companies. Investors should look towards a diversity of near pure-play, small and mid-cap companies in order to gain significant leverage without unnecessarily exposure to bubble-like scenarios."


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