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Wednesday, July 20, 2005 11:39 AM ET
Investors fuel renewable projects and clean tech firms
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A weekly column on the Market Intelligence platform covering issues facing the energy sector. Topics include regulatory matters, profiles of investor-owned utilities and non-investor owned utilities as well as coverage of financial investors in the industry.

Some large investors are paying more attention to the U.S. renewable sector, though other experts warn that more capital is needed for clean technology.

This spring, the California Public Employees' Retirement System (CalPERS), which has more than $186 billion in assets and is the largest public pension system in the United States, announced that it committed up to $15 million to Santa Barbara, Calif.-based NGEN Partners LLC, a venture capital firm that targets emerging technologies. The commitment is part of CalPERS' effort to place $200 million in private equity firms that invest in environmental technology solutions and an additional $500 million in the public markets, CalPERS spokesman Brad Pacheco told SNL Energy. The California State Teachers' Retirement System (CalSTRS), which has $126.6 billion in assets and is the third-largest U.S. public pension fund, has also pledged $700 million.

According to CleanTech Venture Network LLC, a firm that specializes in matching investors up with clean technology companies, approximately 6% to 8% of all venture capital money goes into clean tech and nearly 95 private equity and venture capital funds are currently raising money for clean tech companies. Just last year, $1.2 billion in venture capital assets went into clean tech, according to the Ann Arbor, Mich.-based company.

CleanTech describes clean technology as technology "developed by biological, computational, and physical scientists and engineers that enable more valuable use of natural resources and greatly reduce ecological impact, although this may be only one of a technology's benefits."

When it comes to investing in clean tech firms, potential investors look for the same characteristics that they seek in other investment categories, Keith Raab, CEO and co-founder of CleanTech, told SNL Energy. Investors in clean technology want to see large and growing markets, talented and experienced management teams, a sustainable competitive advantage and the ability to generate decent rates of return on their investment, Raab said.

GE Energy Financial Services President and CEO Alex Urquhart presented his own set of criteria for investors in renewable projects at a June 24 American Council on Renewable Energy meeting:

1)  Does the structure benefit all parties?

2) What is the technology's track record?

3) Are favorable regulations in place?

4) Do the manufacturer, operator and warranty provider have sufficient operational expertise and staying power?

European banks dominate the renewable sector when it comes to investing, Raab said. The major private equity players in the renewable space include:

* Vancouver, Canada-based Chrysalix Energy.

* Wayne, Pa.-based EnerTech Capital.

* San Francisco-based Nth Power LLC.

* Boston-based RockPort Capital Partners.

* Zurich, Switzerland-based Sustainable Asset Management.

* Palo Alto, Calif.-based Technology Partners.

* VantagePoint Venture Partners, which has offices in California's Silicon Valley, New York and Montreal.

Although the percentage of venture capital investment in the clean tech sector is growing, CleanTech is concerned that it may not be enough. "Our opinion is that much more capital is needed than is currently available," Raab told SNL Energy. "In fact, we estimate that another $2.5 billion of new financing is necessary for renewable technology companies over the next three years." Additional funding is required to bring existing clean tech companies to the market — or at least, to the next level. The company will provide more details on this matter in its "CleanTech Capital Report," due to be published in October, Raab said.

Funding for renewable projects boils down to project finance and debt financing. For clean tech firms, most companies rely on personal resources and government grants during a firm's infancy, Raab said. "As the company matures a bit, they can start to go after private [or] angel-type sources and corporations. Later, as the company is built around the technology, venture capital becomes available to some of the clean tech firms," Raab added.

Geothermal, landfill gas, biomass direct combustion, low-impact hydro and onshore wind farms are deemed mature renewable technologies that are widely available, Raab said. Emerging technologies with niche market potential include off-shore wind, crystalline silicon photovoltaics, anaerobic digester gas, biomass co-firing, landfill gas-to-fuel cells and waste-to-energy combustion, according to Raab.

"Tidal and current, waste-to-energy gasification, wave, biomass pyrolysis, nano-solar, thin film PV and concentrating PV are relatively immature technologies in relatively immature markets that are future technologies to watch," he added.

GE EFS has one of the industry's largest renewable portfolios, with approximately $650 million invested in the renewable sector. Hydro and biomass make up the bulk of the portfolio, with 35% and 30%, respectively. Wind makes up 20% of GE EFS's renewable portfolio, while 10% is in geothermal; solar only makes up 5% of the portfolio. Although renewables make up a small proportion of the U.S. power market, Urquhart believes that "conditions are ripening for renewables." He noted during his ACORE presentation that financial incentives are leading to more investments in the sector. Plus, technology is advancing, regulations and renewable policies are growing increasingly sophisticated, enabling more growth opportunities, and experienced capital providers are "poised to invest."


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