Investing in Today’s World of Renewable Energy Competition
John Doerr, one of Silicon Valley’s most respected investors, believes that the emerging sector he calls “green technology” could become as lucrative as information technology and biotechnology. In 2006, he remarked, “The field of greentech could be the largest economic opportunity of the twenty-first century. There’s never been a better time than now to start or accelerate a greentech venture.”
The chart below illustrates the global venture capital investment trend that followed:
The trend was also complemented by public, private and government investment such that total commitments have consistently exceeded $100 billion on an annual basis. Companies and governments all over the world are racing to find cleaner, greener energy substitutes to end our society’s addiction to fossil fuels and cut down on the greenhouse gas emissions that cause global warming.
There are seven significant factors that are driving the enormous growth potential for clean, renewable energy:
1) The rising cost for today’s leading sources of energy;
2) The realization that fossil fuel sources are declining at an increasing rate;
3) Environmental costs are on the verge of being accurately calculated when determining total cost;
4) Increasing global demand for energy from developing countries;
5) Growing public awareness for climate change issues and causes;
6) The extraordinary investment by governments, large corporations and the venture capital industry, and
7) Investments are fueling the creation and development of a variety of very promising technologies.
The mathematics are simple. This sector is primed for compounded growth.
With demand assured, where should a prudent investor put his capital to profit from the Green Revolution? Recent deal activity in the VC market would seem to suggest that the Solar sector is “hot”, no pun intended.
Green companies are no longer a mix of startups and emerging growth companies. Quite to the contrary, there are several companies that have substantial revenue streams and stable business models. In fact, many of these Green sector businesses outperformed the S&P 500’s gain of 28.8% for 2009, many with multiples of that figure. Mutual and index funds dedicated to this sector also participated in this success as interest gathered for this “non-traditional” form of investment.
However, in the rush and tumult of new developments and optimistic predictions, it’s hard to separate the hype from real hope. The hype in the renewables industry, a natural response due to competition for funding and customers, has led to claims that stretch the boundaries of scientific acceptability. The industry risk profile remains high for this reason. Selecting individual companies that may be future winners is therefore a hit and miss proposition at best.
Another key issue is the timing of your market entry. You may need a forex course to follow the strength of the Dollar. For various reasons the Dollar has been strengthening this year, and oil prices tend to move in opposite correlation to the Dollar, as do all energy stocks. The entire energy sector has a dependency that requires attention.
Investments in the renewables space have been frenetic over recent years, both domestically and on a global basis. Industry pundits are quick to point out that much more investment is necessary if we are to reach our energy goals of 2030. However, a wise investor, after appraising the present sector risk, may wish to diversify his holdings by investing in options designed for that purpose. There are several Exchange Traded Funds, devoted specifically to cleantech, that have performed admirably and may offer the best risk-based approach for new Green investors. Do your homework, check your timing, and review with your adviser before investing.