Cleantech Investments A Mixed Bag in 2Q13, But VCs Are Warming Up To Solar

New Hampshire, USA -- Investments in the renewable energy sector were a mixed bag during the second quarter of 2013, according to a trio of analyst reports and many of the same trends we've seen lately persist: the U.S. and Asia-Pacific regions were more active, and downstream activity continues to intensify.

Taking the broadest view, Bloomberg New Energy Finance (BNEF) tallies $53.1 billion in global clean energy investments in 2Q13, up 22 percent from the prior quarter, though down about 16 percent from a year ago. An upswing in investments in the U.S. and China was offset by declines in Europe and globally overall: China was the biggest cleantech investor at $13.8 billion, with the U.S. at $9.5 billion, while investments in Germany and the U.K. fell precipitously from a year ago (to $1.9 billion and $1.7 billion, respectively). South Africa surprised analysts with $2.8 billion in 2Q13 cleantech investments, "up from almost nothing" in the first three months of 2013. Biggest beneficiaries of more financing were wind and solar projects, especially utility-scale ones. Another metric: asset finance was split roughly 70/30 between domestic and cross-border investments. (Here's a video summing up the BNEF cleantech investment findings.)

The Cleantech Group, meanwhile, cites $1.76 billion specifically in global cleantech venture investments in 2Q13, a 56 percent surge from 1Q13, though the number of total deals was off from 1Q13's record high (214 vs. 246). North American venture investments leaped 74 percent to $1.25 billion, while the Asia-Pacific totaled $267 million -- far more money than in 1Q13 for the same number of deals -- and Europe saw less activity in both dollars and deals. Energy efficiency companies secured the most cleantech funding ($378 million), followed by biofuels/biochemicals ($231 million) and solar ($170 million). Bloom Energy (fuel cells), Intrexon (biotech), Skyonic (carbon capture/reuse), China XEMC (wind turbine components), Hefei (solar projects), Blu Homes (energy efficient homes), View (nee Soladigm, energy-efficient glass), Aligned Energy (energy-efficient data centers), and Lampris (renewable energy).

And narrowing even further to just the solar sector, Mercom Capital reports VC investments increased in dollar amounts in 2Q13 from the prior quarter ($189 million vs. $126 million) but the number of deals was down (19 vs. 26), suggesting that investors are interested in the sector but are increasingly picky. Top fundraisers were Chinese solar developer Hefei Golden Sun (raising $69 million) and Clean Power Finance ($42 million), with three other investments coming in between $10-$15 million. Most of the funding momentum continues to head downstream: third-party solar plays topped another record $1.33 billion in publicly-announced residential and commercial solar project funds -- already on par with what was raised during all of 2012. And large-scale project funding totaled $2.94 billion, up from $1.77 billion in 1Q13, including a record $1 billion solar bond offering by MidAmerican Energy subsidiary Solar Star Funding. Another interesting numerical nugget from Mercom: Chinese banks have pledged $53 billion to date in loans, credit facilities, and other types of debt agreements.

Know When to Hold 'Em...

Conversations with startups and a panel session at last week's Intersolar North America pointed to renewed interest from the VC community to put money into solar again, according to Fatima Toor, senior analyst at Lux Research. "Certainly the money going downstream is much more significant, but the fact is there's general interest."

What's been happening for several quarters now, points out Raj Prabhu, managing partner at Mercom Capital, is that funding activity has been below par and money's still tight -- take out that big Hefei deal and the solar sector activity was basically flat in 2Q13, he notes. Companies further downstream, including projects, continue to be the most active funding areas compared with more upstream manufacturing-centric ones. "After all the money that went into thin-film, CSP, CPV companies with no returns, VCs are very, very skeptical," he said.

Solar VC Funding, 2Q13. Credit: Mercom Capital Group LLC

Nevertheless, "when there's a unique technology it still gets funded," he said, citing recent examples in Solexel and Scifiniti. The central message is that investor insterest lies in technologies that are not new and unique, but rather ones that "can improve on existing technology and efficiency a little bit, cut costs here or there, and improve processes," he said. "These are the types we're seeing so far." Lately, for example, he's been seeing more activity in high-efficiency solar panels (specifically monocrystalline silicon tech) and an increased focus on commercial and residential installations.

One positive indicator is that more financial institutions and investment groups are getting involved in solar project acquisitions, because of the calculated returns. "Solar has reached the point in the last 12 months or so where investors do feel it's safe enough, especially institutional investors, and expect a healthy return," he said. He's also seeing more use of bonds to finance projects, which "shows some maturity for solar as an asset class." With bond interest above 5 percent, "where can you park your money right now in the U.S. and get five-plus percent? You can't even get a percent for a CD," Praghu said. With money abundantly available thanks to friendlier federal policies, "5 percent looks like a really good bet, with a lower risk profile," he said.

... And Know When to Fold 'Em

Part of the mindset of an investor is knowing how to identify and ride an early wave of success -- and knowing when to get off the ride. In the case of the boon in solar third-party funding, "that's what a lot of people are wondering," Prabhu said. The third-party business model, which relies heavily on vendors taking the tax credits, has some fundamental uncertainty once the 30 percent investment tax credit (ITC) times out in 2016. And if prices continue to come down, will solar become so attractive that direct ownership makes more sense than leasing? As investors, particularly those who look ahead to annual tax obligations, start to look at solar investments, the thinking around these types of concerns "has to evolve pretty soon," he said.

One last data point Prabhu points out: bankruptcies and insolvencies are actually dropping, roughly half what they were at this time a year ago. "That's what I look at when I tell people, 'we're a little better off than where we were,'" he said. "But [we're] not completely off the hook."

View the original article here