Cleantech Investment In Asia
Selina Harrison, February 2010
As a consequence of the financial crisis, global cleantech investment activity has declined during the past year. Asia has not been immune to these reduced investment levels, but many countries in the region have economies in boom, as well as governments that are committed to supporting cleantech development. As such, the Asian cleantech sector continues to offer some attractive long-term growth prospects.
Indeed, cleantech investment in Asia is likely to be robust in 2010, as governments continue to adopt initiatives and stimulus packages to promote energy efficiency throughout their economy. In addition, international funds, such as the World Bank and Asian Development Bank (ADB), are providing additional sources of capital for technologies and projects. These elements are conducive to growth within the sector. “The number of energy management companies and energy service companies is continuing to increase, facilitating financing opportunities for development stage companies. The overall political and social environment in Asia is thinking clean. Pollution is politically incorrect; energy efficiency in all sectors commands the day,” says Barbara Jones, shareholder at Greenberg Traurig LLP. This is more pronounced following the Copenhagen summit.
Economic growth, energy security and the development of a sustainable living environment are key drivers behind the rise of cleantech and renewable infrastructure investments, according to David Cox, counsel at Allen & Overy. Many governments in Asia are keen for local companies to become global leaders in the development and commercialisation of cleantech, which will be an engine for significant GDP growth in the future. It is also a means of gaining greater security over their energy resources, and many Asian governments are now aiming to reduce their reliance on imported hydrocarbons, and to utilise their domestic resources more widely. But there are also other incentives. “China, is already seeing significant adverse health impacts from high levels of pollution, and reduced economic growth in some areas caused by insufficient water resources, so creating a clean and sustainable living environment is vital and an important driver of cleantech investment, says Mr Cox.
Ample investment, ample opportunities
According to a report called ‘Rising Tigers, Sleeping Giants’, published in December 2009 by the Breakthrough Institute and Information Technology and Innovation Foundation, Asian countries are forecast to outspend the US on clean energy technology and infrastructure by a factor of three to one by 2013. The report also states that between 2009 and 2013, the governments of China, Japan and South Korea will invest $519bn in clean technology, while the US government would contribute $172bn in the same period. In the next 10 years, China alone will spend between $440bn and $660bn on cleantech investment. “Asian countries want to be at the forefront of the green industrial revolution, acting as provider not as beneficiary of the next generation of technology,” observes Mr Cox.
Indeed, China has already established itself as a leading manufacturer of solar PV and wind turbines. It is also making its mark as a leading developer of hybrid and electric vehicles, and has demonstrated repeatedly that it can develop a domestic industry utilising existing technology. Furthermore, the cost-effective export base, and the rapidly growing economy, coupled with its focus on modernisation of the industrial and domestic sectors, will push energy demand and consumption to record highs, providing great opportunities for investment. Vitally, such opportunities are encouraged by the government, which “has actively supported the growth of such cleantech superstars as SunTech, Yingli and JA Solar,” says Ms Jones. “In the current economic climate, these initiatives are particularly important to spur new technologies until international investment returns to acceptable levels,” she adds. However, investment in China is not without obstacles. The legal and regulatory environment is not as well developed as in some other Asian countries, and there are limitations on investment structures and problems with protection and enforceability of intellectual property rights. However, China is working hard to address the issues that foreign investors struggle with, particularly in relation to intellectual property protection.
Aside from China, other countries in Asia that provide a sound environment for cleantech investment include India, whose cleantech market is expected to witness ample activity this year. For example, Khosla Ventures, a $1.1bn fund raised last September, is expected to invest heavily there, with particular focus on wind, small hydro, solar and biomass energies. In addition, Japan and Korea both have an impressive track record in developing and commercialising new technology. Similarly, Singapore has an excellent reputation for developing high-tech products and applications. These countries have well-established legal systems with rules governing investment, corporate governance and intellectual property protection, making them attractive investment destinations.
However, it should be noted that solar and wind technology is now suffering a degree of overcapacity, although there is scope for further investment in second and third generation solar PV technology. But other options are plentiful – for example, across Asia, transportation is a significant focus of government research and investment policy, so hybrid and electric vehicles, high-efficiency batteries and related technology are seen to be key technologies for a low carbon economy, and investment in this area is expected to be plentiful as a result. Particular focus will be on smart mobility, demand-side management systems and energy efficiency (including building materials), with communication and information technologies leading the way. Finally, solar cells, advanced battery technology and LEDs will help to round out investment targets in the Asian market.
The helping hand of the state
Numerous funding initiatives and have been implemented by governments throughout the region in recent years, even in developing countries such as Sri Lanka and Thailand.
Government grants, preferential tax policies, feed-in tariffs in some renewable energy sectors and preferential loan rates have all been introduced to support investment. At the same time, more developed Asian countries have launched well-publicised policies to encourage cleantech investment.
China, in particular, has a clearly articulated policy to develop the cleantech sector as part of its wider renewable energy plan and intention to develop a more sustainable economy. The main policies that govern the cleantech sector in China are the Renewable Energy Law, Sustainable Economy Law and the Medium and Long Term Renewable Energy Plan. It is using the legislation to push its existing energy providers into investing in the renewable energy sector. In late December 2009, China amended its 2006 Renewable Energy Law to require all utility companies to buy all power produced by renewable energy generator. Utilities that refuse to do so face fines of as much as double the economic loss sustained by the renewable energy generator. However, it should be noted that a significant portion of renewable energy cannot currently be transmitted effectively to the grid, which is a problem. The amended law also requires the grid companies to improve transmitting technologies and to enhance grid capability to absorb more power from the renewable sources. "Having looked at both the original Renewable Energy Law and the amendments, my own view is that many of the amendments can be found, in one form or another, in earlier rules and regulations. The significance of the amended law is the clear underlying emphasis on the need to actually dispatch power from renewable energy generators not just have installed capacity" says Mr Cox. It is hoped that these recent changes will stimulate investment in smart grid and related technologies in China.
Japan has also announced several policies that will help to position itself as a leading developer and supplier of clean energy. Legislation includes the Low Carbon Technology Plan and the Innovation for Green Economy and Society Programme. It has also announced clean energy investments of approximately $66bn over the next five years, and the election of the Democratic Party of Japan could mean a boost for the cleantech sector, with talk of wider dispatch obligations and feed-in tariffs for renewable energy. Korea also has big plans for its contribution towards green energy. The Third Basic Plan for New and Renewable Energy Technology Development and Deployment was passed in Korea a year ago, and sets out medium to long-term goals for developing and utilising renewable energy, and a strategy to achieve its goals. In 2008, Korea’s stimulus package included $38bn for a ‘Green New Deal’ targeted at the energy and environmental sector, which has now been boosted by an additional $84bn five-year investment programme aimed at turning Korea into a top seven ‘green power’ by 2020 and a top five ‘green power’ by 2050.
Maximise value, mitigate risk
Asia presents many opportunities for investors into the cleantech sector, but as with any investment in a developing business or new sector, thorough due diligence is essential. It is critical to understand the restrictions on foreign investment in the country in question, as limitations will vary significantly across the region. Investors must structure their deals accordingly and ensure that the local enterprise has the requisite organisational structure, as well as any relevant government licences, registrations and approvals. Investors should also think about their exit strategy. “Partnering with a strategic investor, such as a utility or large manufacturer, will help to mitigate risk, as will side-by-side or initial investment from ADB or World Bank,” suggests Ms Jones. “These groups will add credibility to the project and improve the likelihood of securing additional capital when needed.” Another important factor that investors must consider is the appropriate intellectual property rights. Whether a technology is self-developed and needs protecting, or the technology is acquired from someone else, obtaining those rights is critical to the development of a successful cleantech business.
The short term outlook is positive. “2010 will be a growth year for cleantech investment in Asia. This is because valuations are still relatively low and cheap secondaries are gone. Also, clearer policy and price signals will encourage investors to deploy capital,” asserts Richard Youngman, a managing partner at the Cleantech Group LLC. He forecasts a wave of consolidation in the Asian cleantech market during 2010, particularly in China, where wind and solar manufacturers are suffering from overcapacity. Further, strong investment in LEDs and advanced batteries is likely to lead to a bubble that will peak around 2012 and force consolidation of this market segment.
Overall then, it is almost guaranteed that Asia will be a hotspot for cleantech deal activity for many years to come. Many governments across Asia are determined to position their countries as leaders of supply and production of clean technology. Going forward, the cleantech sector will be an important element of the Asian economy and national development plans, as the concept of sustainability starts to permeate other areas of the economy, and becomes more of an environmental and legislative imperative.
