The outlook for sustainable industries looked challenging during the first half of 2012, as cleantech average deal sizes along with equity financings, and project financings were down compared to the last quarter of 2011. The upcoming elections European debt crisis, and other macro issues have also been weighing on the US economy during the past several months. However, despite these unfavorable conditions, Cascadia believes that financing and M&A in the sustainable industries will begin to make progress and consequently, stabilize by the end of this year. We expect this recovery to be led in part by activity in the energy efficiency and solar sectors, along with early stage investments.
We predict that these five areas will lead the sustainable industries during the rest of this year:
1. Rapid Consolidation in the Energy Efficiency Sector.
The sustainable industries market saw a shift in the last year as money left the sectors with high barriers to entry in terms of capital, such as biomaterials, biofuels and wind, and these investors began shifting their attention to the less capital-intensive sectors such as energy efficiency. As this trend continued into 2012, energy efficiency has now become the most rapidly consolidating sector in the sustainable industries. We believe that this sector will continue to see activity as managed services providers will continue to look to acquire technology focused energy efficiency companies to meet growing customer demand for real-time energy solutions. We also expect to see companies which have not traditionally been involved with the energy services category begin to move into the energy efficiency market through strategic acquisitions. At this halfway point in 2012, almost all of the technology focused, fast growing companies in the space are either buyers or sellers.
2. Downstream Solar Companies Will See Considerable Growth, Unlike Upstream Solar Companies, Which Will Continue to Struggle.
Although highly publicized failures like Solyndra have made investors wary of the solar market, these bankruptcies resulted from failure to respond to important market trends, not an overall industry weakness. The decline in the cost of curve panels, which is the most important of these trends, is actually expanding growth opportunities especially among the downstream solar companies, balance of system providers, solar finance companies, and solar integrators. Upstream companies however, will continue to struggle as they are repeatedly forced to cut prices to stay competitive against other companies in the market.
3. Early Stage Cleantech Investments Will Continue to Accelerate.
A bright spot has emerged from the first half of the year, as the number of early stage financings have continued to increase. In fact, 44 percent of all financings in the first quarter of this year were early stage transactions. This positive for the sector as it is signifies that investors are becoming more comfortable with the risks inherent in early stage deals and that entrepreneurs are creating companies which investors find attractive from both business model and technology perspectives.
4. Natural Gas Will Benefit Renewable Energy in the Long Term
The U.S. Department of Energy issued a report in January, which stated that an estimated 141 trillion cubic feet of natural gas is able to be harvested from the Marcellus shale using technologies that are currently available in today’s market. Although there are many positives with this relatively cheap and abundant form of energy, we will likely see a decrease in renewable energy investments as the natural gas infrastructure is built out over the next several years. However, that natural gas infrastructure will drive overall economic activity, which in the long run will be positive for the renewable energy sector. We expect natural gas to replace many coal plants in the years to come, but in our opinion, the fossil fuel market is too large to be replaced by natural gas or renewable energy alone.
5. Natural Gas Infrastructure Will Accelerate Under Romney Administration
Funding and acquisitions have slowed across sustainable energy sectors due to the uncertainty surrounding the upcoming elections. However, if Romney is elected in November, we expect to see an uptick in transactions across all market sectors, including renewable energy as investors have restored confidence in the economy as a whole.
Mitt Romney, who is a major supporter of natural gas, has made building out the natural gas infrastructure in the U.S. his number one goal of his energy policy. While Obama has been supportive of natural gas development, his policies have generally favored renewable energy. With that being said, Obama hasn’t been very successful in furthering large scale production of either resource.
Lead image: Barnet Rock Shale Pipeline, one of the biggest producer of natural gas in the U.S., via Shutterstock.