What are the financial returns on investing in new clean technologies? Mike Scott investigates.

Clean energy encompasses technologies at all stages of development. Some, such as wind power or hydro-electric, are mature and well-researched. Others, ranging from carbon capture and sequestration to the far reaches of nanotechnology (see case study below), remain in their infancy with their potential as yet largely unproven. Research and development has a vital role to play in finding new clean technologies, as well as improving existing ones.

R&D in this area has grown strongly in recent years – in 2006, according to analysts New Energy Finance, it increased by 25% from $13bn to $16.3bn. Although this year-on-year growth is impressive, says Diana Profir from the Climate Group, it is still a fraction of the funds invested in conventional energy R&D. Data from New Energy Finance says the $10.5bn that companies invested in clean energy R&D in 2007 was only 2% of overall energy R&D.

Government bias

In addition, the low-carbon sector is up against some pretty entrenched government subsidies for more polluting forms of energy generation. Investors’ group London Accord says: “Financial support for renewables is a fraction of the funds supporting conventional generation: in Europe €23.9bn is spent annually on incentives for fossil fuels and nuclear, compared to €5.3bn on renewables.”

The need for R&D in the sector is enormous, says Dr Tariq Ali, director of the energy and environment office at Imperial College, University of London, but there is not enough funding and not enough people working in the field. “We have the brains, but not enough money,” he says. The UK’s spending in this area is derisory, says Dr Doug Parr, chief scientist at Greenpeace, and “signified by parsimony and ineptitude”. It is not alone, he says. “Most European countries have not grasped the competitive advantage aspects of R&D in clean energy.”

Private initiatives

GE famously launched its Ecomagination programme in 2005 and has pledged to invest $1.5bn a year in clean technology R&D by 2010. The rationale is clear – over the same period it hopes to have $20bn in sales from the Ecomagination initiative, up from $12bn in 2006. It has so far invested more than $2.5bn in R&D under the programme, in everything from wind turbines to more efficient aviation engines. Its rival Siemens holds 30,000 patents “for environment and climate-relevant solutions” and invests more than €2bn a year in R&D in this field.

Meanwhile, BP is focusing on a range of clean energy projects, in biofuels, hydrogen, solar and wind. Its biggest R&D investment was a $500m investment in the Energy and Biosciences Institute at Berkeley University in California, which is using the cash to find ways of producing second-generation biofuels (fuel from non-food biomass); converting heavy hydrocarbons to clean fuels; improved recovery from existing oil and gas reservoirs; and carbon sequestration.

Cost demand

Lack of funds for R&D is not the problem, says Ignacio Gavilan, sustainability strategy manager for BP Biofuels. However, Mr Gavilan says, it is difficult to separate spending on R&D from other expenditure such as product development.”There is a lot of money going into this area now. The key is to bring down the cost of some of these technologies.”

There is an obvious demand for biofuels. By 2010, 5.75% of the EU’s transport fuel has to come from biofuels, rising to 10% by 2020.

Meanwhile, by 2022, 36 billion gallons of the US’s expected 160 billion gallons of petrol demand have to come from biofuels. Some 15 billion gallons are expected to come from currently available corn-based ethanol, with the rest being made up of second-generation biofuels such as cellulosic and ethanol.

Google’s search

An encouraging development, says Profir, is the move by Google – whose data centres use massive amounts of electricity – to create an energy R&D centre and its ambitious target to produce a gigawatt of renewable energy that is cheaper than coal within the next few years. The initiative, which has already invested more than $10m in solar thermal and wind technologies, shows it is not just energy producers that can have an effect but end users as well.

Google says it expects to invest tens of millions of dollars in R&D by the end of 2008 as part of its goal of building a gigawatt of renewable energy generation that will deliver electricity for a lower cost than coal “in years, not decades.” Through its foundation, Google.org, the company has already invested $1m in plug-in hybrid electric vehicle technology (PHEV) and is seeking to invest $10m more in the technology.

Extensive R&D doesn’t always pay off, however – fuel cell companies invested more than $213m in R&D in 2006 and made aggregate losses of $644m, up from $371m in 2005, according to PwC. Ballard Power Systems, the industry leader in automotive applications, had a market capitalisation of $15bn in 2000, but last year it had to sell its automotive fuel cell assets to Daimler and Ford, still having never turned a profit. It had failed to achieve a long-expected commercial breakthrough despite spending $75m (140% of its revenue) on R&D in 2005.

States of inertia

In some fields, such as carbon capture and sequestration, governments have to take a lead. “There is just no framework for CCS at the moment,” says Dr Simon Buckle, director of climate policy at Imperial College’s Climate Institute. Bruce Jenkyn-Jones, director of investments at environmental investment firm Impax, adds: “There is no question that governments have to pay for CCS. Companies are not going to spend money when there is no possibility of a return. As an investment proposition, CCS does not make sense at the moment because the technology is unproven.”

Jenkyn-Jones identifies CCS as one of the “step-change ideas” where research efforts must be focused. Others include second-generation biofuels, fuel cells, hydrogen, marine and next-generation solar technologies such as thin-film, organic and solar thermal. Money should also be going to more prosaic endeavours such as improving the efficiency of fossil fuel generation; nuclear power; lighting and energy efficiency, says Mario Lopezalcala, senior analyst at Innovest Strategic Investors.

Simple steps

However, Greenpeace’s Parr says there is a continued obsession with “big kit”, which inevitably means an emphasis on supply side solutions. “There are developments that can provide savings throughout the energy system, such as dynamic demand and peak shaving, whereby non-essential appliances are turned off at peak times. This would save a lot of money and make it easier to accommodate renewables on the grid but because of the way the market is structured, there is no way to get a return for implementing these measures, so it is not going to happen.”

The attraction of investment in this sector is clear – clean energy attracted almost $150bn in funding last year, according to New Energy Finance. That trend is likely to continue, the firm says – investment in renewable energy, biofuels and low carbon technologies will need to triple in the next five years if climate change abatement targets are to be met and a lot of that money will go into technology development, whether by corporations, governments or venture investors. The analysts identify power storage, solar and energy efficiency as most likely to benefit from early stage venture capital investment.

Nanotech case study – Big leap for nanotechnology

One area showing promising results across a range of clean technology applications is nanotechnology. At the nano scale – a nanometre is a billionth of a metre – materials take on different properties from those they possess at the ‘bulk’ scale. For instance, metal nanoparticles are often highly catalytic and properties such as colour, electrical conductivity and magnetism can potentially be tuned by changing the size and shape of nanoparticles.

The market for nanotechnology in clean energy falls into four main categories:

• Energy-saving technologies such as better insulation, solid state lighting, making vehicles lighter and improving their fuel efficiency.
  
  
• Energy storage, including lithium-ion batteries for portable electronics and hybrid electric vehicles; materials that can store hydrogen for use in fuel cells or hydrogen powered vehicles, and supercapacitors.
  
  
• Energy generation, principally in hydrogen fuel cells; and thin film and organic solar photovoltaics.
  
  
• Catalytic technology, which could cut the cost of catalysts by 50% and lift efficiency, and also improve the viability of first and second-generation biofuels.

While some of the world’s largest companies, such as GE, are involved in nanotech research, most companies in the sector have been recently spun out of universities, or are still within them. There remains potential for growth in the sector – analysts Lux says that in 2006 total investment in clean technology totalled $24.5bn, of which nanotechnology attracted just $1.1bn. However, Lux says: “There is a loading up of applications at the back end of the R&D cycle that is creating a wave of innovation set to hit the markets in the next two to three years.”