The need to invest in clean technology

Shrinking supplies of oil and other key resources, combined with soaring demand, have pushed energy and resource prices to record highs, threatening economic growth around the world.

The international accounting and consulting company Deloitte predicts energy consumption will increase 57 percent by 2030, with non-Organization for Economic Cooperation and Development (OECD) countries accounting for a large share of the increase and non-OECD countries in Asia, such as China and India, comprising the largest share.

The Asian Development Bank (ADB) recently estimated that Asian countries will need to invest $6.4 trillion in clean energy by 2030 to offset the rising price of fossil fuels and the related costs from environmental deterioration.

What’s more, the longer the necessary investments are put off, the higher the cleanup costs. According to a report published by the International Energy Agency, by 2030 carbon dioxide emissions will have increased by 130 percent and oil prices by another 70 percent if no changes are to be made to the existing policies. By then, the cost of cutting CO2 emissions by 50 percent will be $450 trillion.

ADB statistics show that global investment in clean energy reached $148 billion globally in 2007. However, the majority of that investment went to alternative energy initiatives in Europe and other developed countries. Asian countries received only a very limited share.

That situation has been reflected in China, where little investment has been made as yet in clean energy businesses. The sector is clearly at an early stage of development and applications of technology in the clean-tech industry in China have so far offered few concrete opportunities for investment gains. As a result, investment levels are low.

“Currently, the majority of funding for clean-tech comes from venture capital and private equity, which also assist in creating business models, expanding market size and standardizing governance structure, helping clean-tech companies become more well-organized. This, however, also indicates that investing in clean-tech is really still in its initial stage here in China,” said Zeng Gang, a Research Fellow of the Institute of Finance and Banking under the China Academy of Social Sciences.

“The underlying reason for investing in clean-tech is the ‘reforming’ influence it will have on economic growth.” said Wang Enqiang, managing partner of Shanghai TianDi Growth Capital Investment Management Company, one of the few private equity investment companies focusing on clean-tech industry. “It will fundamentally change the traditional approach of pollution first, treatment after.”

Investing in clean-tech also offers multiple-returns, including financial benefits, environmental benefits and social benefits, so there is widespread confidence that the market will expand and develop.

However, those committing themselves to the clean-tech industry like the TianDi Fund and the China Environment Fund are still rare among venture capitals and private equity funds. Large capital investors typically set aside a tiny proportion of their assets to invest in the clean-tech area as clean technologies align profit making with corporate social responsibility.

Zeng Gang said that “the reason why there is a quite significant gap at present between the actual investment in the clean-tech industry and the ideal amount is probably that the demand for energy is not yet urgent enough since traditional sources of energy can still fuel the economic growth.”

Investing in the clean-tech industry comes with various “uncertainties”. Investors typically expect to see returns in three to five years before they exit, but for clean-tech companies, it may take them 10 to 15 years. If market factors such as input costs change, pushing the projected payback time further into the future, venture capitalists will be increasingly unlikely to put their money into the sector, further slowing the development of the field. 

As Zeng Gang said, “clean-tech does have a bright future, but this doesn’t mean that things are looking optimistic in every aspect or that now the perfect time for China to pursue this opportunity.”

“People factors are also crucial,” adds Wang Enqiang. “Whether there is sufficient talent with the right operational and management skills is also a risk factor.” 

But with close attention being paid to clean-tech around the world, many experts think it will increasingly become one of the most attractive areas for investment, and related industries will benefit too.

While the government and the private sector can each play important roles in the sector’s development, the speed of that development depends on how much commitment they show. Investors are hoping that the government will take the lead, providing support in research and development while granting incentives and imposing restrictions on energy consumption. Investors say such political grounding would give them more confidence to invest in the sector.

In the end, China could benefit not only from the energy-saving technologies that will emerge, but the country could also become a leader in a new field that could rival the IT sector in its global importance.

Adrienne Zhu is an editor of M4.cn. She can be reached at zhujin@m4.com.cn

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