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2009 Review; 2010 Forecast; Understanding Green ETFs

Issue 68: January 2010

What’s in Store for 2010

2010 will be a record year for ice loss in the Arctic, Antarctic and Greenland. It could well be the warmest year on record because of the combined influence of El Niño and global warming.

Race for Cleantech Domination

Most important for 2010 is the sea change that's occurring in the world's perception of the strategic importance of shifting to efficiency and renewable energy.  While China has seized on what it views as a revolutionary business opportunity, the US is discovering the shame of following for the first time in our country's history because of our complete failure to lead on green technologies.

Of the top 30 companies in solar, wind and advanced batteries, just six are U.S. firms. Will the US stand by as China firms its leadership position? While the realities of climate change have yet to stir the US into action, it looks like the race for technological leadership could.

Tom Friedman says it well:  "An Earth Race - built on markets, economic competition, national self-interest and strategic advantage - is a much more self-sustaining way to reduce carbon emissions than a festival of voluntary, nonbinding commitments at a U.N. conference."

Even facing this leadership challenge, which largely hinges on setting a price on carbon, it's doubtful the US will pass comprehensive climate change and energy legislation in 2010, given the resistance to cap-and-trade. Instead, Congress could opt for a more limited bill that creates a national renewable energy standard and caps carbon within specific industries.

Although a national cap and price on carbon would help tremendously, the genie has finally escaped the bottle, ushering in a cleantech renaissance. In 2010, spending on cleantech technologies will rise 50% to $200 billion, topping the 2008 high of $155 billion, says New Energy Finance. Corporations, utilities and governments are too far along to go back now - momentum and investment for strategic and economic value will drive the field forward.

For example, American Electric, one of the dirtiest utilities that now depends mostly on coal (and one of the biggest spenders lobbying against climate legislation), plans to buy 2000 MW of wind power by the end of 2011, double its original goal, to meet state renewable-energy requirements and company targets. VP Bruce Braine told Bloomberg, "You're paying a premium relative to alternatives like coal or gas, but once you get them in place, particularly for wind or solar, the nice thing is that the energy is almost free.

Country by country and state by state, regulations and incentives will continue to spur demand. Worldwide, 250 climate change regulations have been enacted since mid-2008. And more and more, cities and states are vying for cleantech leadership. In December, Philadelphia became the first city to give B Corporations tax breaks.

Cleantech will be the beneficiary of record funding in 2010 as much of the world's stimulus money hits the street. The levels of public capital flowing into cleantech over the next few quarters will feel like manna from heaven, and would have been unimaginable a couple of years ago.

A shake-out in the solar and wind industries didn't happen last year as predicted, so what about in 2010? Some, like the Cleantech Group, expect "a bloodbath of consolidation and liquidation" for solar and wind firms in Germany and China, where there's the most overcapacity. We don't see a bloodbath, because 2010 should be a year of tremendous growth. 2011 could be another story.

The first plug-in electric vehicles hit the showrooms in 2010, will people buy them? We don't see huge demand unless fossil fuel prices rise (another reason to put a price on carbon now). 

Private Equity Expands

Venture capital firms surveyed by the National Venture Capital Association say cleantech is the sector most likely to show growth in 2010. VC funds are likely to increase in size, following the trends of the past two years. New Enterprise Associates just announced the completion of a $2.5 billion VC fund, the largest since 2007.

But early stage businesses trying to commercialize new technologies could still have a hard time finding investors as the economy recovers. Investors will probably focus on current portfolio companies and less risky ventures that already generate significant revenue.

Funds flowing from the Recovery Act emphasize increasing the efficiency of everything from the grid to manufacturing to resource use, and that will be reflected in private equity investments. The market for lithium-ion transportation batteries is forecast to grow from $878 million in 2010 to $8 billion by 2015. Companies developing efficient energy storage solutions for renewable energy, vehicle batteries, and software to facilitate grid and data center efficiency will be priorities for VC investment.  Water is also moving into the fore.

Over the past year, there's been more attention to the solutions sustainable agriculture can provide to absorb carbon and to feed the world's population, while reducing pollution. For the first time, the US Department of Agriculture (USDA) committed substantial funds for research on agriculture and climate change ($130 million over four years, up from just $10 million in FY 2009).

At the Copenhagen climate talks, 20 countries formed the Global Research Alliance on Agricultural Greenhouse Gases to focus on ways to grow more food using climate-resilient food systems, while reducing  greenhouse gas emissions and increasing carbon storage in soils (sounds like organic agriculture to me).

There is also increasing attention to the world's collapsing fisheries and sustainable aquaculture. Expect a greater investment focus in these important cleantech sectors.

Public Markets

For the stock market, we're expecting a strong first quarter - typically the strongest quarter for stocks - as investors finally jump back in from the sidelines.  We're still somewhere in the early to mid stages of the reversal of the fear, which are hallmarks of a bull market.

Our columnist green portfolio manager, Sam Jones, firmly believes "we've embarked on a global bull market," and expects the S&P 500 to hit at least 1250 in the first quarter - but watch out for a stiff correction after that, he says. The best buying opportunity for stocks should be later in 2010 - the market could reach all time highs in 2012 if economy recovery continues.

The combination of disbursement of the massive worldwide stimulus and the need to rebuild inventories will lead to GDP growth for the next 6-12 months.

Solar manufacturers have worked off much of their excess inventories and liquidity is returning to capital markets. Many solar manufacturers expect over 25% growth in 2010 as demand recovers and prices stabilize. Historically low prices should propel the industry to another leg of growth.

Solyndra, Inc., a solar PV firm that raised $198 million in venture capital, announced its IPO.  

Improved polysilicon pricing should help cement crystalline silicon's advantage in most installation markets through next year and thin-film PV will gain market share in commercial and utility markets. 

But increased competition, commoditized products and ballooning inventories from capacity ramp-ups will change the landscape for many cleantech companies. Gone are the days when every solar or wind firm was a "rising star."

Resource Constraints Intensify

Economically, the situation looks very similar to the mid-70s, when the economy experienced a double digit inflation cycle until 1982. Stocks rose along with interest rates after the Feds bought bad S&L loan debt and nationalized it. Unemployment rose into the teens. Real estate was crushed.

We enter 2010 in a much more resource constrained world than that of the 1970s. Ironically, cleantech technologies like wind turbines and electric engines rely on rare earth minerals, which will be increasingly in demand, but short on supply. We could trade our addiction to oil for an addiction to rare earths, adding to China's dominance. 95% of rare earths are in China - the US imports 100%.

As the world's economies recover and demand picks up, prices for oil and metals will rise. Too much water in some areas and shortages in others will become larger dilemmas, and although we don't expect a crisis in 2010, concerns will continue to mount.

This will be a year for huge solar thermal projects, which are mostly sited in deserts and require large volumes of water. Tensions will rise between environmental NGOs and developers over water and land use decisions in deserts. 

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Read some other 2010 predictions:

Ten Clean Technology Predictions for 2010

Cleantech 2010 Top 10 Predictions

2010:  Five predictions

Lightspeed's 2010 Cleantech Predictions

 
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