Growing Business looks at a climate change in the funding environment for energy entrepreneurs.
Nothing could matter more nationally and globally than getting more energy out of less carbon, and wasting far less than we do currently. The Climate Change Act of 2008, which committed the UK to a minimum 26% cut in carbon dioxide emissions by 2020, followed the Renewables Obligation of 2002 in a bid to make the country a global leader in environmentally responsible thinking.
But are we putting our money where our mouth is? The targets are a start, but each day they look increasingly unattainable. In April, the government was forced to introduce banding to the Renewables Obligation Certificate (ROC) scheme.
This was to give higher value to power generated from new generation renewables that need the greatest development investment, including marine forms like tidal and wave power, or deep water wind generation.
At least the scheme has given a fair wind to green energy entrepreneurs like Dale Vince, who can sense a change in the financial climate at last. His company, Ecotricity, is one of the most active onshore wind turbine builders in the UK, and the retail side of his business is growing rapidly.
The firm is valued at £100m, returning a £2m profit on a £28m turnover last year. Vince aims to grow threefold to a million customers, and has implemented a cutting-edge computer system that will enable him to serve them at minimal cost.
Vince believes green shoots may soon be visible. “I think the funding climate is improving. A month ago I wouldn’t have said that,” he says.
Back in fashion
Vince has picked up signs that the banks are preparing to make funds available to finance both renewable energy generation and for what he calls
day-to-day business.
“I think these guys have touched the bottom and now it’s dawning on them that they have got to lend money because that’s what they’re for,” he says.
The trick, Vince claims, is that wind farms are assets, and “assets are back in fashion big time”. Their appeal may have something to do with all those ROCs too. He has been busy talking to the banks again, including his favourite, the ethical Triodos Bank, but venture capital does not light his fire.
“It doesn’t matter who you talk to, they all have basically the same model,” says Vince.
“They are looking for an established business, a strong management team, a product that has proven itself and the ability to give them 30% return. To me, that isn’t taking a risk, and it’s not a model that fits our business.”
But even he has to raise funds. “We haven’t got to the bottom of EIB [European Investment Bank] loans and other pots of money that had been announced,” he says. “We’ve got to hope that some of that will have an impact not just on us, but on the sector as a whole.”
Billy French is head of legal and commercial investment at Triodos’ investment banking arm. “We have a fund called Triodos Renewable Energy Fund, an unlisted plc that has mainly invested in onshore wind assets,” he explains. “When we are chasing projects, we are finding more and more of them are falling over because other partners haven’t got access to finance.
“We did a fund-raise last year and got around £10m, far more than we expected, and are busy trying to invest that money. We try to place 80% in generating capacity, 10% in investments and deploy 10% to stimulate technology projects.”
Triodos invested in Marine Current Turbines, which makes ‘underwater windmills’ to generate power from tidal currents. At present, the company’s proving the technology at Strangford Lough in Northern Ireland.
Off the rocks
Recent research shows that venture capital investment in new energy businesses fell off a cliff in 2008. It’s currently languishing on the rocks, says Peter Linthwaite, managing partner at the Carbon Trust’s CT Investment Partners (CTIP), one of the few funds still chucking money at promising clean energy technology businesses.
“A lot of venture capitalists are reserving capital for their portfolio companies, because bringing in new investors has become so much more difficult,” he says.
“We are backing a range of early-stage energy efficiency companies and looking for interesting opportunities in next generation renewables.”
Among the former is Green Biologics of Abingdon. It developed accelerated fermentation processes to make biofuels at a time when prices were high.
When the market dropped last year, it had to re-engineer its business plan, cut costs and look for different ways to reach breakeven point. “One of the advantages of a new business like ours is that you can be nimble and adapt quite quickly,” says chief executive Sean Sutcliffe.
Green Biologics switched its focus to China where the considerable biomass capacity built recently was struggling, having been designed against a high fuel price environment.
“That was good for us because our technology allows them to switch to lower-cost feedstock,” explains Sutcliffe. “We did a funding round in February, right at the bottom of the market, and managed to bring in the Hong Kong investment group Morningside. Indeed, its founder, Dr Gerald Chan, has joined our board.”
CT Investments and Oxford Capital Partners came in too, but Sutcliffe says meeting Morningside’s Shanghai people gave him an entrée to that market he’d never have been able to gain otherwise.
Green Biologics might offer an intriguing thermometer for the market for energy investment, but his pertinent advice on adaptability is not sector specific. “Look at the new reality early on,” he advises, “and adjust your business accordingly. Focus on where the customers are and search for your funding there. Finally, look for any low hanging fruit that can give you credibility and short circuit the business development process.”
Another company funded by CTIP has its eye on China. 4Energy of Newbury developed a passive system that keeps telecommunications base stations cool, but at less than half the cost of traditional units and with no maintenance required.
The technology is being rolled out across Vodafone’s 500 UK base stations, says CTIP partner Jonathan Bryers, having been shown to reduce its carbon footprint by 90%. China Mobile has 5,000.
Waiting game
So, it is still possible to raise funds for cleantech. If you are a pre-profit entrepreneur, don’t expect the banks to be as nice as they are being to Vince. Venture capital is improbable, but even if NESTA and the Carbon Trust don’t come forth, there are always the angels.
GenDrive of Cambridge has developed technology that will make small-scale ‘community’ energy generation from sources like small or biomass generators much more viable.
It would have liked to have been able to raise £1.6m to secure its business plan for the next couple of years or so, but in the end was happy to raise a smaller sum in angel funding earlier this year to take it through its next phase.
“There are still individuals with money to spend, and energy is one of the most popular sectors,” says GenDrive’s founder Dr Damyn Musgrave.