European investment - must do better

Clean energy is poised to become a significant high-growth industry for Europe, according to a new survey of venture investment. But there's no room for complacency – Euro4.5bn of new investment is needed over the next three years to match the growth of the US sector.

The report – commissioned by the Carbon Trust, the UK government-backed agency charged with encouraging the shift to a low-carbon economy, and carried out by Cleantech Advisors, part of the Cleantech Group – finds that while European investment in clean energy has grown over the past four years, it still falls short of the buoyant US market.

Between 2003-2006, 300 European clean energy companies received a total of Euro1.96bn venture investment, in 444 rounds. That's around 60% by number and 40% by value of the US total.

Clean energy investment accounted for an average 10% of total European VC deals per quarter, on a par with biotech, IT and semiconductors. The UK lead the pack with 42% of all deals (211 funding rounds), reflecting its dominance of the wider European VC market. Germany (14%) came a distant second, with France (7%), Sweden (5%) and Finland (4%) following.

As in the US, companies developing or deploying renewable energy generation technologies took the bulk of investment, with a total Euro795m. Solar energy attracted Euro292m investment, with German companies taking the largest share thanks to generous government incentives boosting demand. Wind power took Euro165m, closely followed by hydrogen and fuel cell businesses with Euro149m.

Energy conservation and efficiency technologies took Euro899m in 203 rounds. This is a significantly larger share of net investment than in the US, suggesting an emerging area of specialisation for Europe.

But while North American venture investment has surged since late 2005, European levels have remained fairly static. That's partly due to the role of London's AIM (Alternative Investment Market) and the Frankfurt Stock Exchange in providing funding for growing tech businesses. 2005 saw 22 clean energy IPOs, with a further 15 in 2006.

The rush of IPOs and some questionable valuations has fuelled speculation that the clean energy sector is in the throes of an unsustainable financial bubble. The report concludes that there is indeed a bubble, but not necessarily a worrisome one: Rather than another dot com bubble bursting, we have seen a period of carbonated fizz generated around this sector which has gradually faded as the market has become more educated.

Staking Europe's place in the clean energy economy calls for a substantial increase in venture investment, however. Maintaining the current growth rate will require a further Euro2.5bn investment by 2010 - but achieving the growth rate seen in the US over the past three years will need Euro4.5bn.

The UK has seen the largest growth in Europe, although still less than the US. That may be thanks to the role of venture funds backed by public money, notably the Carbon Trust itself - over 45% of UK cleantech deals have been backed by public sector investors, according to an earlier study by venture specialists Library House. The European average is just 14.7%, leading to calls for more government support for young cleantech companies.

The role of the state in backing clean energy ventures is emphasised in the latest Energy White Paper published by the UK Department of Trade & Industry last month. The paper calls for further incentives for private sector investment in low carbon technologies, as well as direct government funding for some research – the DTI is currently preparing to launch its Energy Technologies Institute, a public/private joint venture dedicated to low carbon R&D, with projected funding of £600m over 10 years. Governments have a responsibility to create the right incentives and frameworks to enable a rapid transition to a low carbon economy, the paper concludes.

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For the latest on European and UK cleantech investment, see my new blog, Clean Ventures.