The energy efficiency sector has had a healthy injection of venture capital over the past 18 months. In Q2, investment in energy efficiency accounted for almost a quarter of cleantech venture capital commitments (Cleantech Group).
It is an increasingly appealing sector for VCs in the ongoing difficult economic climate: asset light business models and more predictable return over shorter time-frames – with some compelling growth drivers.
In Europe, the European Commission has mandated a 20% reduction in energy consumption by 2020, but the biggest impact on the sector has been the disaster in Fukushima and the subsequent decision by the German government to close down all nuclear power stations by 2022.
Swiss-based VC firm Mountain Cleantech, which is focused on the DACH region (Germany, Austria and Switzerland), says this factor alone is now the most significant driver of investment in energy efficient technology, and more specifically in the smart grid, in the region. Reducing and managing consumption will be key to its successful transition to cleaner and safer sources of energy.
Mountain Cleantech says this fundamental change in the energy market has forced the region to rethink how it produces and consumes energy. Efficient energy utilization, energy saving and the expansion of renewable energies must now all be driven forward concurrently – and quickly.
The increase in energy from more costly and inconsistent renewable sources means utilities need data on overall energy demand to efficiently perform load management and energy consumers need to reduce energy consumption due to rising energy costs. Mountain Cleantech believes the biggest potential will be found in the areas of smart metering and smart home, green IT and demand response.
The German Corporate Energy Efficiency Initiative outlined that EUR250 million and 1.4 terawatt hours of potential savings could be realized in the DACH region per year through energy efficient IT alone.
Equally important, they say, is the risk of blackouts due to bottlenecks in energy supply. As renewable energy sources do not deliver energy consistently, being able to manage the energy demand is crucial for energy suppliers. Companies delivering reliable and scalable technologies for demand response have huge potential.
This potential, as always, is not without its risks. In the area of smart metering and smart home, in particular, there are several problems that have been causing development to stall. It could now be held back further by the recent withdrawals of a few big names.
Mountain Cleantech highlights a lack of standards and regulatory parameters, hype around smart meters and the lack of economic incentives for the end user as a few of the issues that may delay the adoption of technologies that are critical to a secure energy future.
But as more and more cheap nuclear power comes offline, innovative and scalable technologies should have a pretty good shot at early success in DACH.
Having set the standards in engineering and renewables, Germany now looks well positioned to take the lead on energy efficiency too.
More on the risks and opportunities of investing in energy efficiency along with many other topics will be explored in a free report The LEIF Brief: Energy Efficiency which will be published in September. The report will feature the insights of Mountain Cleantech along with several other VCs focused on the sector.
Article by Tom Whitehouse. Tom is the Chairman of the London Environmental Investment Forum (LEIF) and the Founder and CEO of LEIF’s Initiating Partner, Carbon International, the cleantech fund-raising and communications consultancy. Tom has been an advisor on political risk to large energy companies, including Shell and BHP Billiton, a foreign correspondent for The Guardian and a reporter for the BBC. Tom has a BA in Politics, Philosophy and Economics from Oxford University in the UK.