UK returns to the clean energy slow lane

It is an all too familiar chorus. Entrepreneurs at the Low Carbon Vehicles Partnership annual forum in July last year lamented the stop/go nature of government policy and support for vehicles running on biogas or electricity. At the same time as trumpeting clean technologies as a source of new economic growth, grants to encourage consumers to buy plug-in electric and hybrid electric/petrol cars were being cut.

Then fast forward to last month, and another government U-turn, this time on the size of solar power subsidies, a move that has undermined several large solar farm projects. The change is “Terrible news for the renewable energy sector,” and “Effectively destroys the solar industry for installations above 50 kilowatts,” said Andrew Lee, Head of International Sales at Sharp Solar, Europe’s biggest solar panel manufacturer, which is based in the UK.

“This over-zealous proposal will wipe out community projects like installations on school, hospital and churches, will halt business and industrial investment, and will limit solar to small scale domestic projects,” Lee claimed.

Of course, the UK government is not alone in having to temper spending in a bid to reduce structural deficits. But many in the industry – across the chain from start-ups to established companies like Sharp Solar - also complain of a lack of underlying coherence in the government’s approach to clean energy.

High capital expenditure required

SMEs bemoan a shortage venture capital, insufficient bank lending and a lack of government commitment in a difficult investment environment.  “Infrastructure orientated cleantech such as energy, water, and transport, is difficult due to the often heavy capital expenditure requirements to commercialise at scale and the timescales involved,” says Alex Hook, investment manager at the National Endowment for Science, Technology and the Arts (Nesta).

The paradox here is that - even post the financial crisis - the UK has a dominant financial services sector. But Nesta says the country is unable to translate relatively strong performance in areas such as venture capital or banking into ease of access to capital, as assessed by business.

Part of the problem is the perennial one – that venture capitalists want to reach an exit within five years, but developing and proving novel energy technologies - and then accessing the market - takes longer. Wayne Keast of Consensus Business Group, which advises a family trust on investments, says the sector needs some, “more patient money.”

In the US, there is more capital available to support companies through their different stages of development, Keast says. Investors are therefore more confident that if they finance a company to reach a particular stage of development, new investors will come in.  “The big risk we face in under-developed markets is the financing risk, that is, [will] the business be able to secure financing to get to the next stage?” says Keast.  In the UK the risk is of not being able to raise more money is greater and as a result VCs are less prepared to support very early stage investment in unproven technologies.

Complexity in clean energy

Lucy Marcus, CEO of Marcus Ventures Consulting, a company that advises venture funds on where to invest, agrees a large part of the problem is a lack of appreciation of the complexity of the clean energy sector, where emerging, unproven technologies have to establish themselves in a tightly-regulated monolithic energy infrastructure. To help overcome this inequity, the government should promote development of clean tech clusters that will enable companies developing new technologies to access all the resources they need in one place, and drive economies of scale.

“Part of the issue with cleantech is the expense of protecting intellectual property. You need experienced lawyers and accountants,” Marcus says, adding, that in addition, “You need labs, engineers, manufacturers and a place to do all that work.” Past experience of building high tech sectors, such as information technology or biotechnology, shows that clusters attract investors. “There are some places we know that if you put your money there you’ll get more for your pound or dollar, [so] creating hubs and valleys can really help,” says Marcus. Clusters will also promote the critical mass required to challenge the fossil fuel incumbents.

The unfortunate combination of an incoherent energy strategy, stop/go funding, and the uncertainty caused by a change of government, took an inevitable toll on investment in the UK in 2010. As reported last week, clean energy investment in the UK dropped by 70 per cent in 2010 and the country’s position in the global league table fell from fifth in 2009 to 13th, according to research by the Pew Charitable Trusts.

The UK’s dramatic drop in private investment was in stark contrast to the rest of Europe, and to global trends. Overall, Europe remained the leader in clean energy funding, attracting $94.4 billion, with Germany pulling in $41.2 billion and Italy, ranked fourth overall, $13.9 billion.

Phyllis Cuttino, director of Pew’s Clean Energy Programme said that with a new government in the UK, investors, “Appear to have taken to the sidelines until there is more certainty in the marketplace.” But she added, “Our research consistently demonstrates that strong policy attracts investments. Nations like China, Germany and India, which all saw an increase, were attractive to financers because they have national policies that create long-term certainty for investors.”