Green IT 2011: China Marches Towards Greentech Dominance

1Executive Summary

The world’s greentech industry is likely meeting the end of 2010 with a mix of relief and trepidation. While the year’s tally of green investment and business growth didn’t turn out as poorly as some had feared, it also failed to match some of the more optimistic expectations out there. While global investment into renewable energy infrastructure continued to grow, clouds on the horizon — falling incentives for solar power in Europe, shrinking pipelines for wind power projects in the United States — indicate that 2011 might present those sectors with significant challenges.

Meanwhile, the tens of billions of dollars in government greentech stimulus that helped the industry ride through the year’s economic doldrums were mostly allocated as of year’s end, and shifting economic and political fortunes makes increases next year seem less than likely. Venture capital investment in green technologies held its own compared to 2009. However, certain trends in dealflow — such as a slowdown in early-stage investments and several large investments in startups that might have rather gone public, save for the dour economic climate — indicate that spigot is running low, as VCs fret about realizing returns on their existing investments.

So what’s to come forthe world’s greentech industry in 2011? Here are some predictions:

Some IPOs will make or break well-funded greentech startups. A host of greentech startups that received hundreds of billions of dollars of investment are now facing their moments of truth — show investors profitable exits, or else. Exhibit A may well be Solyndra, the thin-film solar startup that raised $970 million in equity and a $535 million Department of Energy loan guarantee, only to postpone its IPO in mid-year and announce layoffs and a factory closing in November. Other well-funded startups with much less dire prospects are expected to attempt big exits next year — several often-mentioned potential IPO candidates include smart grid networking upstart Silver Spring Networks and solar thermal startup BrightSource Energy.

Solar power will continue to get cheaper, both through growth and by necessity. Europe leads the world market for solar panels to date, but 2010 is expected to bring a slowdown in that market, as solar feed-in tariffs in world market leader Germany and other big European markets are set to decline. That’s expected to drive down the prices developers, and their equipment suppliers, can command. At the same time, the buildup of capacity in silicon-based solar manufacturing — driven in particular by Chinese solar companies — are causing competitors around the world to lower prices. iSupply predicts solar panel prices will fall about 5 percent, and overall solar project costs nearly 10 percent, in the coming year. That will put pressure on startups like Solyndra and Nanosolar that have raised billions of dollars but have yet to prove they can compete on price.

Biofuel will continue to struggle for profitability and scale. Two of 2010’s notable greentech IPOs belonged to Codexis and Amyris, two biotechnology startups with deep-pocketed oil company backing for their next-generation biofuel technology. But both have seen their share prices slide sideways since their market debuts, and both are facing continuing losses and uncertain paths to profitability. Other well-funded next-generation biofuel startups with IPO plans include Gevo, which hopes to raise up to $150 million. No doubt greentech investors will be keeping an eye on the biofuel IPO market to measure the success of Khosla Ventures, which has placed several big bets on the sector.

Utilities will continue to spend stimulus dollars on smart grid rollouts, but must adapt to customer and regulatory pushback. We’ve all seen the problems that utility smart meter projects ran into in 2010, with customers suing utilities and state regulators denying projects or pushing more costs back to utilities themselves. That’s led to a newfound focus on the consumer side of the meter. More automated energy-saving offerings could well find purchase in this environment. At the same time, utilities have actually spent less on smart meters than they have on smart grid systems that help utilities control their own distribution grids, a trend that ongoing customer worries might help accelerate.

Electric vehicles will finally have their chance to prove or disprove their mass-market appeal. 2010 finally saw the emergence of two mass-market plug-in cars, Nissan’s all-electric LEAF sedan and General Motors’ plug-in hybrid Chevy Volt. No doubt green-eyed automakers from Toyota to Tesla are eagerly eyeing how both will do in the coming year. Nissan’s all-electric LEAF scores well on its low price and charging costs, as well as its EPA’s miles-per-gallon equivalent rating. However, its range of less than 100 miles per charge could scare away consumers with EV range anxiety. The Chevy Volt has its gasoline-powered engine to cover those worries, but at a price point that may turn some away. Meanwhile, startup Coda Automotive has pushed back the launch of its EV Coda Sedan until late next year, putting it out of competition for 2011 plug-in of the year.

Greentech venture capital investments focus on software, services and ancillary technologies. In 2009, greentech startups tally fell to $4.85 billion. While 2010 is expected to exceed that poor showing, it appears that VCs are resetting their sights on smaller, more nimble technology players that can offer improvements to existing processes. Solar startups are shifting tactics to focus on software and services, and VC smart grid investments are increasingly headed in that direction as well. Intel’s $30 million set of investments into some green IT software, data center efficiency and cloud computing startups this fall illuminates how this trend could play out.

Data center server architecture and energy awareness will grow in importance. Data centers won’t stop growing, and their energy needs won’t subside anytime soon. In fact, they’re supposed to double their energy appetite over the coming decade. The problem is being tackled at every level, from steady improvements to server architecture to more radical new designs, including the potential for ARM-based chips to take on Intel’s dominance. While newer servers will use less energy, data center operators will still want to fill their racks with the latest equipment, meaning facility-wide efforts to curb and optimize data center energy usage will continue.

New financing models will emerge for everything from solar power and batteries to energy efficiency. Renewable energy isn’t just relying on efficiency improvement to compete with grid power, it’s also looking to the world of finance. Rooftop solar financing pioneers SolarCity and SunRun both scored some impressive investments and deals in 2010, and similar efforts were underway to underwrite energy efficiency upgrades. New business models for plug-in vehicle charging got their share of attention, including a launch of a privately financed, for-profit car-charging business in the deregulated energy market of Texas. Let’s not forget the aftermarket opportunities either — a host of partnerships to reuse partly depleted EV batteries for grid energy storage were launched in 2010, though they’ll be spending years in testing before the first generation of EVs have a chance to run down their batteries enough to make a market for them.

China will continue its march toward greentech dominance. China racked up an impressive set of greentech accomplishments in 2010, including a number of high-grossing IPOs and nearly half of global clean energy asset finance — $13.5 billion out of the world’s $32.8 billion — in the third quarter of the year. China has the world’s largest population and a booming economy (even if it is beginning to show some worrisome signs of a bubble). That could help it augment its current role as greentech manufacturer of the world to become greentech consumer of the world as well. The Silicon Valley venture capital community is taking notice, with VC firms opening offices and staking claims in China. At the same time, increasing competition between China and the U.S. for greentech dominance could make pan-Pacific cooperation tricky. If the Obama Administration chooses to take up a United Steelworkers complaint that China’s government has been breaking World Trade Organization rules with its support for domestic greentech companies, things could get very tricky indeed.

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