Why Investors Should Care About Cleantech

Posted on 01 July 2009

The magnitude of the change that is encompassed by even the term “alternative energy,” which is just a portion of the broader “cleantech” universe, is staggering. Over the next roughly two generations (call it 50 to 60 years), the world needs to get itself largely off of fossil fuels as sources of energy. Driven by the peaking of oil production, and by the need to cut CO2 emissions, the scale of such a change is tremendous, and it will have dramatic impacts on most parts of the economy and therefore most parts of the investment world.

Renewable clean energy sources like solar, wind, geothermal, etc. currently provide only about 1.4% of global energy needs. That contribution needs to grow, not just ten-fold (which would get it to 14% from 1.4% of the current needs), but more likely one hundred-fold, or to something like 140% of the current global energy use in order to replace fossil fuels and allow for some growth. The time frame varies depending on whether the driver is assumed to be fossil fuel production declining or greenhouse gases (GHG) rising, but there are many experts who would argue that the necessary transformations must take place in less than two genertions.

A massive shift measured in terms of two orders of magnitude, spread over 50 to 60 years, implies annual growth rates in double digit amounts on a sustained basis. Growth of 10% per year gets to a 100-fold increase after 48 to 49 years. Growth rates this high over sustained periods are simply beyond anything that investors have experienced. The closest recent example is China’s economy. From 1978, when China’s government introduced the market reforms that put it on the path of becoming a quasi-free-market economy, until 2008, or a period of 30 years, China’s economy measured in real GDP grew at about 9.5% annually, according to the best estimates we could find. That growth was enough to impact the global economy in many ways, but it was “only” a 15.2-fold increase. Thus, the potential impact of “cleantech” is even bigger than China has been.

The chart in Exhibit 1 is a purely theoretical exercise to show what growth rates are needed to achieve a 100x increase within 50 to 60 years. The vertical axis is shown with a log scale. A growth rate of 7.98% annually for 60 years is necessary to achieve 100x over 60 years. A faster 9.65% is needed to achieve 100x in the shorter 50 year span. For those who believe 50 to 60 years is too long, the chart shows that 20.23% annual growth is needed to grow 100-fold in 25 years. The highest growth rate shown, which is 40% annually, would reach 100x after a little less than 15 years.