As the UN climate summit in Copenhagen in December approaches, advocates of sustainable energy are hoping investment in the sector will pick up.
Private equity and venture capital investment in the sector dipped significantly in 2008 in line with fund activity generally.
But managers of ‘clean technology’ funds point to regional economic stimulus packages that include a significant allocation of funds to the green economy as offering an engine of investment growth.
In the Gulf, promoters of green technology are championing investment in the sector as a route to economic diversification as well as growth.
“You cannot build an economy on just real estate and tourism,” says Reza Shaybani, managing partner of the TVM Emirates Fund. “Industrial development is a key part of any healthy economy and will create jobs.”
Shaybani co-founded Emirates Venture Capital (EVC) three years ago to undertake sustainable investments primarily in solar technologies in the UAE.
Now that the frantic pace of economic growth in the Gulf has slowed, investors, including Dubai government agencies that were not previously keen, have been showing an interest in sustainable-energy investments.
EVC has since merged with global venture capital firm TVM Capital and launched the $300m TVM Emirates Fund.
Among a range of technologies, the fund is looking at solar, wind and biomass opportu-nities to develop in the Gulf, for which it is seeking to bring in and expand European and US enterprises.
TVM Emirates holds a 25 per cent stake in established German solar panel and glass manufacturer Scheuten, an arm of which has been set up in the UAE.
“What they needed was not so much capital but to set up local operations as sales and technical support,” says Shaybani.
The fund plans to establish an integrated photovoltaics manufacturing facility with Scheuten in Abu Dhabi in 2010 to test local demand for Scheuten’s technology.
“It is low-risk and high-return,” says -Shaybani. “There are a lot of opportunities for funds to invest with us, such as family offices, if they are interested in what we are doing.”
The family business interest is there. Dubai’s SS Lootah Group, for example, has established a technical centre to spearhead its exploration of green opportunities.
In May, in partnership with Sharp Middle East, Lootah exhibited a solar-powered car, boat and house as part of a green lifestyle concept.
“The opportunities in renewables are attractive in part because there are physical assets”
John Wisniewski, director, Arcapita
In late September, Lootah met with members of the European Photonics Industry Consortium, which toured the region marketing its members and some of their applications for solar power.
Lootah’s interest is also ethical. The company is funding the construction of carbon-neutral towns in Sudan and Yemen. Houses in these towns will be entirely solar and wind-powered, and residents will generate income by farming adjacent plots of land.
Regional investors have an appetite for renewable energy, which falls under the broader, sharia-compliant category of infrastructure, says John Wisniewski, director, asset management, at Bahrain-based investment house Arcapita.
“Renewables are seen as less speculative investments, but in general the fundraising environment is difficult,” he says. “The opportunities in infrastructure and renewables are attractive in part because there are physical assets, and also because if you invest in critical infrastructure, there is a low likelihood of losing your principal [investment].”
In mid 2008, Arcapita formed a joint venture with India’s Tanti, Horniton Energy, which operates a wind farm in Inner Mongolia that feeds energy into China’s national grid.
Such opportunities are only beginning to emerge in the Gulf, where the private equity firm has focused on energy efficiency and invested in a district cooling facility along with the UK’s Dalkia.
The expansion of clean-technology investing into the Gulf is a continuation of its spread from the US to Europe and Asia.
“Clean-technology investing is small but advancing in the Gulf, whether they pick the low-hanging fruit in energy efficiency, follow a commercial interest to develop alternatives to fossil fuels or, for ethical reasons, invest in sustainable energy,” says Andrew Musters, head of private equity at Rotterdam-based investment fund Robeco, which invests in clean technologies.
In the same way, the Gulf is now following a global trend of looking beyond traditional renewable energies such as wind and solar to other clean-technology areas such as energy efficiency, biodegradable plastics and agricultural technologies, says Musters.
However, investment in the sustainable-energy sector in the Middle East has been minuscule compared with elsewhere in the world. Out of a global total of $119bn of new investment in the sector in 2008, only $2.6bn was in the Middle East and Africa, according to the UN’s Global Trends in Sustainable Energy Investment 2009 report.
“Renewables cannot compete with fuel prices and electricity unless there is government support”
Reza Shaybani, managing partner, TVM Emirates
At $450m, regional private equity and venture capital investment in the sector in 2008 was a fraction of the $13.5bn invested globally. However, it was a 520 per cent increase on 2007. “In private equity and venture capital, there is no critical mass,” says Dieter Fuchs, general manager for the Middle East at German research organisation Fraunhofer.
“There is no government funding for research. To be sustainable is to build your own capacity, not to buy and install it.”
Regional governments have expressed green ambitions but legislation in the Gulf to enforce sustainable standards in, for example, the construction of buildings or street lighting is only in place in Dubai and Abu Dhabi (see features, pages 14 and 18). Elsewhere in the world, compliance has driven innovation and changes in consumer habits.
Despite the obvious potential to develop renewable energies in the region, such as solar power, significant barriers remain. Not least is the extremely cheap and subsidised fuel and electricity in the region, which challenges the short-term economic -viability of renewable-energy projects.
“The GCC would be a great place to build a solar plant, but local power generation is fuelled by oil and gas, and it is difficult to compete on the economics,” says Wisniewski.
Arcapita would consider investing in a regional solar energy plant if there was the opportunity, he says.
However, a large-scale solar plant would first require investment in manufacturing facilities for solar equipment.
“The first major solar project is likely to be a government scheme or else driven by significant subsidies,” says Wisniewski.
In Oman, tendering has begun for the sultanate’s first solar plant.
Outside the Gulf, because of the high cost of developing renewable technologies, solar schemes are subsidised to reach commercial parity with traditional energy sources on price.
Investors point out that a similar feed-in tariff would be required in the region.
Furthermore, subsidising traditional energy is a drain on resources that could be put towards developing renewables.
“Renewables cannot compete with fuel prices and electricity unless there is government support,” says Shaybani.
The global need for fresh investment in the sector is clear. According to the UN Global Trends report, investment in sustainable energy needs to reach $500bn a year by 2020 to ensure that global targets for greenhouse gases are met.
There is consensus among those in the industry that government support in the form of subsidies or incentives is key to growth in sustainable energy globally.
This applies in the Gulf, where the most advanced and headline-grabbing carbon-neutral city is being developed by Abu Dhabi Future Energy Company (Masdar).
Masdar is also co-investor along with the UK’s Consensus Business Group, Credit Suisse and Germany’s Siemens in the $250m venture capital Masdar Clean Tech Fund.
The fund is fully committed and invested, largely in US-based enterprises, which it hopes in time to bring to sufficient scale to move to the UAE.
Typically, smaller, clean-technology enterprises are given a significant kick-start by large government orders, says Wayne Keast, chief executive officer at Consensus Environment, a division of Consensus Business Group, and director of the Masdar Clean Tech Fund.
Currently, Masdar is where the opportunities lie for Gulf investors. Scheuten is co-ordinating its plans with Masdar and is working on an integrated photovoltaics manufacturing facility at Masdar’s headquarters.
There are also advanced talks about a bigger, Masdar Clean Tech 2 Fund, says Keast, raising the prospect of a larger pool of partners.
“Government-backed initiatives are where the likely opportunities will be,” says Neil Nicholson, head of corporate finance at UK law firm Denton Wilde Sapte in Dubai.
These projects tend to be on such a scale that funds will need government support to move forward.
Abu Dhabiand Oman are not the only Gulf sovereigns interested in clean technology. The Qatari government has partnered with the UK’s Carbon Trust to launch its £250m ($406) Clean Technology Investment Fund, which will support the development of a low-carbon innovation centre in Qatar.
The fund is a means by which Doha hopes to perpetuate its energy expertise. However, it will target venture-capital investments in the UK, not the Gulf.
While elsewhere in the world the lowering of fuel prices has meant that interest in pursuing green-energy opportunities has waned, the drop in the price of hydrocarbons is not seen as having an impact on Gulf investors’ interest in green technologies.
Soaring fossil fuel prices in recent years have fuelled the global drive to develop alternative sources of energy.
In the Gulf, massive surpluses from the price spike mean producers have had the funds to pursue sustainable-energy investments as a path to economic diversification.
Oil production costs remain low and regional sovereign wealth funds have accumulated resources to deploy into -sustainable energy even at reduced hydro-carbon prices.
There is also a long-term interest in developing alternatives to hydrocarbons wealth in the Gulf. One of Masdar’s goals is to transfer technology and human capital to the local economy and establish Abu Dhabi as a centre for alternative energy.
“It is a macro issue in the Gulf,” says Keast. “There is a realisation that peak oil will occur and to protect the generation after, you need to diversify and you need sustainable energy.
“It is tied together with climate change. The objective is sustainability in business. Once you can do technology transfer and own intellectual property, you can create a wealth of knowledge in-country.”