Last year, global investment in clean, renewable sources of energy grew by a better-than-expected 16 percent to $310 billion, according to Bloomberg New Energy Finance (BNEF). Industry watchers applauded the strong showing, but the numbers imply more than just robust growth. A careful analysis leads us to two additional illuminating conclusions about the industry’s current level of development and its future.
- The clean energy industry is in a development phase
In 2013, China’s gross domestic product (GDP) grew 8.5 percent, with investment comprising 47 percent of GDP. By contrast, GDP in the United States expanded 1.9 percent, with investment comprising 16.8 percent. As a developing country, China’s growth rate is significantly higher, and a telling characteristic for developing countries is that investment makes up a relatively large percentage of GDP.
This pattern doesn’t just hold true for countries; we also see a similar dynamic when looking at industries. According to BNEF, the oil & gas (O&G) industry spent $913 billion on capital expenditures, or capex, last year, while the market capitalization, or market cap, for the top ten companies in the NYSE Arca Oil & Gas Index stood at $1.63 trillion. By contrast, the market cap for the top ten companies in the Wilder Hill New Energy Global Index was much smaller at $164 billion. The Wilder Hill New Energy Global Index comprises 107 companies from around the world that cover a broad spectrum of clean energy technologies.
While O&G capex dwarfed last year’s clean energy investment of $310 billion by about three times, the market cap for the top ten largest O&G companies was about ten times larger than for the top ten clean energy companies. Seen in a different light, clean energy investment was about twice as large as the market cap of the ten largest clean energy companies. By contrast, O&G capex was half as large as the market cap of the ten largest O&G companies.
The clean energy industry’s high investment relative to market capitalization – as compared to the oil and gas industry – indicates the clean energy industry is in a development phase and, thus, more likely than a developed industry to undergo dynamic growth given favorable conditions.
- Clean energy investors are optimistic about future technological improvement
A measure for investors’ optimism for future technological improvement is an industry’s level of venture capital (VC) investment. Total investment by VC firms in the U.S. hit $65 billion in 2012-2013, according to Ernst & Young.
During this same span, investment by VC and private equity in clean energy came to $6.7 billion, according to BNEF, more than fifteen times the level of VC investment in the oil and gas industry, which was only $383 million in the same time frame. VC investment in solar and wind energy alone stood at $1.9 billion, five times O&G VC investment.
VC investment points to a rosy future for technology development in the clean energy industry as compared with the O&G industry. From 2012-13:
- VC investment in clean energy in the U.S. accounted for 10 percent of total U.S. VC funding, while VC investment in solar and wind energy alone came to 2.9 percent of the total. Contrast this with a paltry 0.6 percent for the entire O&G industry.
- The unadjusted value for VC investment in clean energy in the U.S. was 4 percent of the current market cap of the top ten companies in the Wilder Hill New Energy Global Index. By comparison, the figure for the O&G industry was 0.02 percent of the current market cap of the top ten companies in the NYSE Arca O&G Index.
High levels of venture capital investment in the clean energy industry – relative to the fossil fuel industry – indicate clean energy investors’ optimism for future innovation in clean energy technologies.
The fossil fuel industry, on the other hand, is seeing much lower VC investment and as a result, is likely to see fewer new innovative technologies in the near future. Although it’s much larger, the fossil fuel industry is no longer experiencing the dynamic growth we’re currently seeing in clean energy.
Solar and wind energy, as well as other clean energy technologies, are far from exhausting their potential. The clean energy industry is clearly in a state of growth development and has a long way to go before it’s a mature industry. And that’s a good thing.