Clean energy to benefit from government policy, says Pictet

Government policy has been supportive of the clean energy sector despite the recessionary environment, and such investments should start reaping the benefits this year, says Philippe de Weck, senior investment manager at Swiss fund manager Pictet.

Clean energy investment was down 26-32% last year, following a 38% annual growth rate from 2002 to 2008, according to New Energy Finance. But it will see a return to structural growth this year, says de Weck, who manages Pictet's Clean Energy Fund out of Geneva.

When credit normalises, clean energy will be among the first to benefit, he adds, as banks favour lending to low-risk projects in the sector and clean energy subsidies and tariffs are designed to give a high certainty of returns.

Speaking at Pictet's Green Investment Forum in Hong Kong on Wednesday, de Weck cited China's $20 billion investment package as an example. The country is set to become a "global force in wind energy", he adds, and is likely to be the largest market in this sector in 2010, having created a group of "national champions" in this area.

But despite the efforts of firms such as Pictet and Sarasin to educate investors in Asia on the benefits of green or sustainable investing, investors and fund managers in the region seem to be lagging those elsewhere in terms of their approach to environmental issues.

Yet quite apart from the altruistic aspect, clean energy investing can be extremely profitable, says de Weck. He goes on to outline the potential benefits of buying into wind and solar power, smart electricity grids and efficient lighting and advanced vehicle technology.

Wind is one of the cheapest renewable energies, says de Weck, with costs of 6-8 US cents a kilowatt hour (KWh) being competitive and comparable to those of natural gas. Cumulative capacity of 120 gigawatts today will grow by five to 15 times by 2050, he adds, citing Global Wind Energy Council figures.

De Weck says owning wind infrastructure can provide returns of 8-12%. "We favour large owners of wind farms with high-quality assets and pipelines and strong balance sheets," he says.

Solar energy costs may be higher than those for wind -- at 15-50 US cents/KWh -- but solar is a better longer-term bet, says de Weck. Wind-power generation involves a lot of moving parts and is less predictable than the sun, he adds, which means solar energy is easier to manage on a grid.

While solar is three times as expensive as wind power in terms of capital investment, there was a drop in the cost of solar panels of 40% last year, says de Weck. And the cost will continue to come down, thanks to research spending by countries such as Japan and the US.

Pictet's Clean Energy Fund also invests in natural gas, which generates half the carbon emissions of coal or oil and represents a transitional fuel until renewables come into their own.

Smart electricity grids -- required to manage less certain power supplies, such as that from wind -- are an area where a great deal of "catch-up spending" is required, says de Weck. For example, the Danish grid simply can't handle any more wind power than it does at the moment. As a result, the grid sector will grow a lot faster than the renewable energy industry as a whole. For example, China plans to spend Rmb4.5 trillion upgrading its grid between 2009 and 2020.

In terms of investment in advanced efficient lighting, LED light-bulbs use five times less energy than traditional light-bulbs. Pictet has increased investment in this sector in the past 12 to 18 months and sees "continued upside in this area", says de Weck.

As for vehicle technology, electrification is being driven by ever stricter emissions regulation in Europe, Japan and the US. De Weck cites HSBC estimates that penetration of hybrids, plug-in hybrids and fully electric vehicles could reach 5% by 2020 or around 5 million cars.

However, the vehicle tech industry is still in its infancy and faces challenges, including: technology limitations (range, durability, charging time, safety and so on); charging infrastructure; battery costs; consumer acceptance; and a relative scarcity of pure-play investment opportunities.