7 Jun 2015

What if the clean-tech sector adopts more regulated approach like the pharmaceutical and biotech sector?

A sharp decline (from £210M in 2012 to £70M in 2014) in investment into the cleantech is a sort of reasonable response from private risk money. To put it simply, the balance between risk and return is almost broken. This is my personal, possibly unique, observation by being in cleantech after completing an MBA with healthcare concentration, with an undergraduate degree in political science.

Two issues of cleantech investment
Cleantech, arguably defined by reducing greenhouse gas emission such as CO2, might require a totally different approach, if we seriously addressing the climate change problems while aiming for modest financial returns. However, there are a few crucial issues in the cleantech sector to overcome the situation:

  • From a perspective of economics of energy sources, coal, oil, and gas are too competitive  compared with clean energy sources. Possibly competitive and stable (or base for civilisation) sources are hydroelectric and geothermal, both of which are biased geographically, unfortunately; and
  • Clean technologies need longer (mostly more than 5 years, which is similar to the pharmaceutical and biotech sector) shot of investment than typical venture capital's timeframe, since fundamental technologies develop linearly, not exponentially as in the IT or computing sector.

Due to these two fundamental factors, private risk money won't be invested into the cleantech sector because there are more attractive opportunities for the money. In short, the cleantech is too risky but its expected return is not high enough to compensate the risk.

Plausible solutions
So what kind of solutions can the sector pursue? It is quite basic: both increasing return while reducing risk, obviously. The latter is better addressed than the former, from my perspective. One example in the UK is this Cleantech hub idea in London: Proposed CleanTech hub to end green investment drought?

To address the former, one good example might be the highly regulated pharmaceutical and biotech sector. The healthcare sector allows a monopoly rent for initial years through regulations to incentivise R&D into such fields, which benefit human beings in the long run. Without such regulatory, thus artificial, monopoly, no one would invest in several hundred million dollars to such a risky business.

Two micro and macro pitfalls
Of course there is plausible pitfalls if the cleantech sector implement this idea of rigid regulations.

On one hand in micro level, by the nature of technology, it is difficult to identify the core patent or intellectual property. As it is based on piled past researches and likely cross-licensing between firms, such as in the electronics industry, it is hard to define what should be protected by regulatory.

To put it differently, usually cleantech products cannot be standalone as those in the healthcare sector, where a product or drug means an identified molecule or chemical material. However, since medical devices, which should have similar features as electronics and thus cleantech products, are also regulated, this could be sorted out if carefully and thoroughly discussed and socially and politically agreed.

On the other hand in macro level, issues related to energy are prone to be a political agenda as energy security is, at least for some resource-less countries, crucial for a government to maintain its sovereignty. Therefore, it is difficult to share a common interest among governments, leading to fragmented approach by each: but this has to be solved as soon as possible to avoid catastrophic changes in global climate.

Europe could lead this discussion because it's coordination between governments are at least tried a lot, and geopolitically, it is far from the next consumption giant: China (and India in the longer run). It is indeed a must to involve them to cap GHG emission drastically, otherwise they consume [really!!] a lot of fossil fuels in coming decades (see below), which will exacerbate the situation to irreversible status. I don't blame them as I totally understand their willing to catch up to better quality of life.

Source: Charting the outcome of the Obama – China climate deal by 2030 (Whats Up With That? ,2015)

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