At the end of 2010, Baird held its first ever Clean Technology Conference in San Francisco, where a panel consisting of dedicated analysts and experts from Baird’s Clean Technology Equity Research, Policy Analysis and Investment Banking teams provided their perspectives on the current state of the sector as well as their outlook for 2011. Key observations are summarized below:
The Changing Political Environment in the United States
- The 112th Congress will face incredible pressure, particularly on the new Republican leadership in the House, to provide more fiscal stewardship and offset continuation of tax incentives.
- Addressing environment and energy efficiency tax credits could result in changes to preferential tax treatment currently enjoyed by the oil and natural gas sector, a difficult proposition with a Republican House.
- The Environmental Protection Agency will roll out final versions of pending air pollution rules, coal ash disposal rules, and a proposed rule for cooling water, in the spring of 2011. These new requirements will force retirements of older, less efficient, coal-fired power plants while opening the door for renewables, energy efficiency and natural gas-fired capacity to become larger components of the U.S. electricity portfolio.
- The change in the leadership on the House Energy Committee should bring additional oversight hearings for the EPA.
- Congress could make progress by moving away from discussions of utility regulation and renewable power to focus more aggressively on natural gas vehicle incentives, bio-fuels and electric vehicles. These areas tend to be less politically charged and could represent an opportunity to rally on common ground.
Clean Technology and the Broader Economy
- In the wake of the global economic crisis, the largest macroeconomic concern continues to be the availability of capital to get programs and projects off the ground. Many investors and companies have re-evaluated plans to bring technologies to market with an eye toward more efficient use of capital.
- Another major macroeconomic factor is commodity pricing. Oil has been quite resilient in terms of price. But more importantly, here in the US our natural gas prices dictate electricity prices. The marginal price of electricity factors into the economic viability of many new technologies within renewable, and it also affects the ability to get these projects financed, up and running. In recent years, policy has acted as a buffer against that negative price factor.
- The last macro factor to keep in mind is the impact of subsidy programs across all subsectors of clean technology. Governments deciding and changing policy have created volatility in stock performance and in the business models these companies employ. While subsidy programs have helped jumpstart the industry in various markets around the world, we do expect them to disappear at some point – something companies should be prepared for.
- The solar sub-sector could see additional growth in 2011. There are still substantial government programs globally that allow for very high volumes. It won’t be the same kind of growth we saw in 2010.
Investment Outlook and Opportunities
- Broadly speaking, the past couple of years have been tough for the IPO markets in general, and Clean Technologyhas been no exception. But we saw an uptick late in 2010. We believe there is a pent up supply of high quality private clean tech companies.
- M&A activity is increasing and we believe it will continue to increase. There are many strong companies that have not only been looking at acquisitions, they have made acquisitions or established partnerships through minority equity investments in Clean Tech companies. Meanwhile, the big technology providers are clearly very active in building their presence within the sector.
- We see 2011 as a time when companies within this sector can start to achieve some of their goals.