Water – Where is the money?

Deutsche Bank’s piece on the Water sector (World Water Markets, pdf) presents an interesting read. Following on from our research Water Scarcity – An investment Opportunity, Deutsche Bank echoed some of our thoughts. In particular, two areas stand out.

First, the agriculture sector plays a vital part within the water value chain. We maintain our view that ‘water efficiency‘ remains the primary factor in extending the use of fresh water. Further, the challenge with respect to putting a price on water is discussed in the DB paper although no clear recommendations are being made how to overcome the conundrum.  We previously looked at tradeable water rights, Full Cost Recovery, and Polluter Pays Principle and suggested areas for thought how to establish a market mechanism.

Second, Deutsche Bank raises the issue of how to find credible investments in the water sector. KPMG, also, put out a research report that looked at private investments in water infrastructure (2008, pdf). Although the primary investment focus in both reports is on water infrastructure, we are not comfortable with the likely returns that may be earned in this space. Specifically, the requirement for sewage plants may be interesting but the returns to be earned will likely mimic utility and/or project finance like returns. The high up-front capex is something we normally shy away from. Rather, we look at the technology side of the investment theme and focus on efficiency plays. Deutsche agrees: “A large range of technologies is needed. The demand for efficient irrigation technologies, seawater desalination and sewage treatment facilities, technical equipment (e.g. pumps, compressors and fittings), filter systems or disinfection processes (e.g. using ozone or ultraviolet light) and efficient sanitation facilities will probably pick up sharply.”

Another area that we explored a while back are the business and management issues for companies based in India and China that lack access to fresh and/or clean water. For investors who like to look at the state of the Chinese Water sector and how to potentially participate, we recommend KPMG’s report ‘The Water Business in China – Looking below the Surface.’ In a nutshell, the report explores ways to participate in the urbanization and how to invest in Joint Ventures at the Municipal level. JPMorgan explored business risks associated with water access in their report ‘Watching Water – A Guide to Evaluating Corporate Risks in a Thirsty World‘ which extends our thoughts from our Water Scarcity piece above. We mentioned a glass and pharmaceutical company which admitted that they were accessing ground water deeper and deeper under ground every year. At which point, does this become a clear cost and business risk issue?

We note that Fidelity Investment Managers has put a note out on the their take on the water sector; better late than never one might say. There isn’t anything new or jaw-dropping in the report, Fidelity lists the usual investment ideas such as Veolia, Hyflux, Doosan Heavy Industries, Jain Irrigation Systems, General Electric, HaloSource (recently IPO‘ed) and RusHydro as potential investment targets. We previously eluded to the fact that although GE only generates a single digit portion of their group revenues from water, in absolute terms these revenues ($2.5bn+) still rank them as a Top 10 water investor and supply chain player in the world.

Update: A list of some water ETFs can be found here.


Silicon and the Solar industry – a Boston Consulting Group assessment

Phillip Gerbert and Holger Rubel (both Boston Consulting Group) published an interesting review of the Solar sector and its strategic position both in the pre-2009 years and its outlook for the next decade. A research piece by JPMorgan‘s Gokul Hariharan, Shoji Sato and Carrie Liu comes to their support although takes a more holistic, if not biased view.

The key observation remains: despite the phenomenal energy we could generate on the back of the sun, the costs to do so remains restrictive. Today, the authors claim, only 0.1% of the energy mix comes from solar; by 2020 it may be as ‘high’ as 2%. There is the issue of moving variables, Phillip and Holger elude to, but not explore further. Anxillary industries such as the electric vehicle and smart grid companies, may come as helpful support. Ceteris paribus, and if all parts move in the right direction, the path to solar may be faster then expected as the perceived benefits to both companies and society starts to accelerate in the eye of the beholders.

The Venture Capital industry is pumping significant amounts of capital into the solar sector (in fact, the bulk of all renewable investments goes towards solars technologies) which should reap some rewards in the next 3-7 years, subject to vintage years.

Source: The Boston Consulting Group

Focusing on the supply side constrains, the silicon spot price reached a peak at $400 whilst long-term contract deals were struck at a fraction of the price. However, whenever the economic rent is too good to be true, entrepreneurs as well as corporates enter the market and ramp up capacity. Sounds like a typical China-syndrome: becoming a market leader irrespective of the long-term implications whether the supply-demand balance is sustainable. The consequence, margins drop off and firms struggle to survive.

The McKinsey chart below shows that Chinese corporates are significantly ramping up the capabilities in the silicon supply chain. Again, the credo of ‘lets become world leader’ is an interesting one. We had a meeting with a CEO of a Chinese company who proudly presented to us that they had a achieved their goal of being #1 in their industry. He could not answer the question what vision and objectives the firm would focus on from now on. Equally he did not see the issue of now being the one to chase and he did not yet know what industry leadership abilities he had to prove. The silicon industry may walk down a similar path.

An interesting presentation on the silicon industry put together by Wacker Chemie can be found here. Wacker Chemie is one of the leading suppliers of silicon and they have a number of business units that deliver products to the solar industry.

Todays news on MEMC (dropping 17% in intra-day trading) may be a sign for significant struggles ahead. The jury is out when the solar market will take a turn. Meanwhile, we continue to think that investors struggle to extract sustainable returns of the sector. A possible route to see significant total returns may be to back leading VC players who are able to spend significant resources filtering through the many start-ups that are trying to commercialize low-cost solutions. However, patience may be key at this stage.

GE Energy Financial Services

About: GE Energy Financial Services’ (GE EFS) experts invest globally with a long-term view, backed by the best of GE’s technical know-how, financial strength and rigorous risk management, across the capital spectrum, in one of the world’s most capital-intensive industries, energy. GE EFS helps its customers and GE grow through new investments, strong partnerships and optimization of its more than US$22 billion in assets. In renewable energy, GE EFS is growing its portfolio of more than US$4 billion in assets in wind, solar, biomass, hydro and geothermal power. GE EFS is based in Stamford, Connecticut.


Key Personnel:
Alex Urquhart, President & CEO
Kevin Walsh, Managing Director, Power & Renewables

Their investment focus is in Power, Oil & Gas, Water, Venture Capital, Renewable Energy, Pipelines & Storage and Global Growth.
Venture Capital
– Current Communications, Ocean Power Delivery, Sub-One Technology, A123Systems, Think Global, Advanced Electron Beams, Soliant Energy, Danotek Motion Technologies, TPI Composites, Southwest Windpower (GE EFS provides mainly equity to them, except equity & debt to Ocean Power Delivery).
Renewable Energy – Alsleben Wind Farm, Babcock & Brown, Comverge, EnxCo, Forest Creek, Krusemark Wind Farm, Kumeyaay Wind, Noble Environmental Power, REpower Systems, Denker & Wulf,Serpa Solar Plant, Tawhiri Power, Theolia, Airtricity, Plutonic Power, SunPower, Scholl Canyon Landfill Gas, Invenergy Wind, Stanton Wind, Enel SpA, Renewable Energy Systems Americas, Horizon Wind Energy, Fotowatio, ACCIONA Energy (GE EFS provides mainly project equity to them, with minority of debt, debt & private equity, assets-for-equity swap, debt & project equity).

News: In June 2009, GE EFS announced it has signed an agreement with EarthFirst Canada Inc. to consider purchasing up to 300-megawatt Dokie Ridge Wind Project, the largest wind farm project under construction in British Columbia. Subject to satisfaction of conditions, including due diligence and internal approvals, GE EFS has agreed to form a partnership with Plutonic Power Corporation which, provided the acquisition is completed, will own and operate the project, located 1,100 km northeast of Vancouver, near Chetwynd. The project would represent GE EFS and Plutonic’s first wind energy investment in Canada and an expansion of their relationship from hydroelectric power development into wind energy.

In April 2009, Noble Environmental Power received long-term capital from GE and other for 3 NY windparks. GE EFS invested more than $200 million in the portfolio, which includes the Noble Altona, Chateaugay and Wethersfield Windparks. A syndicate of banks and financial institutions provided long-term debt, including letters of credit, totaling approximately $440 million. This long-term capital structure replaces construction financing used to build the Noble windparks. Noble was mentioned earlier in this post and it is majority owned by funds affiliated with JPMorgan Partners which are managed by CCMP Capital Advisors.

Kevin Walsh speaks about GE invests in electric vehicles and battery technology in this video or on vodpod. He also has a presentation “Policy Options Shaping Private Investments in Clean Tech” dated 1 May 2009 here.

ge efs