At Essex Investment Management, we believe the clean-tech sector will continue to deliver favorable returns in 2020, even while most investors worry about the late-cycle expansion and stretched equity valuations. It appears clean technology is attractively positioned from a valuation relative to growth perspective—especially in the global, small-cap segments—as the fundamental catalysts begin to significantly take hold.
Water technology adoption will significantly increase.
Our domestic water utility systems are in dire straits, and one clear example is the Flint water crisis of 2014 which illustrated the once wonder material – lead piping -- as the cause of significant lead contamination. Replacement rates used by public water utilities over the past decades have averaged 1% per annum on 100-year old infrastructure, a level insufficient to maintain public health and service. The most alarming current issue is emerging contaminants such as micro-plastics and PFAS chemicals which are not being regulated by the EPA. Municipal utilities are planning to get ahead of this issue with PFAS, which we project will lead to significant uptake of water management systems and filtration processes.
The problem is our water utilities are extremely decentralized and lack the capital to deploy to modern systems. We anticipate much higher water rates, utility consolidation and public/private partnerships for capital injection. In short, the long-term case for water remains intact. In California, for example, the state struggles with extremely variable water supplies as 12% of its energy usage goes toward water distribution and 80% of its water supply is used for agriculture.
The electric vehicle revolution is here.
We have been observing the global auto manufacturers, or original equipment manufacturer (OEMs) making significant announcements over the past several years about planned electric vehicle (EV) model launches. We now anticipate real capital investments from the OEMs as the planned EV launches are just around the corner. An EV requires the OEMs to drastically shift designs, supply chains and manufacturing practices from those required with internal combustions engines (ICE). For the case-in-point, many traditional OEM competitors are now forming strategic alliances for battery materials such as nickel, cobalt and lithium.
OEMs are moving away for their traditional vertical integration to outsource as they face execution and technical pressures given the varied inputs of EVs versus ICE design and manufacturing. While last year’s EV sales of 2.2 million were flat globally versus 2018, the rate of growth is much greater in China and the E.U. In 2020, it is expected European EV sales will grow 32%, with 165 EV models on the market, according to Bloomberg New Energy Finance. And IHS Markit says that EV sales in 2019 were 3.4% of global automotive production, and this is forecast to increase to 5.5% in 2020. This trend will continue, as VW just announced it will produce 1.5 million EVs by 2025.
Power management technologies will be unleashed.
We forecast disruptive and more efficient technologies will be released to better allow more efficient energy usage, conversion, storage and distribution. As we strive for a lower carbon economy, a key ingredient is managing power with lower losses and more efficiency whether it’s EVs, battery packs, industrial tools or electricity conversion from AC to DC. Improved power management leads to more efficient energy harvesting, storage, conversion, and less energy losses during transmission due to power degradation or heat loss.
One important technology example is the increased usage of silicon carbide (SiC) semiconductor substrates allowing more efficient power management and distribution for use in EVs, automation equipment and renewable energy systems. SiC has properties with great atomic hardness and bonding allowing for much greater operational efficiency and duration than traditional silicon chips. SiC technologies are incorporated with sensors for use in industrial automation and battery management systems to monitor and control all the processes impacting high voltage battery storage and conversion.
Grid resiliency investment moves from talk to action.
The electrical grid in developed markets has been unchanged for 100 years, yet it is beginning to undergo transformation from a centralized system using obsolete coal-fired generation. Our antiquated system is either on or off, and cannot easily adapt to peak energy demands or storm damage. For periods of high demand, expensive “peaker” plants have been constructed, compounding the costs and problems of our legacy grid as they are expensive assets that are only used intermittently. The new smart grid is transforming electricity generation and usage, and this new grid requires fewer centralized generation resources because it relies on greater energy efficiency and generation resources that are decentralized. The smart grid is more flexible as electricity can be generated at the source of demand given the rise of solar generation. This distributed energy source is more resilient as the grid makes for a stronger connected system less prone to power outages or disruptions.
Increasingly, solar systems are being installed with battery storage, solving the intermittent nature of solar power generation. Battery storage systems allow several hours of electricity supply which was generated earlier in the day when solar systems run at peak productivity. Battery storage can also be called upon during severe demand periods, drawing power to the grid from the consumer and negating the need for peaker plants. The smart grid is evolving swiftly at the edge of the network, meaning consumers are adopting technologies to save and generate electricity. Utilities that embrace the new grid will ensure their business models are enhanced, customer relationships are deepened, and margins improved. This trend is all the more important given the wildfires experienced in California and Australia, or the recent superstorms of Southeast Asia, Puerto Rico and the Bahamas.
The rise of bioingredients and proteins.
From headlines about the great Pacific plastic island to beef shortages in Australia caused by the bush fires to the widespread swine flu of China, the world is now demanding alternative protein sources that have lower environmental impact, as well as a desire to move beyond plastic. Consumers are increasingly demanding bioingredients for goods from straws to foot wear and carpeting. Increasingly, consumers are shopping with sustainability as an increasingly important trait for purchasing decisions. As the appetite for less meat and fossil fuel-based packing increases, coupled with increasing consumer vigilance regarding product contents, consumer-products companies are seeking bio-based ingredients and adopting technologies to track and trace ingredients.
Many technologies to assist in these consumer trends stem from the biofuel startups of 10 years ago, with companies making strategic pivots to develop biocatalysts that allow consumer products to be manufactured more efficiently and safely than traditional materials. These technologies use big data to target chemical formulations and traits to create solutions such as lower drug manufacturing costs, healthier soy proteins or corn that requires less water and nutrients. The intellectual property at hand can develop ingredients that are safer, healthier and more environmentally friendly with much faster product life cycles.
Bill Page is senior portfolio manager at Essex Investment Management, which runs the Essex Environmental Opportunities Fund (GEOSX).