The greenback backs green

Cleantech companies raised more venture capital in the US in the second quarter than telecommunications and medical equipment companies. Why isn't that happening in Israel?

In the second quarter of 2006, the North American cleantech industry raised a record $843 million, 61% more than in the first quarter of the year, and 129% more than in the corresponding quarter in 2005. To celebrate eight consecutive quarters of growth, Cleantech Venture Network LLC, an organization that provides services to cleantech companies in the US, issued a festive press release fanfairing the $1.4 billion raised in North America alone in the first half of 2006. For the sake of comparison, this is almost the entire amount raised in 2005 as a whole, and what the Israeli venture capital industry raises in one year. Cleantech Venture Network says that cleantech deals amount to $10.2 billion since 1999.

Sounds fantastic? The figures look even more impressive when you consider that during the first half of the year, the finance raised by the cleantech sector exceeded that raised by the telecommunications and medical sector sectors. It is now in third place behind the software and biotech industries. The interest in cleantech has now gone beyond investors and is reaching companies, global media, governments, academic institutions and consumers, Cleantech Capital Group CEO and co-founder Keith Raab declared proudly.

This trend has also swept through Europe and Israel, and Cleantech Venture Network reports that a record $120 million was raised in the first quarter in Israel and Europe. The size of the average cleantech deal is also impressive: $5 million, compared with an average $5.1 million for a venture capital deal in even the most popular high-tech fields such as Internet, Web 2.0, and IT.

What actually is cleantech? And why has it become the new goldrush? Cleantech is a fairly new, growing sector, and is, in fact, a new and sexier packaging of energy and environmental technologies such as alternative energies, materials, nanotechnology (which could be classed as a medium or tool rather than a product), agrotechnology and agriculture, air quality, recycling, and water treatment processes. Anything thats green.

According to the Worldwatch Institute, by 2050 the worlds population will have grown 4% to 8.9 billion people, many of whom will have a fairly high standard of living. What kind of inheritance are we leaving them? The world is heating up, oil supplies are running low, and the little that remains causes pollution while its price threatens to become uneconomic. The world is becoming thirstier all the time, while bacteria, solids, and chemicals manage to coexist surprisingly in the water.

The 1993 Kyoto Declaration on Sustainable Development was little more than something to hang on the walls of parliaments and government commissions. Against the backdrop of this dismal state of affairs, the flourishing environmental technology sector promises environmentally-friendly affluence in the future, and an opportunity to get rich. Thus, the environmental discussion has moved from being the hobby of fringe elements to the business mainstream.

The buzz surrounding the cleantech industry has brought with it a corresponding rise in investment and forecasts. A report produced by Cleantech Ventures Network estimates the annual cleantech market at more than $200 billion and rising. Cleantech Ventures Network forecasts that the cleantech industry will account for 10% of total venture capital investment by 2009, $6.2-8 billion, with 240 cleantech companies ready for exit in 2007-2009. Imagine the joy of the industrys leaders when they learn that the industry had already beaten its own forecasts, with sector investment accounting for 13.4% of total venture capital investment across all categories in the second quarter. This amazing figure has alsobeat a forecast made Carmel II general partner Avi Zeevi, who said several months back that today, 15-20% of investment goes to software, and I expect that, within five years, cleantech will be getting at least a similar amount.

Israel awaits cleantech

Several Israeli companies are also participating in this massive global bonanza. There are 270 start-ups in Israel focusing on environmentally-friendly technologies, says Dr. Ofira Ayalon, environmental affairs director at Samuel Neaman Institute for Advanced Studies in Science at the Technion Israel Institute of Technology. These companies are trying to introduce the world to clean technologies, and have only been partially successful so far." One reason for this is related to the forces of nature. Israels climate, unfortunately, does not produce gale force winds or high sea waves that could be used as alternative energy sources. What we do have here is agrotechnology, a field with a lot of established and successful companies - which do not fit into the current hype - and companies that specialize in water treatment and solar energy. This is the Israeli cleantech industry in a nutshell.

Every year, the environmental affairs website Sustainable Business ranks the top 20 environmental companies that it recommends investing in, not for profit but because they have changed the world for the better. One Israeli company is on this list, Yavne-based Ormat Industries (TASE: ORMT), which develops environmentally-friendly energy systems. Notwithstanding the hype surrounding cleantech industries, Ormat is a success story, which, it is believed, is far from over. With annual sales of NIS 1.2 billion, Ormat Industries, the parent company, currently has a market cap of NIS 5 billion, while its subsidiary Ormat Technologies (NYSE: ORA), has a market cap on the New York stock exchange of $1.3 billion.

One can only regret that Ormat is the only Israeli representative on this prestigious list. During the 1960s, Israel was considered a pioneer in the production of solar water boilers, but disappointingly, not much has happened since then. For the sake of comparison, on the other side of the globe, several years ago, 40,000 Japanese citizens - with the support of their government - mounted photovoltaic installations on the roofs of their homes. The Danes have placed windmill turbines in their backyards. We, on the other hand, are still busy with solar water boilers, which save 3% in electricity consumption, just like they did back then.

Israel could become a global powerhouse in the field of solar and photovoltaic energy, claims Prof. Gershon Grossman, of the Department of Mechanical Engineering at the Technion - Israel Institute of Technology, and a fellow of the Neaman Institute. This is being prevented by lack of government awareness, problematic legislation and, most of all, by the fact that the Ministry of National Infrastructures has been headed by a succession of temporary ministers who are not really interested in this field.

Its not as if we dont have the potential. Grosman stresses that very few countries worldwide have such ideal climatic conditions for the exploitation of solar energy. We have very few cloudy days, and the temperature is high enough to prevent the risk of installations freezing over, as happens in Europe. One of the problems is the price: a kilowatt hour produced by coal-fired power plants costs $0.04, while the cost of a kilowatt hour produced by solar energy is $0.11-13.

If we can manage, through technological developments, to get the price of solar energy down to $0.10 per kilowatt hour, while at the same time, compensating for external costs by a further $0.03 per kilowatt hour, were in business, says Grosman. The problem is that no one anywhere has given any consideration to the price of a sick person or a dead person. If this figure were taken into consideration, we would realize just how cheap alternative energy is. Naturally, the future of solar energy will change once the government begins investing in the field, and fuel prices rise. If fuel and coal prices continue to rise, the sun will become the ideal alternative, economically, says Grosman.

Photovoltaic technologies are slightly better off where cost is concerned. Here too, there is a need for a government decision like the one taken by the German government, which required electricity companies to purchase alternative energy at a price five times that paid by consumers, in order to compensate other electricity producers. Rumor has it that the government made the move out of a desire to help Siemens. Even if this is true, it has no significance at present since Siemens is considered to be the leader in this field, says Grosman.

MST founder, chairman, and CEO Dov Raviv, a missile expert and the founding father of the Arrow anti-ballistic missile project, has devoted his time in recent years to solving the energy crisis through use of solar energy. His company MST is a renewable energy company that focuses on finding creative methods for reducing the cost of solar energy. Raviv believes that energy produced from the sun can supply most of Israels energy needs, and that if the state sets up solar energy farms in the Negev, these will save $140 billion in energy costs over the 40 years of the projects life and will create 33,000 jobs. When are they going to make a decision on this? Youll find the answer two paragraphs back.

Israel is also considered to be a pioneer in water. Here too, we have a very good chance of missing the global window of opportunity. Israel has, for example, become famous for its water desalination industry. The largest desalination plant in the world, operated by the VID Consortium, is in Ashkelon. It produces 100 million cubic meters of desalinated water a year at the lowest cost worldwide, yet despite this, Israels share in the global water treatment amounts to only $1 billion, half of which is attributed to Netafim which specializes in drip irrigation technologies. Operating alongside Netafim is Tahal Group, which focuses on infrastructure development, and Plastro Irrigation Systems. The other companies are still finding their way in the market.

Water is a dynamic field with a secure future. Many countries fear for the future of their water supplies, an assessment supported by a string of alarming figures, such as the one which shows that only 0.75% of the water worldwide is in good condition and safe to use. Or the statistic which reveals that water consumption has doubled over the last 50 years and that 1.1 billion people do not have access to water sources. According to other estimates, by 2050, 60 countries will face a water shortage. The water market is already the fifth largest in the world, with an annual turnover of $400 billion, and growth of 7-8%. It could overtake the cellular telephony market within two years.

Mekorot National Water Company chairman Baruch (Booky) Oren says that 24 technological incubators and a large venture capital industry now operate in Israel. It is now possible to pick discoveries off the shelves at universities and out of draws in desks at research institutes and turn them into start-ups. Mekorot, he says, has an important part in this industry, as its large testing site. Under Orens model, academic researchers will provide the technologies, while the incubators will develop and produce the products, which will then be tested at Mekorots facilities. Its a short road from there to the markets.

Mekorot has so far accepted 185 projects for testing using this method, of which 94 were rejected while the rest will go forward to the experimental stage. Oren predicts that this industry will generate revenue of $2 billion by 2010, double the present level, and will employ 10,000 people. By 2020, sales will reach $10 billion, with 50,000 people employed in the industry.

Excellence Investments Ltd. (TASE: EXCE) CEO Meir Hornstein agrees with Oren. He describes water as transparent gold, with rigid demand and limited supply, and estimates annual sector growth at 6-15%. Like Oren, Hornstein also believes in Israels potential, since Israel suffers from a permanent water shortage. The proof of this, he says, can be seen in the construction in Israel of the largest desalination plants in the world, and the extensive research that increases Israels chances of becoming a global force in water technologies. To add a further note of optimism, Hornstein predicts that, within two years, companies in this field will be able to make IPOs at fairly high values.

Hesitant academics

Surprisingly, the academics, the ones who are supposed to produce their patents, are more skeptical. Professor Raphael Semiat of the Grand Water Research Institute at the Technion explains that while academics may know how to write research papers, they dont know how to design products. So the salvation will come from the big companies, and not from academics. Professor Eilon Adar, director of the Zuckerberg Institute for Water Research at Ben Gurion University feels that if the state does not commit itself to the task of moving from the basic research level to feasibility testing, we will lose out, since it is impossible to expect researchers to create products.

A few months ago, the strategic consulting company Trigger Strategic Consulting completed a study called Lakes for the Ministry of Industry, Trade and Labor, which focused on the strategic direction that Israel should take on the development of water technologies. Trigger Strategic Consulting co-founder and managing director owner Noam Gonen says that Israel should make haste and enter this field before the big players move in. Gonen advises the authorities to focus especially on identifying water pollutants, currently at the center of the international agenda.

Another person who feels that the state should get involved here is Ori Yogev, former Ministry of Finance budget director, and currently chairman of Waterfront, a newly formed industry lobby made up of academic institutions, Mekorot, and private companies, and also chairman of Plastro Irrigation Systems (TASE: PLSTR). Yogev believes that the state should invest in technological education, incubators, and support through the office of the Chief Scientist. He suggests providing support to big companies through foreign trade risk insurance, so that they can participate in major projects for which agreements between countries are important.

I spent years in the Ministry of Finance and I even dealt with desalination issues, recalls Yogev. Unfortunately, no one told me that this field had tremendous export potential. Everyone was too preoccupied with the question of how to pump even more water out of the Sea of Galilee (Kinneret, Israels primary water reservoir), when that wasnt the big issue at all. Had we understood this back then, we would certainly have started sooner. Trigger Strategic Consultings paper shows that we are still within the time window that would enable us to very quickly become a leader in this field.

The state is investing in the development of incubators, but government aid soon dwindles once the development stage has been completed, and companies have difficulty staying afloat afterwards, says Eilon. Another problem is that cleantech is a step son at the Ministry of Industry, Trade and Labor. Thus, despite being five times the size of the biotechnology sector, it does not get the same amount of aid. Adar says this is due to a failure to identify the industrys true value and potential. Local industry too, is in no hurry to integrate Israeli technologies and serve as a testing site. As a result, Israeli companies have difficulty proving that their technology is feasible, says Eilon, calling this a monumental failure.

In contrast to the global trend, where venture capital investment is rising rapidly, local venture funds are in no hurry to channel their investors money into cleantech. One of the reasons for this, according to Eilon, is a lack of understanding of the field, and its markets and potential. Because the timeline from the completion of the alpha site stage to implementation and then exit is fairly long, and because the entrepreneurs in question are scientists and not business people who know how to write a business plan, young companies have difficulty convincing funds of the need for their inventions.

Cleantech may sound really sexy, but after the promises aside there awaits a lot of hard work that needs broad support that for the time being is not forthcoming in Israel. Perhaps instead of politics, money and time continuing along the lines of business as usual, each one of us should stop our endless consumption and reduce the pollution that we cause? But in the capitalist world of supply and demand, it is easier to build companies, write impressive business plans for them and raise billions of dollars in venture capital, than, lets say, to ride to work on a bicycle.

A representative sample of Israeli cleantech companies

Solel Solar Systems

Solel was founded in 1992 on the basis of Luz Industries, developers and builders of three of the world's largest solar power plants in the Mojave desert in Southern California. In accordance with a government decision, Solel plans to set up a solar power station in the Ashalim region in the Negev. The companys flat plate collectors can be used to heat water and generate cooling for the industrial, commercial and residential property markets.

Distributed Solar Power (DISP)

DISP is a Yozmot HaEmek Ltd. incubator company. It has developed a form of mirror that concentrates sunlight from a large area onto a small number of specially designed high efficiency photovoltaic cells. $750,000 has so far been invested in the system which is at the pre-prototype stage. The system is being offered to industrial and commercial entities, but will also be offered to the general public, so anyone can install the system and produce his own electricity.

TreaTec 21

TreaTec 21 was founded by the Yissum Technology Transfer Company of the Hebrew University of Jerusalem. It has developed two products for purifying water. One of them is an electro-chemical device that extracts contaminated particles from water through a chemical process. The company had sales of $50,000 in 2005 and expects sales to increase to $2 million this year.

Sulis (Shir Solutions)

Sulis has developed a filtering system for bottled water. This product is suited for military personnel, business people, tourists, and hikers visiting regions where the local water supply is polluted. The system consists of a cap, seven centimeters in diameter that fits on the bottle and purifies the water.

AqWise Wise Water Technologies Ltd.

AqWise develops and markets advanced technologies for performance enhancement, capacity increase and nutrient removal in activated sludge processes in wastewater treatment plants. AqWise ended 2005 with sales of 2005 and has received investment from Israel Chemicals (TASE: CHIM), Polar Investments (TASE: PLR), and Ron Lauder.

Blue I Technologies

Blue I Technologies has developed an automated device for monitoring various elements in water such as chlorine levels, turbidity, temperature, conductivity and PH levels. The readings are transmitted over the Internet using GPRS technology. To date, the devices have been sold in China, Japan, as well to an American swimming pool builder, Coca Cola, and Oil Refineries Ltd.. Blue I recently completed a pilot project for testing the water of the River Seine in Paris.

Particle Monitoring Technologies (PML)

PML is a Kinarot - Jordan Valley Technological Incubator incubator company. It is developing technology for measuring a wide range of particles sizes and concentrations, which uses a unique structured laser beam, scanning for viruses, particles, sand and other elements at high speed across the water sample. The company is currently conducting a pilot project at Mekorots water filtering facility.

EWA Technologies Group

EWA produces water from the air, even in climates with 0% humidity. The device is designed for use by armies and emergency services operating in disaster areas. Feasibility of the device has been proven in theory and by research but there are no installations yet.

Published by Globes [online], Israel business news - www.globes.co.il - on September 3, 2006

Copyright of Globes Publisher Itonut (1983) Ltd. 2006

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