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A brief history

Cleantech is often associated with green energy and biofuels, however its definition is quite nebulous. Clean Edge, a cleantech research firm, describes the industry as "a diverse range of products, services, and processes that harness renewable materials and energy sources, dramatically reduce the use of natural resources, and cut or eliminate emissions and wastes." The roots of the cleantech movement began around ‘00 and the industry has been steadily gaining momentum since. As with the internet boom, the financing for most cleantech companies was originally from venture capital investors, however this has been changing as of late.

Acceleration in ‘10 means momentum in ‘11

Currently, the areas generating the most revenue are the ones resulting in energy efficiency; specifically: lighting, smart grid technology and building controls. The reason is quite simple, these products are proven and provide a positive ROI. When coupled with the fact that US corporations have more cash on their balance sheets than any time in the past 50 years (over $3T in aggregate), the reason for activity is apparent - capital is looking for positive NPV projects. These factors have created an environment for cleantech that is similar to the tech boom in the early 90s, a sector in its infancy with immense growth potential and investors fighting to get in at the ground level.

Some of the new technology is merely IT relabeled as cleantech; however a significant portion is new products, or applications such as LED lighting and more efficient HVAC systems. Another factor contributing to the significant demand in energy efficiency is aging commercial real estate. Many building owners facing huge vacancy rates are looking for a way to attract new tenants; one way is to offer differentiation in terms of increased efficiency and “greenness”. The most grand example of this is the recent renovation of the iconic Empire State Building, its leaseholders invested over $500M in a complete renovation, of which the backbone was updating its systems to offer increased efficiency compared with competing properties. Developments in lighting, building controls and other energy saving products have recently arrived at a point where the renovations and capital costs necessary to implement them have a much shorter payback than even a few years ago.

As many homes are now switching to CFL lighting to save on electricity bills, commercial users are taking advantage of the benefits of LED lighting. If you view a warehouse or commercial building as its own grid you will begin to see where commercial and industrial scale lighting technology is headed. Think digital smart operation and you will arrive at my two picks in the lighting segment of cleantech. Both can capitalize on future growth from firms looking for new technology that can be used to retrofit large buildings and yield cost savings. My first favorite for this is iWatt; iWatt is the only company of its kind that has a digital process for converting AC-DC power resulting in reduced size, cost and of course energy for LED applications. Another innovator that can capitalize on large warehouse lighting is Digital Lumens; think of its LED lighting system as a small version of a smart grid. It combines LEDs, sensors and networking resulting in a system that can sense, react, communicate and control on its own-- resulting in huge savings.

The smart grid will take cooperation of power generation and transmission companies, appliance and machinery manufacturers and IT, all tied together. All of the current players in their respective industries will have to innovate and adapt when it comes to power generation and use, but new firms have sprouted up to fill the voids in IT. There are literally hundreds of IT firms trying to capitalize on the potential for smart grid growth, I am only looking at firms that have closed large high profile deals and have momentum in revenue growth. My first pick is Open Access Technology International [OATI], they have formed a strategic partnership with data acquisition firm Telvent (TLVT) to provide advanced network balancing while maximizing energy efficiency. Another strong bet is EnerNOC (ENOC); ENOC provides energy management applications and is coming out with a SAAS product which should help propel growth onward. Both will be strong performers in ’11, get in on the action if you can. With all of the hype in smart grid, it is not new news that all of the big players have technology in development. Of these giants, my bets are on IBM (IBM), GE (GE) and Cisco (CSCO).

French building materials conglomerate Saint-Gobain has the right idea with its recent bet on smart glass manufacturer Sage Electrochromics. The idea behind smart glass is to incorporate building energy systems into glass, so the glass can increase or reduce solar transmission and make building heating and cooling more efficient. Similarly, GE invested in Soladigm, which claims it can reduce HVAC energy consumption by 25%.

There is a current movement towards smart buildings that will require smart glass, so invest in the manufacturers and win when they are acquired. A long standing favorite in the controls market is Johnson Controls (JCI), the company has far reaching tentacles in the cleantech market and have hundreds of products in the building efficiency arena. Although JCI has significant exposure to building controls, it also has products spanning nearly any segment that requires user dialog; this means that while JCI will experience significant growth in its building controls products, the company will see some drag on its complimentary products. Still, JCI had nearly 10% growth in its stock and an even bigger swing in operating income from 2009 to 2010; it will continue to grow both in earnings and value, but will not be a home run. My advice is to add JCI to your portfolio as a workhorse.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Cleantech: Acceleration in '10 Means Momentum in '11