ABSTRACT June 9, 1994 Working Draft
This is a brief analysis of markets for environmental or so-called "green technologies." It focuses on markets, potential investors such as venture capital firms, and barriers to the growth of markets for new environmental technologies. It discusses the current paradigms for development of environmental technologies and reviews the potential of new approaches to natural resources which may affect business decision making in future years.
These new approaches include sustainable development and industrial ecology. A fundamental question is whether these paradigms will make a difference in business decision making in the next 5-10 years. Current market forecasts for the growth of pollution abatement technologies are trend analyses based on current paradigms and do not provide answers.
Investors such as venture capitalists in environmental technologies encounter significant barriers to entering the market. These include uncertainties caused by changing federal and state environmental regulations, lack of business management expertise, and a lack of integration of environmental factors in mainstream business decision making.
I am circulating this paper because I believe that despite a very active search for sources that there are many issues, data, which I missed. Therefore, if you find value in reading this report, please respond with your ideas, pointers to sources, or your own analyses. Sections which I know are incomplete are highlighted in Italics.
This paper is by no means comprehensive in its coverage. It was developed primarily from secondary sources such as news media reports, trade newsletters, congressional testimony, etc. This is not a scholarly work. All of the data are drawn from the sources cited in the bibliography attached at the end. There is no unpublished proprietary information in this report.
Comments are welcome and should be addressed to:
Dan Yurman PO Box 1569 Idaho Falls, ID 83403 firstname.lastname@example.org
MARKETS [See Tables in Appendix]
Table 1 The world market for the environmental industry is estimated to be $200 billion with growth to $300 billion by the year 2000. Of this amount, US spending on pollution abatement in 1991, not including hazardous materials cleanup and related service, was $24.8 billion or about 12.3% of the world market. Japan and Germany are the most significant US trading partners in terms of US imports for these markets.
The Congressional Office of Technology Assessment estimates 10- 15% of the total world market may be open to US, German, and Japanese exporters of green technologies. The balance of spending overseas is home grown. Currently, the US enjoys a favorable balance of trade in environmental exports.
Treatment of drinking water and wastewater constitutes the largest percentage of global environmental technology spending at 30% of the total. Over the next five years the most rapid area of growth will be waste management with a projected 58% increase from $40 billion to $63 billion. OTA finds that technologies which lower the cost of environmental compliance may fare better in global markets.
Table 2 Pollution abatement spending in the US in 1991, the latest year for which figures are available, was $7.4 billion for capital equipment and $17.4 billion in operating costs. Total capital equipment spending by US businesses in 1991 was $528 billion making the environmental portion for capital equipment about 1.4% of the total.
Air pollution control equipment accounted for half of all capital equipment expenditures for environmental compliance in the US in 1991. Operating costs in 1991 are divided roughly in thirds for air, water, and solid waste pollution abatement spending.
Table 3 Spending in the hazardous waste management sector was $12.2 billion in 1991 projected to increase by nearly 40% by 1995 to $17 billion. In 1991 34% of spending was on direct site remediation. This category is expected to increase to 46% of the total market by 1995, but will start to decline in its rate of growth after the year 2000 as sites get cleaned up.
Table 4 Segmenting the hazardous waste management market indicates that industry spending is the single largest category in 1991 with 32% of the total. Industry spending will grow to 27% of the total projected of $17 billion in 1995. Defense related spending is expected to more than double from $1.18 billion in 1991 to $2.64 billion in 1995, or from 9.6% of the market to 15.5% of the market. Estimates for EPA and DOE are subject to change due to Congressional consideration of the reauthorization of Superfund and review of the rise in costs for cleanup of DOE weapons plants.
Table 5 In 1991 the US exported $1.7 billion in environmental protection equipment and imported $567 million. Air pollution control equipment accounted for more than half of all US exports in this market.
Decision-making by venture capital funds and other firms on investments for emerging environmental technologies has to take into account significantly more risk than other technology-driven markets. The development of environmental technologies is a high- risk endeavor because the market is driven by government regulations that can change with passage of new legislation at the federal or state level. However, the logic remains that firms will invest in R&D for new technologies where they believe potential markets exist.
The Environmental Business Council (EBC), based on Boston, MA, which represents manufacturers of environmental technologies and service companies, is skeptical of the Clinton Administration's efforts to promote environmental technologies and related R&D as an area of emphasis for growing US exports and diminishing the balance of trade. EBC is critical of "fragmentation of federal programs," which limits the effectiveness of the Administration's initiative.
Dag Syrrist of Technology Funding, a California venture capital firm, has made numerous statments in the trade press that fragmentation of federal environmental programs creates disincentives to experiment with innovative environmental technologies. With so many federal and state agencies having a say in what constitutes compliance, technologies cannot be brought to market with an assurance that they will meet regulatory requirements.
Manufacturers and buyers of environmental, or green, technologies need to know exactly what emission limits they must meet before committing to developing or buying a technology. Given the usual high risks of start-up companies, having certainty that the product will be compliant with environmental regulations is a major issue. Once a technology has been proven in terms of its effectiveness, a firm must find the capital to bring it to market.
Typically, for "seed" investments, e.g., 1st or 2nd round financing, venture capital funds seek to validate their investments in about 18 months. This will determine the potential for start-up financing. For later rounds of financing the "cash out" period for a Venture Capital firm could be as long as seven years seeking a 30% return on investment. Most venture capital firms are actively involved in the management of the firms they invest in.
Efforts to overcome these problems are highlighted by the activities of the National Environmental Technology Application Center (NETAC) in Pittsburgh, PA. It is a non-profit cooperative effort between the University of Pittsburgh and EPA to facilitate commercialization of environmental technologies with primary emphasis on hazardous materials. It's work includes finding funding sources, doing market research, and technology assessment. It has produced a database of remediation technologies which is available by subscription.
NETAC has segmented the environmental technology market for hazardous materials into three broad areas: (1) technology equipment providers, (2) service providers, and (3) waste management facility owners and operators. [See the discussion under "Barriers" later in this paper on why venture capital firms shy away from environmental technologies.]
In 1993 NETAC estimated the size of the environmental technology and services market in the US at $13.4 billion. This number may be low based on US Department of Commerce estimates for 1991 noted above. Although NETAC is able to identify $500 million in venture capital funding for environmental technology firms over the past 12 years, this represents less than 2% of all venture capital placements in the US for this period.
According to Venture Economics Publishing, the total for venture capital investments in 1992 was $2.54 billion. Of this amount, software and services accounted for about 25%, medical/health care at 20%, biotechnology at 10%, and energy-related at just over 1%. At this time investments for environmental technologies are not considered to be significant enough by the National Venture Capital Association to be tracked as a separate category. Total venture capital investments in 1992 for all categories at the "seed" stage were just $74 million. So-called "start-up" dollars were $209 million, and the majority of funds, $1.4 billion, were for expansion of established companies.
John Gibbons, Director of the White House Office of Science and Technology Policy, describes two types of environmental technologies. These are light green which are designed to achieve waste minimization and pollution prevention objectives and dark green which deal with traditional end-of-pipe technologies that control or eliminate waste after it is created. Gibbons said the Administration is much more interested in light green technologies that improve manufacturing processes and produce less waste.
In FY 1995 Gibbons says the Federal government is requesting $525 million combined for EPA and DOD to conduct environmental technology-related research, an 11% increase over FY 1994. Global change research is requested to increase by 24% to $1.8 billion. About two- thirds of that amount will go to NASA for satellite-based environmental data acquisition. DOE would get $126 million for global change research.
EPA recently announced (2/3/94) a Technology Innovation Strategy to bridge the gap between R&D and commercialization. The program document for the strategy recognizes the market uncertainties which limit entry of investors to the field. Venture capital interest in environmental technologies is growing, but not fast enough where demand for environmental technologies, such as Pittsburgh, outstrips available capital.
The Advanced Research Projects Agency (ARPA) and the National Institutes for Standards & technology (NIST) have announced four rounds of Technology Reinvestment Project (TRP awards in 1993- 1994. Total funding in FY 1994 for these programs is expected to exceed $600 million. Though the focus has been on technologies other than in the environmental area, the most recent announcements of new funding from NIST includes a track on sensors, which could apply to environmental problems.
Environmentally-related energy technologies and their applications for "demand side management" of peak-and-base-load electricity are receiving attention from sources of investor capital. This is due to an international treaty on global climate change which the US signed requiring steep cuts in emissions of carbon dioxide over the remainder of this decade. The US Climate Action Plan requires the nation as a whole to achieve as much as a 20% reduction in CO2 emissions by the year 2000. The plan has been criticized in terms of the slow start of the Administration in implementing its requirements and in funding various aspects of the plan. Some critics also think estimates of reductions in CO2 may not be reached and that expected dollars proposed for investment by industry may not be made available unless the economy improves.
The response from the electric power utility industry to this international agreement has been to seek to develop market-based incentives [described below] as an alternative to government- mandated actions under a command-and-control scenario. The Edison Electric Institute (EEI), which represents 76% of all electric utility customers in the US (90% of plants coal-fired), developed a cooperative agreement with the U.S. Department of Energy in March 1993 titled "Climate Challenge Program." The Electric Power Research Institute and Gas Research Institute are also involved in this program.
Environmentally-related energy initiatives in the EEI/DOE agreement include investments of hundreds of millions of dollars into photovoltaics, wind, and geothermal energy technologies. Some of these investments will be cost-shared between the utilities and DOE.
DOE massively reprogrammed its renewable energy R&D resources ($390 million, +15%) in its FY 1995 budget request to Congress shifting funds from nuclear research into alternative energy technologies. It increased its request for energy efficiency R&D by 42% to $978 million.
This industry/government agreement has attracted the interest of venture capital firms and investor-owned utilities. Advent International, one of the world's largest venture capital firms, has expressed interest in energy efficiency, renewable energy, and alternative energy sources such as photovoltaics and fuel cells. The Sacramento (CA) Municipal Utility District (SMUD) plans to supply most of its future consumer demand for electricity with alternative energy sources such as those described in the EEI/DOE agreement. SMUD has set a goal to meet 75% of future demand with these technologies by the year 2000. The firm serves 467,000 customers. It relies heavily on DOE's National Renewable Energy Laboratory in Golden, CO, for key technologies.
Hambrecht & Quist, a leading venture capital firm in San Francisco, has developed a $17 million program, the Environmental Technology Fund. Susan Pfund, the firm's director, sees opportunities in chemical recycling, analytical instrumentation, and software for improving manufacturing and energy use while reducing waste. The trend for this venture capital firm is toward pollution prevention and consumer-related environmental products and away from clean-up, site remediation, and traditional environmental-engineering such as wastewater control. Many other venture capital firms are developing similar investment strategies.
Congress is promoting green technologies as a government mission. On 5/12/94 by a vote of 85-14 the Senate passed the National Environmental Technologies Act. Sponsored by Baucus, D-Mt, Lieberman, D-Ct, and Mikulski, D-Md the bill has four key objectives:
1. Coordinate the estimated $4 billion spent by Federal agencies on green technologies [addresses the "fragmentation" issue discussed earlier]
2. Authorize US EPA to match innovative investments by industry with $36M already appropriated for FY 1994 and authorize $80M for FY 1995 [funds the EPA Technology Innovation Program announced last February]
3. Set up a government-wide database of information on green technologies to assist in promotion of exports [builds on the NTAC model]
4. Invest 1.25% of Superfund monies in green technologies [expands funding for the existing EPA Superfund Innovative Technology Program]
Note to the reader - information on EPA's SITE program will be included in a future draft.
Last year the President issued an executive order on recycling and reuse of paper in federal agencies. A primary objective of the executive order is to promote markets for recycled materials.
The Congressional Office of Technology Assessment (OTA) believes the world market for environmental technologies exceeds $200 billion. Of that amount, 15% or $30 billion, may be open to exporters. The majority of spending is "home grown," says OTA which issued the report in January 1994 as part of a government effort to promote exports of environmental technologies. Previously, OTA issued a report in November 1993 which identified a new industry developing around biopolymers which could be used to make biodegradable plastics.
Air pollution control technologies are seen as a growing area while Superfund and related hazardous waste cleanup work is not seen as an increasing activity. This view from an arm of Congress is significant and may be a more accurate outlook on future appropriations than US Department of Commerce estimates included in the 1994 Industrial Outlook. Major growth areas identified by OTA and venture capital firms are instrumentation for testing water, wastewater, air, food, and fuel. Online, or real-time, testing is attractive to investors.
Another stimulus for some environmental technologies is that they are not "high tech." Brookhaven national Laboratory has successfully developed bioremediation technologies and processes which use basic "kitchen chemistry" to clean contaminated soils with bacteria and citric acid. A.J. Francis, a microbiologist at the lab, said interest is growing in his work because "there are very few knobs to control." David Miller, President of Geraghty & Miller, agrees that the environmental field is really "engineering. There's nothing really scientifically new. It's just applied in different ways."
OTA believes that new forms of regulation allowing firms to adopt innovative practices to address pollution can help developers and users of environmental technologies. These include performance standards, economic standards, and adjusting permitting and enforcement to stimulate adopting of new technologies. Policies to speed use of cleaner technologies also reduce the need for "end-of- pipe" processing of residuals and promote pollution prevention approaches to environmental compliance.
DOE's environmental restoration program is spending $6 billion annually on cleanup of weapons facilities. However, growth in the program may be flat-lined in future years due to criticism from Congress and the Office of Management & Budget that the program is a "budget buster" and is not producing desired results quickly enough.
DOE Assistant Secretary for ER&WM Thomas Grumbly has responded with statements to the press that, "DOE can no longer pursue a strategy of 'suck, muck, and truck' for cleanup." He said that innovative technologies to remediate mixed waste sites must be developed to cut costs.
In August 1993 Los Alamos National Laboratory (LANL) hired a private firm to help start-up companies develop around the spin- off of technologies from the lab. LANL engaged an Austin, TX, firm, MCC Ventures Inc., to spend six months and $1 million investigating which LANL technologies have commercial applications. MCC will focus on electronics, software, environmental, and manufacturing technologies. MCC will work with LANL to attract venture capital to start-up firms to commercialize the LANL technologies.
Also in August 1993 the Sandia Laboratory contract was awarded to Martin-Marietta Corp. Part of the agreement with DOE stipulates that the contractor will establish a $40 million venture capital fund for technology transfer start-ups. Environmental projects are part of the investment portfolio. Martin-Marietta also manages DOE's Oak Ridge National Laboratory.
At Argonne National Laboratory ARCH Development Corp., in cooperation with the University of Chicago, raised an additional $30 million following the successful placement of $9 million in 13 new spin-off companies. Examples of successful projects include materials for superconductor applications and resins which are selective for certain radioactive metals. The resins are useful in weapons' project cleanup activities at DOE facilities.
In article in Harvard Business Review [6/94] "It's Not Easy Being Green," by N. Walley and B. Whitehead of McKinsey & Co., argue against the conventional wisdom concerning the expected continued positive growth of environmental technologies. They point to "skyrocketing" environmental compliance costs that cannot generate a positive financial return. By measuring environmental compliance investments as an equivalent of the price per share of the value of the company, the analysts point to very high numbers. Because companies have demands on available resources to achieve compliance with existing, known technologies, they may have fewer dollars to invest in new environmental technologies.
The authors argue that environmental compliance expenditures are not strategically focused on the corporate bottom line. Instead, spending for compliance and environmental technologies are isolated from decision making about the core business leading to investments that are not cost-effective.
Walley and Whitehead assert that to achieve cost-effective environmental solutions managers must search for technologies which give smarter solutions to current problems and which don't steal capital from key business activities. For example, the writers assert that long-term increases in efficiency of production processes, which would produce fewer residuals to manage with 'end-of-pipe', e.g., dark green technologies, would give Dupont a 15% or $3/per share return on investment. The strategic approach for the company is not to seek new, breakthrough environmental technologies for specific compliance problems, but to preserve shareholder value while avoiding enforcement actions.
This approach will require developers, marketers, and suppliers of environmental technologies to look beyond management of specific residuals toward the company's bottom line. There are three ways to do this, the authors say. They divide environmental technology issues into three categories: operational, technical/organizational, and strategic.
1. Operational Issues The first step is to understand what is being spent on environmental compliance and why. The second step is to insure that maximum environmental impact is being achieved with minimum cost.
2. Technical Issues The second step is to be able to allocate emissions and costs by process and business unit. Few companies are able to do this much less target new environmental technologies where they will do the most good. A strategy for change is to conduct "opportunity-based" environmental audits rather than "compliance-oriented" reviews.
3. Strategic Issues The impact of management decision making at this level can put the company's core business at risk if a wrong choice is made. A key question is whether to lead, follow, or lag behind other firms in the industry. If a firm lags it could be hit with fines or other sanctions from enforcement actions brought by regulatory agencies. If it leads, it could incur pollution control costs which reduce its competitiveness compared to other companies.
© Dan Yurman, 1994.