The Cleantech Opportunity

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					Cleantech –
The Energy Opportunity

How the quest for energy efficiency creates new opportunities
for economic development in Cleantech

Dr. Florian Weig, McKinsey & Co., Inc.
Berlin, May 2010

Any use of this material without specific permission of McKinsey & Company is strictly prohibited
The share of sectors for which energy plays a key role is particularly high
in Eastern European countries
Share on total national revenues 2008, percent
                                 44              43
                                                                               39                                            Global:
Mobility                                                                                   35                                Ø 40%
                                                                                                     31           30

Industrial High Tech
IT and IT services

                             Germany Japan                  Eastern         Italy        France   Great       US
                                                            Europe1                               Britain
Revenues of
relevant sectors              2,380          3,210          1,720          1,420         1,460    1,360        6,320
EUR billions p.a.
Total market
revenues                      5,380          7,460          4,119          3,640         4,170    4,370       21,070
EUR billions p.a.
1 Bulgaria, Czech Republic, Hungary, Poland, Romania, Russia, Slovak Republic, Ukraine

SOURCE: Global Insight; World Industry Monitor, February 2009                                               McKinsey & Company   | 1
McKinsey's assessment of energy efficiency levers in the global
abatement cost curve
   Cost of abatement                                                       deforestation       CCS, coal
   EUR/t CO2e                                                              America             retrofit


         0   1   2    3   4    5   6   7   8   9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27
   -20                                                                                       Abatement
                                                                                            Gt CO2e/year


   -80                             Air conditioning                Clean technologies are products or
                                                                   solutions that
 -100                              Lighting systems                ▪ Lead to a step change of 50%+ in
                                                                     energy efficiency vs. existing
 -120                                                                technology
                                                                   ▪ Are disruptive to their industry
 -140                                                              ▪ Develop global growth clusters

SOURCE: McKinsey, Vattenfall                                                               McKinsey & Company   | 2
Cleantech centers of growth are developing a global market potential of
EUR 2 trillion in 2020
EUR billions p.a.

Sum of all                              Development of selected centers of growth
centers of growth                       within key sectors                                                                             2020

          13% p.a.                                                                                                            Percent

                    2,140                                                                  15
                                                          Mobility                                                                29
                                                          Buildings                                                                7
                                                          Industrial High Tech                                                     8
                                                          IT and IT services1
                                                                                                45                                18
                                                          Energy industry
                                                                                                                        345       13

    2008            2020

1 Include energy-efficient IT, IT for energy management, smart grid, IT based traffic systems

SOURCE: McKinsey report, "Wettbewerbsfaktor Energie"                                                              McKinsey & Company   | 3
Radical customer orientation and new business models key to realizing
market potential
                                              Main levers

                            Adapt applica-    A Design-to-value, e.g., cogeneration
                            tion to meet          solution to reuse rejected paper
                            customer needs
                            precisely         B Design-to-cost, e.g., using less costly
                                                  components in CHP systems for
                                                  residential customers

 Mindset of radi-
 cal customer
                            Cater business    C Financing models, e.g., rate payment
                            and financing         models for energy-efficient consumer
 focus to bring
                            models to cus-        products
 products to scale
                                              D Business model transformation, e.g.,
                                                  energy contracting solutions for buildings

                            Raise custom-     E   Value-selling, e.g., clearly defining and
                            er awareness          communicating value to the customer and
                            of TCO benefit2       offer alternative operating/financing models

1 Combined heat and power
2 Total cost of ownership

                                                                           McKinsey & Company   | 4
How is your glass? Half empty?

                     Following the wave is already promising
                     ▪ Economic competitiveness: Many Cleantech
                       applications have short payback periods – good models
                       to cross the initial investment barriers are needed
                     ▪ Jobs: In typical Cleantech industries like renewable
                       energies about 50% of value add is in designing and
                       installing the system locally
                     ▪ Energy independence: Energy efficiency reduces
                       dependence from unreliable or costly supply
                     ▪ Environmental benefit: Lower pollution levels and
                       higher quality of life
                     ▪ Accept technology leadership by others: US,
                       Germany, China all have quite a headstart

SOURCE: McKinsey                                                   McKinsey & Company   | 5
How is your glass? Half full!

  Surfing the wave leads to real opportunity
  ▪ Still emerging opportunities: Most Cleantech markets
    have no established industry structure and are expanding
    constantly; no single technology or business model
    winning so far
  ▪ ECA advantage 1: High energy dependency of ECA
    industries makes them the perfect breeding and testing
    ground for many Cleantech applications
  ▪ ECA advantage 2: Strong R&D and engineering culture
    providing a strong innovation base
  ▪ ECA advantage 3: Established partners in many of the
    Cleantech industries to quickly access know-how
   What is your strategic posture?
    Where is your Cleantech master plan?

SOURCE: McKinsey                                               McKinsey & Company   | 6
Start to think about
your Cleantech
opportunity today…

Thank you!

                       McKinsey & Company   | 7
Energy plays a key role in 40% of the global economy
2008 worldwide revenues, EUR billions

                                                                     100% = 36,500

                                                                                    7,650         Mobility

                              100% = 90,750
                                                                                    7,440         Buildings

                       60%                             40%                          9,830

                                                                                    1,710         Industrial High Tech
                                                                        1,110                     IT and IT services

                                                                                    8,760         Energy industry

SOURCE: Global Insight; World Industry Monitor, February 2009; McKinsey report, "Wettbewerbsfaktor Energie"    McKinsey & Company   | 8
The energy crisis and climate change are forcing politicians and industry
to act on energy efficiency
Energy efficiency discussion driven by 3 underlying issues
High energy                                       ▪   Energy prices volatile, but increasing in long term,
prices in                                             e.g., by 2.5 - 3.5% p.a. for German industry
long term                                         ▪   Driver: sharply increasing demand for primary
                                                      fuels, especially in developing regions

Concentration                                     ▪   Indigenous local resources being depleted, e.g.,
of supply                                             EU gas supply will shrink by 15 - 20% by 2020
                                                  ▪   Remaining resources increasingly under political
                                                      control of exporting countries

Climate policy                                    ▪   Challenging national targets for energy efficiency,
objectives                                            e.g., in Germany and the US
                                                  ▪   EU CO2 trading schemes will likely be extended to
                                                      more industries; long-term CO2 prices climbing
                   "Double energy efficiency by
                  2020 compared to 1990 levels"
                     German Federal Government

                                                                                       McKinsey & Company   | 9
Our definition of clean technologies – Cleantech – and respective
centers of growth

                                                  Example – automobile drive technology

                                                                    Increase in energy Automobiles sold
                                                  Automobiles       efficiency above   Millions                  CAGR
Definition                                        with              historical average 2008      2020            Percent

We focus on clean technologies/
products/solutions that …                         Standard com-
                                                                         < 50%               55        22          -7
▪ … can improve energy effi-                      bustion engines
   ciency (or decrease GHG
   emissions) by at least 50%
   beyond historic trajectory                     Optimized com-
                                                                                       2                    42     29
                                                  bustion engines
▪ … are thus disruptive
                                                                         > 50%
▪ … develop into centers of
   growth with average growth                     Hybrid or elec-
                                                                                       1              13           24
   rates of 13% p.a.                              tronic motors

                                                                                                  Centers of growth

SOURCE: McKinsey report, "Wettbewerbsfaktor Energie"                                              McKinsey & Company   | 10
Already in 2008, over EUR 100 billion investments flowed into the
Cleantech sector across all asset classes worldwide

Global Cleantech
investment flows1
EUR billions2

                                                                                 Private equity
                                                       Government R&D
                                                   Venture capital              5.8
        43% p.a.                                                          6.0
                                              Public markets
                 100.7                                              6.7

                                            Corporate R&D 7.7                                     55.1 Asset finance

    24.2                                                    Small-scale

   2004           2008
1 Excluding M&A and MBO deals
2 USD converted to EUR with exchange rate of 0.71 EUR/USD

SOURCE: World Economic Forum report, "Green Investing 2009"                                           McKinsey & Company   | 11
C Innovative financing models – Berlin Energy Agency
  aligns investment and benefits for building retrofitting
                               Project approach

                                                        Berlin Energy Agency
                                                        ▪ Acts as project manager
 ▪ Berlin Energy                                        ▪ Pools buildings and
    Agency manages                                        negotiates contracts
    retrofits of large
 ▪ Example projects                                     ▪ Guarantees energy savings
    include schools,                                        of > 25%
    offices, hospitals,                                 ▪   Assures financing of retrofit     Energy systems
    and residential            Building owner                                                 company, e.g.,
    buildings                                           ▪ Pays 80 - 97% of achieved           equipment supplier
 ▪ Public-private                                           energy savings until retrofit
    partnership of city                                     is paid back (8 - 12 years)
    of Berlin, Vattenfall      Key benefits
    and KfW (Federal
    Promotional Bank)          ▪ No up-front investments                                    ▪ New business
 ▪ Program already             ▪ Professional retrofit                                        generated through
                                 plan leveraging full                                         endorsement of Berlin
    transferred to                                                                            Energy Agency
    several ECA cities           savings potential
                               ▪ Positive cash flow from                                    ▪ Additional revenues if
                                 energy savings from                                          retrofit measure more
                                 day 1                                                        effective than planned

SOURCE: Berlin Energy Agency                                                                    McKinsey & Company   | 12
D Energy contracting models can bridge high up-front costs
       Energy contracting example, Siemens Building Technologies

Both customer and contractor benefit from energy savings …                   … creating a win-win situation

Energy and
operational costs
                                                                              ▪ Makes investment for
  Baseline costs                                                                energy-saving measures
                                                                              ▪ Receives payment within
                                                               Customer         guaranteed amortization
                                                               savings          period
                               Guaranteed savings

                    Reduced costs due to performance-based solutions
                                                                              ▪ Does not need to pay for
                                                                                up-front investment
                                                                              ▪ Does not assume any risk
                                                                              ▪ Benefits from any upsides
                                                                                of energy savings

                                        Program               Time (years)

                                    Contracting model transformed business from selling
                                    mere equipment to selling energy efficiency service

SOURCE: Siemens Building Technologies                                                       McKinsey & Company   | 13

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