Cleantech – The Energy Opportunity

1
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
CONFIDENTIAL AND PROPRIETARY Any use of this
material without specific permission of McKinsey
Company is strictly prohibited
2
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
44
43
43
42
42
Global Ø 40
Global Ø 40
39
39
Mobility
Mobility
35
35
31
31
30
30
Buildings
Buildings
Energy-intensiveindustries
Energy-intensiveindustries
Industrial High Tech
Industrial High Tech
IT and IT services
IT and IT services
Power
Power
US
Great Britain
France
Italy
Eastern Europe1
Japan
Germany
US
Great Britain
France
Italy
Eastern Europe1
Japan
Germany
Revenues of relevant sectors EUR billions p.a.
2,380
3,210
1,420
1,460
1,360
6,320
1,720
Total market revenuesEUR billions p.a.
5,380
7,460
3,640
4,170
4,370
21,070
4,119
1 Bulgaria, Czech Republic, Hungary, Poland,
Romania, Russia, Slovak Republic, Ukraine
SOURCE Global Insight World Industry Monitor,
February 2009
3
McKinsey's assessment of energy efficiency levers
in the global abatement cost curve
Avoided deforestationAmerica
CCS, coal retrofit
Cost of abatement EUR/t CO2e
Solar
40
20
0
13
12
11
10
1
0
23
22
21
20
2
19
8
7
9
6
5
4
3
27
26
25
24
18
17
16
15
14
-20
AbatementGt CO2e/year
-40
-60

• Clean technologies are products or solutions that
• Lead to a step change of 50 in energy
  efficiency vs. existing technology
• Are disruptive to their industry
• Develop global growth clusters

-80
Air conditioning
Lighting systems
-100
-120
Insulation improvements
-140
-160
SOURCE McKinsey, Vattenfall
4
Cleantech centers of growth are developing a
global market potential of EUR 2 trillion in 2020
4
EUR billions p.a.
Sum of all centers of growth
Development of selected centers of growth within
key sectors
CAGRPercent
13 p.a.
2,140
Mobility
29
Buildings
7
Industrial High Tech
8
IT and IT services1
18
500
Energy industry
13
2020
2008
1 Include energy-efficient IT, IT for energy
management, smart grid, IT based traffic systems
SOURCE McKinsey report, "Wettbewerbsfaktor
Energie"
5
Radical customer orientation and new business
models key to realizing market potential
Main levers
A
Adapt applica-tion to meet customer needs
precisely
Design-to-value, e.g., cogeneration solution to
reuse rejected paper
B
Design-to-cost, e.g., using less costly
components in CHP1 systems for residential
customers
Mindset of radi-cal customer focus to bring
energy-efficient products to scale
C
Cater business and financing models to cus-tomers
Financing models, e.g., rate payment models for
energy-efficient consumer products
D
Business model transformation, e.g., energy
contracting solutions for buildings
E
Raise custom-er awareness of TCO benefit2
Value-selling, e.g., clearly defining and
communicating value to the customer and offer
alternative operating/financing models
1 Combined heat and power 2 Total cost of
ownership
6
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
• But
• Accept technology leadership by others US,
  Germany, China all have quite a headstart

SOURCE McKinsey
7
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 RD 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
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Start to think about your Cleantech opportunity
today Thank you!
9
Energy plays a key role in 40 of the global
economy

2008 worldwide revenues, EUR billions
36,500
100
Mobility
7,650
100 90,750
Buildings
7,440
Energy-intensive industries
9,830
60
40
Industrial High Tech
1,710
1,110
IT and IT services
Energy industry
8,760
SOURCE Global Insight World Industry Monitor,
February 2009 McKinsey report,
"Wettbewerbsfaktor Energie"
10
The energy crisis and climate change are forcing
politicians and industry to act on energy
efficiency
Energy efficiency discussion driven by 3
underlying issues

• Energy prices volatile, but increasing in long
  term, e.g., by 2.5 - 3.5 p.a. for German
  industry
• Driver sharply increasing demand for primary
  fuels, especially in developing regions

High energy prices in long term

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

Concentration of supply

• Challenging national targets for energy
  efficiency, e.g., in Germany and the US
• EU CO2 trading schemes will likely be extended to
  more industries long-term CO2 prices climbing

Climate policy objectives
"Double energy efficiency by 2020 compared to
1990 levels" German Federal Government
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Our definition of clean technologies Cleantech
and respective centers of growth

Example automobile drive technology
Automobiles sold Millions
Increase in energy efficiency above historical
average
CAGR Percent
Automobiles with
2020
2008

• Definition
• We focus on clean technologies/
  products/solutions that
• can improve energy effi-ciency (or decrease GHG
  emissions) by at least 50 beyond historic
  trajectory
• are thus disruptive
• develop into centers of growth with average
  growth rates of 13 p.a.

Standard com-bustion engines
-7
55
22
lt 50
Optimized com-bustion engines
42
29
gt 50
Hybrid or elec-tronic motors
13
24
Centers of growth
SOURCE McKinsey report, "Wettbewerbsfaktor
Energie"
12
Already in 2008, over EUR 100 billion investments
flowed into the Cleantech sector across all asset
classes worldwide
8
Global Cleantech investment flows1 EUR billions2
Private equity
Government RD
4.1
Venture capital
43 p.a.
Public markets
100.7
Corporate RD
Asset finance
24.2
Small-scaleprojects
2008
2004
1 Excluding MA and MBO deals 2 USD converted to
EUR with exchange rate of 0.71 EUR/USD
SOURCE World Economic Forum report, "Green
Investing 2009"
13
C
Innovative financing models Berlin Energy
Agency aligns investment and benefits for
building retrofitting
Project approach

• Berlin Energy Agency
• Acts as project manager
• Pools buildings and negotiates contracts

• Berlin Energy Agency manages retrofits of large
  buildings
• Example projects include schools, offices,
  hospitals, and residential buildings
• Public-private partnership of city of Berlin,
  Vattenfall and KfW (Federal Promotional Bank)
• Program already transferred to several ECA cities

Building owner
Energy systems company, e.g., equipment supplier

• Guarantees energy savings of gt 25
• Assures financing of retrofit

• Pays 80 - 97 of achieved energy savings until
  retrofit is paid back (8 - 12 years)

Key benefits

• No up-front investments
• Professional retrofit plan leveraging full
  savings potential
• Positive cash flow from energy savings from day 1

• New business generated through endorsement of
  Berlin Energy Agency
• Additional revenues if retrofit measure more
  effective than planned

SOURCE Berlin Energy Agency
14
Energy contracting models can bridge high
up-front costs
D
Energy contracting example, Siemens Building
Technologies

creating a win-win situation
Both customer and contractor benefit from energy
savings
?
Energy and operational costs

• Contractor
• Makes investment for energy-saving measures
• Receives payment within guaranteed amortization
  period

Baseline costs
Customer savings
Guaranteed savings
?

• Customer
• Does not need to pay for up-front investment
• Does not assume any risk
• Benefits from any upsides of energy savings

Reduced costs due to performance-based solutions
Time (years)
Program
Contracting model transformed business from
selling mere equipment to selling energy
efficiency service
SOURCE Siemens Building Technologies