By Courtney Barry for Fortnightly’s PUB - Public Utilities Blog.

Word from Wall Street: Don’t overload on solar and wind.

According to the April 6, 2010, BofA Merrill Lynch Global Research report Alternative Energy Perspective, investors are changing their aim “to look beyond wind and solar as opportunities broaden…Venture capital investments are becoming less solar-centric… [S]mart grid/energy efficiency provided the greatest number of deals in the quarter.”

That trend is echoed by the Cleantech Group of San Francisco, which provides updated industry market statistics on clean technology. While wind and solar PV project markets continue growing, due to extended tax credits, private equity and venture capital investing is a different story.

“Solar VC investment is a shadow of what it formerly was,” said Dallas Kachan of Cleantech. The firm shows that solar has fallen from its position as undisputed top sector for venture capital investment, which it held over much of the last few years, and now isn’t far off its three-year lows ($322 million in 27 deals). Kachan noted that comparable analysis for wind investments is difficult because wind receives an insignificant percentage of venture capital.

Meanwhile, smart grid and energy efficiency venture capital investments are on the upswing for the 1^st quarter 2010. “We saw 11 venture investment deals in the first quarter of 2010 in smart grid,” Kachan said. “The total invested was $53 million. And we saw $217 million invested in the first quarter of 2010 into the energy efficiency category for a total of 39 deals.”

Some recent smart-grid private equity deals noted by Cleantech include KLG Systel of India, which provides solutions for IT and currently implements a real-time energy management system for one of India’s largest cement companies; and Daintree Networks, a U.S. company that provides wireless control solutions for commercial buildings. The top three energy-efficiency placements involved Lemnis Lighting of the Netherlands, specializing in sustainable lighting based on led technology; Wuhan HC Semitek, a Chinese high-tech company that manufactures and sells blue and green LED chips; and Luminus Devices, a U.S. manufacturer of solid state lighting for various illumination applications, including PhlatLight LEDS.

Why the trend? “There has been a tremendous amount of capital put into solar,” said Jeffrey Lipton, a managing director with investment bank Jefferies & Co. “A number of high profile companies got funded over the last three to five years, raising anywhere from $250 million to $1 billion dollars in private capital, and they haven’t reached large scale production yet — which is a very different type of proposition for private investors than what they’re used to.”

Moreover, PE and VC firms have been investing less money in wind energy recently, viewing the sector as more mature and consolidated than solar. “The investment in wind has been more around project or wind farm development, so the challenges are a bit different than solar, where names like Nanosolar, Miasole, Solyndra, etc., have each raised several hundred million dollars and still have not reached large scale commercial production.”

Compared to solar, investors view energy efficiency and smart grid opportunities as less risky and faster to bear fruit. They need less capital and have much shorter payback periods for customers in many instances, Lipton said. “Smart Grid is a different kind of investment because you don’t need to spend several million dollars to build the first plant. And people see energy efficiency as an attractive return-profile business, so that’s why there’s a focus on that. It’s a lot easier to use less energy than to build new capacity.”-Courtney Barry for Fortnightly’s PUB