TODAY’S STUDY: THE PRIVATE SECTOR DRIVING NEW ENERGY

Low Carbon Entrepreneurs: The New Engines of Growth

June 2013 (Carbon Trust)

Executive Summary

The low carbon economy is a UK success story. It accounts for more than £120 billion in annual sales and employs almost 1 million people. It has been growing despite the recession with “over a third of the UK’s economic growth in 2011/12 likely to have come from green business”.

The UK Government has put the low carbon economy at the heart of its strategy for growth. Its Plan for Growth identifies the low carbon economy as a priority theme which cuts across all sectors.

Given the size, growth and strategic importance of the low carbon economy, this research looks at the pivotal role played by small and medium size enterprises (SMEs). SMEs drive innovation, growth and job creation. They represent 60% of all UK private sector jobs. 9 out of 10 unemployed people who found work in the private sector since the economic downturn either started or joined an SME. Small businesses also account for more than 90% of the low carbon sector. SMEs are therefore critical to, and a key indicator for, the present success and future potential of the low carbon economy.

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Low carbon enterprise: a bullish new breed of business

New analysis of the SMEs driving the low carbon economy reveals a bullish breed of business which is intent on pursuing a global low carbon sector forecast to be worth £4 trillion by 2015:

■ Low carbon SMEs are almost twice as likely to have export customers as small businesses in other industries;

■ Almost two in five low carbon SMEs are already exporting to a diverse set of countries and three quarters plan to enter or expand exports to a new market in the next two years;

■ This ambition is matched by plans for growth

– Three quarters of low carbon SMEs plan to raise funding in the next year;

– Two thirds plan to recruit in the next year (more than half have created new jobs in the last year and 12% hired more than 4 new team members);

■ However, the sector is not without its challenges. Chief among these are access to funding, technology demonstration opportunities and securing the right skills. The UK also remains a tough commercial nut to crack which is a contributing factor for low carbon SMEs seeking sales in overseas markets.

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Low carbon innovation mainstreaming across the UK

Aside from the commercial landscape, a geographic analysis of enterprise by location reveals low carbon enterprise mainstreaming across the UK. Low carbon SMEs are found across the length and breadth of the country. Low carbon innovation hubs emerged in London, Oxford, Cambridge, Leeds and Southampton. Relative to population size, Derbyshire and Nottinghamshire also had high proportions of low carbon SMEs. Access to talent and regional funding sources are key reasons that drive business location after where company founders happen to live.

However, entrepreneurs in the low carbon sector are almost invariably male (more than 90%) and middle aged (more than 75% are over 40) highlighting the need to harness a broader UK talent base. This research also looked ahead to the next generation of low carbon innovators. Encouragingly, almost one third of entrepreneurs from a data set made up predominantly of 16 – 30 year olds say they would like to start a new low carbon business or get involved in the low carbon economy but don’t know how to go about it.

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The Ten Steps for Success

We highlight 10 steps for success to help the UK’s low carbon SMEs to grow, create jobs and deliver the innovation needed to realise the UK’s environmental ambitions.

1 Maintain clear, long term vision and ambition

Clear long term vision and ambition is required to accelerate the move to a low carbon economy. This will provide the framework that enables low carbon SMEs to innovate, grow and create jobs and will enable investors to engage in the sector with confidence that the market will grow. The UK government has led the world in creating a long term legislative vision in the form of the Climate Change Act 2008. It has also signaled its intent to create new structures like the Green Investment Bank and mechanisms like the carbon price floor to help stimulate the low carbon economy. These measures provide a platform to build on to increase the scale of existing initiatives and develop new ways of catalysing the growth and potential of the low carbon economy.

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2 Ensure funding is available for development and growth

The market for early stage funding has contracted since 2008 and is now stranding low carbon entrepreneurs with innovative technologies that could help to grow the low carbon economy. It is also challenging for private sector investors to raise new funds and these investors have limited dry powder in existing funds for new early stage investments. This research highlights the urgency of addressing the funding gap for low carbon SMEs and the opportunity for the government to correct a market failure. One suggestion for how to do this was put forward by the Green Alliance19 who outlined a measure to re-allocate £100 million of R&D tax credit funding that currently goes to large companies to an early stage venture capital fund. Although large companies would lose in the short term from this re-allocation, large companies in general are relatively well capitalised at present and the advantages of this type of approach are that it would require no new government funding. There are also other ways that funding could be made available for development and growth (e.g. loan funding, contributions to crowd sourcing). Consideration of the appropriate funding mechanism may include factors like: how established the routes to channel the money are, how well known the transaction costs are, what flexibility companies may gain compared to R&D tax credits from this funding and how involved the private sector is in helping to allocate this funding.

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3 Enable demonstrations through procurement

One of the key areas where low carbon SMEs would benefit from support is in relation to demonstration opportunities to show whether their technology performs as they claim. Demonstration opportunities are pivotal for low carbon SMEs particularly where the demonstration enables them to gather reference data from a relevant operating environment. Reforming procurement rules provides one way to encourage more demonstration opportunities. This could include both government procurement reforms and also initiatives like the ‘Access Pledge’ which encourages large companies to reform their procurement rules to make it easier for small companies to bid in for opportunities. This model could be useful to a wide range of low carbon SMEs and could help to unblock a key barrier these SMEs face in getting to market.

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4 Provide sustained and tailored commercial advice

There is a need for sustained and tailored mentoring and commercial advice to low carbon SMEs. This would complement existing initiatives (e.g. the Growth Accelerator and incubation support from the Energy Entrepreneurs Fund). The focus should be on the leading low carbon SMEs given, for example, job creation research which shows that a small minority of the fastest growing firms are responsible for a disproportionate share of the UK’s job creation20. The support should also be tailored to the gaps of each individual venture. This type of sustained, customised support has been demonstrated to deliver results. For example, the Carbon Trust’s Entrepreneurs Fast Track catalysed £150 million of private sector investment and joint development agreements for low carbon SMEs in the UK within a year of support to the businesses.

5 Help SMEs access export opportunities

Exports are important to the current and future plans of low carbon SMEs. It is not easy for SMEs to export successfully and accessing the right local partner is particularly challenging. Existing initiatives run by the UKTI and the Foreign and Commonwealth Office were praised by many of the low carbon SMEs interviewed as part of this research. Given the scale and importance of exports to low carbon SMEs, there seems to be an opportunity to build on existing activities to help SMEs realise the export plans. This could involve further specific low carbon technology missions for SMEs (e.g. to build on the Clean and Cool Mission) or the inclusion of more low carbon technology SMEs as part of overseas trade missions.

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6 Address the skills gap

Access to talented people is one of the top three reasons for the location of low carbon SMEs. The profile of current low carbon entrepreneurs is predominantly male and over 40 and that a new generation of entrepreneurs is keen to enter the sector. Other reports21 have highlighted the potential low carbon skills gap and various government responses have been written to highlight steps being taken to address this skills gap. These measures are a good start. More is likely to be needed right from early encouragement in secondary schools of science, technology, engineering and mathematics (STEM) subjects through to later qualifications to provide the engineering and technical skills needed to transition to a low carbon economy. In addition to the technical skills that are important, there may also be a skills gap at senior commercial levels (e.g. CEOs, Commercial Directors) for low carbon SMEs particularly at an early stage when salaries are either low or not paid and it can take time to generate the revenues that put the venture on a stronger footing. New ways need to be found to encourage senior commercial people into the sector to ensure technical developments are not held back by a lack of commercial expertise in low carbon SMEs. It would be useful to encourage more engagement with both young people and those who are considering becoming low carbon entrepreneurs to help them understand in a reasonably approachable, time efficient way what entrepreneurship involves, to help building entrepreneurial skills earlier and highlight some of the challenges that entrepreneurs face.

7 Develop new models to drive collaboration

New collaborative models that engage a wider range of actors in the low carbon economy are needed to drive collaboration. In particular, corporates have a key role to play given their financial resources, technical expertise and global reach. New collaborative models that deliver benefits to corporates and SMEs are needed to accelerate low carbon innovation and overcome the barriers that have made it challenging for these two groups to engage effectively. SMEs often do not find it easy to engage with corporates and vice versa but examples like Artemis demonstrate that it can be done successfully. New models are emerging for how to enable this type of collaboration to take place. For example, the Carbon Trust has a $5 million incubation partnership with GE to find, assess and incubate start ups across Europe with the aim of driving the growth both of GE and start up partners that we engage with. The Offshore Wind Accelerator is another example of a collaborative model and convenes nine of Europe’s leading energy companies with 77% of the UK’s licenced offshore wind capacity to drive down the cost of offshore wind by 10% by 2015. The H2 mobility partnership is another example of collaborative partnerships involving corporates and SMEs to create a market and unlock innovation opportunities. More of these models are needed and at larger scale to accelerate the move to a low carbon economy.

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8 Focus where the UK is well placed to lead

Innovation support requires significant commitments of capital and resources. There is not enough of either to fund all the projects or ventures that apply. In order to deliver jobs, growth and environmental outcomes, the UK should consider focusing most of its innovation support on areas where the UK has a material advantage or a particular need to develop a technology option to make sure it gets the most benefit from the scarce resources available. The Carbon Trust has previously highlighted the need for this focus. The Technology Innovation Needs Assessments that have now mostly been completed provide an evidence base to enable prioritisation to happen and this is something the Low Carbon Innovation Coordination Group is taking forward.

9 Recognise industry specific challenges

The low carbon economy is a UK success story. It is also an industry that faces a variety of difficult challenges compared to many other sectors. Low carbon technologies often require high amounts of capital and long timeframes to get to market at scale. It can be difficult to differentiate the outputs of low carbon technology product from the solutions they are trying to replace (e.g. electricity from low carbon versus high carbon generation). The sector is also particularly reliant on government regulation which creates uncertainty and risk for investors. Given these features of the low carbon economy, it seems important to recognise that targeted industrial policy for the sector can be justified to correct market failures that would otherwise limit its growth.

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10 Celebrate success

The UK economy is a low carbon success story. There are a range of entrepreneurs who have achieved great success. This success needs to be celebrated both as a reward to those who have prevailed against the odds (most new businesses fail within 10 years) and to provide reference cases for aspiring entrepreneurs who are considering entering the sector to show them that it is possible to both succeed commercially and achieve environmentally. A core objective of Shell Springboard is to find the UK’s next big idea in low carbon enterprise and innovation and celebrate the success of leading low carbon entrepreneurs in the UK. More programmes or initiatives like this could help to both reward those entrepreneurs who have worked so hard for their success and inspire the next generation of entrepreneurs to engage in the sector.

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