First published in the Quoted Cleantech newsletter, January 2011. Copyright Cleantech Investor 2011

Cleantech did not keep pace with the overall performance of the Alternative Investment Market in 2010,  with the result that the sector remained flat during the year. This was the second year running that cleantech has underperformed AIM.

At the end of 2010, the Sigma Capital Cleantech index had hardly changed from the end of the previous year. By contrast, AIM as a whole rose by nearly 40% during the year, following on from a nearly 66% rise in 2009. AIM is still underperforming the main market of the London Stock Exchange over a longer time period, which puts cleantech’s own relative underperformance into perspective.

There have been times during the year when the Sigma index appeared to be closing the performance gap with AIM, but these proved short-lived. The majority of Sigma’s underperformance came in the last couple of months of the year, when cleantech shares went backwards and AIM built on its earlier gains.

Fuel cell developer AFC Energy, whose share price rose 562% in 2009, has emerged as the best performing share in the cleantech index for the second year running. In 2010, the improvement was 430%, which is particularly impressive considering the previous year’s growth. AFC has become the third largest company in the index.

The next two best performing companies in the index, Acta and ITM Power, also come from the fuel cell sector. However, it was Acta’s move into the solar installation market in Italy that has transformed its fortunes and given it a revenue stream. At the start of 2010, Ceres Power and Ceramic Fuel Cells were the largest constituents of the fuel cell sub-sector.  Their poor performance – Ceres has more than halved in price – means that the sub-sector has fallen during the year.

The best performing sub-sector in 2010 was solar, which was more than 78% ahead thanks to a strong performance by ReneSola before it left the index at the end of November. In 2009, solar had been the worst performing sub-sector. Delays in new contracts have hit Zenergy Power, making it the worst performing company in the overall index with a fall of nearly 83%.

During the year carbon trading business Climate Exchange, wind turbine technology developer Clipper Windpower, wind power generator Novera Energy, fuel efficiency technology developer Catalytic Solutions and  packaging supplier Plantic Technologies were all taken over. That compares with two takeovers in 2009.

China Biodiesel, fuel cell developer Protonex Technology and solar materials supplier ReneSola all chose to leave AIM, with the latter deciding to concentrate on its NYSE listing. One positive in 2010 was that no company left solely because of financial difficulties.

The departures included four of the seven biggest companies in the Sigma Capital Cleantech index, with an aggregate value of more than £920 million at the end of 2009. They are the main reason why the market value of the index fell by £1 billion to £1.1 billion during the year.  The number of constituent companies has fallen from 37 to 30. Ocean Power Technologies (OPT) will be leaving AIM in 2011 and the company is currently the only constituent of the marine sub-sector – the worst performing sub-sector in 2010. OPT, the tenth biggest company in the index, is valued at £36.8 million.

Some cleantech companies did manage to raise cash during 2010, although many found it difficult and had to be satisfied with a smaller sum than they had  originally planned. Water treatment technology developer HaloSource was able to raise all the cash it required when it floated on AIM in the autumn, but LED technology business ProPhotonix had to settle for a much reduced figure when it joined the junior market just before Christmas.

The UK Government’s feed-in tariffs launched last year have led to investor interest in the cleantech sector, which has sparked the launch of Venture Capital Trusts focused on investing in solar generating capacity. This appears to be a case of fund managers launching new products in a fashionable sector. Foresight Solar VCT, which is currently raising £40 million, has achieved £11.2 million so far and Ingenious Solar VCT is raising £20 million. There is even talk of a Downing Solar VCT.

Hazel Renewable Energy VCT is also trying to raise £40 million, with £12 million bagged to date. It has 60MW of solar capacity lined up, but is also investing in wind and hydro.

Whether or not there will be enough suitable investment opportunities for this cash, particularly in solar in the UK, is questionable. Meanwhile these funds could end up taking investor cash away from other cleantech opportunities, including AIM cleantech companies.

Andrew Hore has covered London’s Alternative Investment Market for more than a decade and is the publisher of AIM Micro: www.aimmicro.com