Feb 29 - International Herald Tribune

Long considered marginal and even quixotic, energy from sources like the wind, sun and plants is turning into one of the world's most highly valued industries. And while power generated by "green" sources remains tiny compared with fossil fuels, the sector has begun to attract the attention of big-league investors seeking to profit from a new wave of growth in alternative energy.

But even as the amount of cash swells, environmental officials warn that financing is flowing to projects that may be doomed to failure.

Once-trendy biofuels like ethanol produced from corn are now being derided by the authorities, who say the fuels have little value in the fight against global warming. Vital components for windmills and solar cells have run short over the past year, requiring expensive projects to a halt. Meanwhile, subsidies for renewable energy remain at the whim of politicians, creating a boom and bust cycle for wind farms and solar projects, particularly in the United States.

Such a risky environment means some bankers are placing bets on projects that are unlikely to develop into serious, profitable alternates to fossil fuels, and could ultimately slow investment flows

"Some of these green investments are going in the wrong direction," said Yvo de Boer, the executive secretary of the United Nations Framework Convention on Climate Change. "Very well- intentioned projects can go awry, particularly where government policies on cutting emissions aren't clear."

Other experts say pouring money into newfangled renewable technologies could prove less cost-effective than relatively straightforward improvements in energy efficiency. Efficiency measures could cut growth in energy demand in half by 2020 and earn investors double-digit rates of return, said Diana Farrell, the director of the McKinsey Global Institute.

"Too much of the energy debate has focused on simply boosting supplies that are destined to be wasted," she said.

Global investment in alternative energy last year soared 60 percent, to $148.4 billion, from 2006. That would need to triple in the next five years to roughly $500 billion if governments are to meet their targets to reduce emissions and generate energy from renewable sources, said Michael Liebreich, the chief executive of New Energy Finance, which tracks investment flows.

But any transformation of the energy industry still may take decades, and investors should be wary, said Kevin Parker, the global head of asset management at Deutsche Bank.

"Climate change may be the most important investment megatrend of our lifetimes," Parker said. "But it creates a highly dynamic and treacherous investment landscape, and some of today's winners are bound to turn out to be tomorrow's losers."

Just three years ago, renewable energy was largely a niche area for specialist venture capital and private equity firms.

Since then, warnings by scientists about the link between emissions and climate change have sparked a flurry of new financing as authorities in the United States and Europe mandated greater quantities of power from renewable and clean energy sources.

Today, top-tier banks and big-name financiers dominate a closely watched annual rankings compiled by New Energy Finance.

Credit Suisse handled stock market listings worth $2.8 billion last year making it the most active in public market offerings, according to the third edition of the rankings to be released Friday. Merrill Lynch ranked second with deals worth $2.4 billion while Morgan Stanley was in third place, with deals worth $2.3 billion.

Good Energies, a firm based in Zug, Switzerland, made the largest number of venture capital and private equity investments in 2007 while heavyweights of the Silicon Valley start-up industry - Khosla Ventures and Draper Fisher Jurvetson - placed second and third.

In terms of overall amounts of venture capital and private equity, Goldman Sachs led with investments of $443 million followed by Credit Suisse, with $428 million, and Macquarie Bank, with $334 million.

Capitalizing on the trend, John Lynch, a banker with Merrill Lynch, arranged a spinoff of Iberdrola Renovables, the world's largest renewable energy company, from its Spanish parent.

But he had one concern about selling shares in a company in the red-hot wind power sector: The long shadow of the Internet boom and bust.

"We had to educate naysayer investors that this isn't dot-com all over again," said Lynch, the lead banker handling the initial public offering of its shares. "We had to convince investors that the cash flow couldn't just evaporate," he said.

Lynch explained how the value of Iberdrola Renovables - as with many Internet companies - was based on future cash flows. But unlike dot-com-era offerings, wind, Lynch was able to tell investors, is a viable business because of legislated rates to buy the product - clean electricity - at favorable prices from farms, many of which already are built.

His campaign paid off: the company raised euro 4.48 billion in its debut and is now valued at about euro 17.2 billion, or $26.2 billion - more than many conventional utilities.

Having used the proceeds from its IPO to pay off debt, Renovables now is seeking financing to double its wind capacity, mostly through building new farms in Spain, Britain and the United States.

But even for wind - which raised about $10 billion in public offerings in the past three years, beating amounts raised by solar and biofuels companies - hazards remain.

Legislators in two of the most important wind markets, the United States and Spain, have not yet renewed subsidy programs, helping depress the stocks of some wind operators, including Iberdrola Renovables.

But some of the most serious concerns are in the solar sector, where shares dropped sharply in recent weeks after some companies doubled or tripled in value last year. A number of solar companies have postponed or cancelled initial public offerings.

A major problem with solar is that it still costs more than wind to produce a unit of electricity from photovoltaic cells. Another problem is a shortage of a key ingredient, silicon, to make solar cells.

In a rush to secure silicon, a number of solar companies have developed their own production operations. But some, like REC Group of Norway, have seen their shares tumble because of production problems.

The volatility of the renewable energy sector has prompted speculation that investment could slow dramatically as it did after the oil shocks of the 1970s. Once oil prices stabilized, the vogue for renewable energy waned, particularly in the United States. Other challenges to renewable energy include a renaissance in nuclear power and the emergence of technologies to make cleaner-burning coal and gas.

With mounting evidence of weak spots in renewable energy at a time when the global economy is slowing, the rate of growth in the sector could slow to 20 percent from a white-hot rate of 60 percent growth last year, Liebreich of New Energy Finance said.

"The world is repricing risk, and these are risky assets," Liebreich said, referring to renewable energy investments.

Parker of Deutsche Asset Management agreed that big investors were heeding warning signs in the renewable energy sector and now were refining their investment strategies accordingly.

He said bankers already were becoming more discerning about projects by starting to favor financing for energy efficiency projects and showing greater interest in technologies like "concentrating solar power" - which uses mirrors to concentrate the sun's rays rather than relying on sometimes scarce inputs like silicon - to avoid supply shortages.

Originally published by The New York Times Media Group.

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