Credit Crunch Bites Clean Tech

Credit Crunch Bites Clean Tech

Location: New York
Author: Ken Silverstein, EnergyBiz Insider, Editor-in-Chief
Date: Tuesday, April 29, 2008

The credit crunch has taken a bite out of the clean tech sector. But despite the critical situation, the industry is expected to go on to prosper.

The fundamentals are all in place. The rise in oil prices has caused an upward spiral in all of the fossil fuels, giving sustainable sources not only an economic advantage but an environmental one as well. Indeed, national governments around the globe are enacting clean air laws that encourage renewable energy consumption. The result, over time, will mean increasing levels of investment in clean technologies.

"While the long-term trend shows continued expansion of the category as a whole, we are seeing contraction in what had been the market-leading sectors first-generation bio-fuels and second-generation solar," says John Balbach, managing partner of the Cleantech Group in San Francisco. "This healthy minor correction indicates exuberance is giving way to tempered optimism."

Clean Edge, a different research firm that has been tracking the growth of clean-energy markets since 2000, had reported last year a 40 percent increase in revenue growth for solar photovoltaics, wind, bio-fuels and fuel cells. That equates to $77.3 billion in investment in 2007 and $55 billion in 2006. For the first time, three of these are generating revenues of $20 billion each, with wind now exceeding $30 billion.

New global investments in energy technologies-including venture capital, project finance, public markets, and research and development-have expanded by 60 percent from $92.6 billion in 2006 to $148.4 billion in 2007, according to research firm New Energy Finance. But that was last year.

This year, the credit crunch is taking its toll. Clean energy investments made in the first quarter of 2007 totaled $3.7 billion, says New Energy Finance. But the same group attracted only $2.4 billion in the first quarter of 2008. It says that private equity investors cut the level of their investments by 64 percent, reflecting the uncertainty and volatility of the financial markets as well as the credit crisis.

Money raised in public equity markets has also dried up since the $7.2 billion initial public offering of Iberdrola Renovables in December 2007, which "marked the top of the market," the firm say says. The industry attracted just $807 million in the first quarter of this year. That compares to $5.2 billion during the same period last year. Venture capital investors, though, increased their stakes by 57 percent during the same time period.

"If anything, high oil prices should strengthen the renewable energy sector and encourage people to invest in clean energy that is cheaper and more secure, long term," says Matthew Clayton, investment manager at Tridos Bank, in an interview with BusinessGreen.com. "I have no massive concern for companies getting funding."

Bright Prospects

To be sure, the collapse of sub-prime mortgages took a huge toll on global financial markets. While central bankers have lowered interest rates in an attempt to increase liquidity, bankers are still leery and won't accept much risk. The resulting crunch has reduced cash flow, helping to explain why investors are more cautious.

Nevertheless, renewable energy projects have increasing appeal. Not only are energy prices high but national governments are also enacting policies to encourage renewable energy use. The wind and solar industries in particular are the beneficiaries of generous incentives that are designed to spur new technologies and more development.

It seems to be working. Companies ranging from BP and Chevron to Goldman Sachs and Chase to General Electric want in on the action. Basically, a lot of firms that had been allocating investments to high-tech in the late 1990s are now creating clean tech divisions. GE Energy Financial Services, which estimates the market for green energy to be $60 billion a year, has more than $3 billion in renewable energy transactions.

In the case of Europe, nations there have enacted 20 percent renewable portfolio standards that are to be in place by 2020. In this country, about half the states have implemented such standards while the federal government has given the renewables sector valuable tax breaks. The production tax credit benefits utilities about 2 cents for every kilowatt of wind they produce over 10 years of operation while the investment tax credit provides residential solar installation credits from $2,000 to $4,000. Together, they total about $1 billion a year.

But those incentives are set to expire at year-end 2008, leading the investment community to implore Congress to quit playing tug-of-war with the tax provision. "We believe we are at the dawn of a green energy revolution potentially as powerful as the Internet revolution," says Dan Reicher, director of climate change for Google.org and a former Department of Energy official. "Policymakers can make or break this revolution."

With the right mix of policies and investors, Clean Edge research says that the industry will develop. Wind power investment is projected to expand from $30.1 billion in 2007 to $83.4 billion in 2017 while solar photovoltaic energy installations are expected to grow from a $20.3 billion industry in 2007 to $74 billion by 2017.

Clean tech investments have ingratiated themselves with mainstream America. While those funds have taken a hit early this year, they have still provided a ray of sunshine in otherwise gloomy economy. Better yet, the prospects should only get brighter as the credit crunch eases and consumers grow wary of traditional, high cost fuels.