Financial Recovery

Financial Recovery

January 30, 2009

Ken Silverstein
EnergyBiz Insider
Editor-in-Chief

President Obama's leadership may spur the country back on track. But it will take time. And until that point, many businesses have put investment on hold and some utilities specifically are scaling back their capital expenditures.

The uncertainty has bred uncertainty. But the new administration hopes to encourage development in infrastructure and clean technologies through a mix of tax cuts and federal subsidies. The idea is that the green revolution will take hold and return the nation to the era of prosperity. Utilities will play a key role.

"Obama called for growth of manufacturing in the United States, employing Americans in the manufacturing of solar panels, wind turbines and equipment associated with energy efficiency, electric power transmission, smart grid, and advanced vehicles," says Michael Eckhart, president of the American Council On Renewable Energy. "Our industry can lead the way on economic recovery and growth with immediate results."

According to the United Nations, global investment in the renewable energy sector hit a record of $148 billion in 2007, which is 60 percent higher than that of 2006. Wind power attracted a third of that, although solar energy was the fastest growing segment and saw its level of investment double between those years to more than $28 billion. And while renewable energy now comprises just 2 percent of the world's electric generation mix, it is drawing 18 percent of all investment.

Some fear, however, that the glitter now bestowed to clean energy will grow dim. They reason that energy prices will moderate before any new alternative fuel sources can accelerate -- much the same way that gas prices dropped from $4 a gallon to less than $2, dousing some of the talk about alternatively-fueled vehicles. The financial crisis, meanwhile, has scared off investors who now see such forays as riskier.

The investment banks had long bankrolled green energy projects. But they are largely and battered. And while utilities may now be seen as white knights capable of raising the necessary funds, they too are cutting back. FPL Group, the country's largest wind operator, is budgeting 25 percent less to wind development in 2009.

The frugality, though, is in response to the global recession -- something to which critics say is ill-advised. They argue that downturns are the perfect time for firms to make vital expenditures so that they can emerge even stronger from dark periods. Nevertheless, energy demand is temporarily off, putting downward pressure on prices. And utilities do not want to get stuck with expensive new projects that will not operate at capacity and which are unable to pay for themselves.

Evolving Markets

The economic climate is destined to change. The stimulus packages will make an impact. But so will the underlying fundamentals that include the desire to switch to low-carbon fuels and to modernize the grid, all of which are endorsed by the Obama Administration. And as the energy demand increases, it will require a fresh influx of investment in newer, cleaner and more efficient technologies.

"As governments prepare to launch a new round of post-2012 climate change-related negotiations later this year ... the finance sector believes the existing technologies of today can and will 'decarbonize' the energy mix provided the right policies and incentives are in place at the international level," says Yvo de Boer, executive secretary of the UN Convention on Climate Change.

If greenhouse gas reduction targets are to be met, then governments and industries must continue to invest heavily in renewable power and energy efficiency, the UN says. While a bit rosy, it says that such expenditures are expected to reach $450 billion a year by 2012 and $600 billion after 2020. The clean energy sector's overall performance during 2007 and beyond sets it on track to achieve those levels, it adds.

Markets invariably evolve. The investment banking firms that have been so instrumental to the green movement could give way to more non-traditional firms such Google and Yahoo, both of which have committed to expanding their involvement in this area.

Meantime, institutional investor Calpers has pledged $200-$600 million to the green cause, saying that it expects such strategies to blossom. With an estimated $11 trillion in assets, all such pension funds could boost the long-term viability of the American economy. And with about $1 trillion of total infrastructure needs in the United States -- an estimated $100 billion required for transmission -- the goal would be to get those pension accounts to give such assets a closer look.

Indeed, renewable energy's future is promising. While policymakers are providing key incentives to ensure that developers capitalize on the phenomenon, the financial malaise that now permeates is an impediment. But if the green trend is real, political and economic interests will converge to ensure the construction of more clean energy projects.

"Investments will soon be pouring back into the global economy," says Pavan Sukdhev, a senior banker from Deutsche Bank, who serves on a UN committee. "The question is whether they go into the old, extractive, short-term economy of yesterday or a new green economy that will deal with multiple challenges while generating multiple economic opportunities for the poor and the well-off alike."

The current recession cannot be glossed over. Prior to the downturn, however, investors had been enamored of the green economy. President Obama wants to reignite that flame. The sea change may be slowed but it will surely continue. The movement may, in actuality, hold the key to the nation's long-term financial recovery.