Energy Predictions for the Second Half of 2012

Michael Butler

During the first half of 2012, the outlook for sustainable industries looked challenging. Clean-tech equity financings, project financings, and average deal sizes were down compared to Q4 of 2011. Macro issues, including the European debt crisis and the upcoming U.S. elections, also weighed on the overall economy. Despite these conditions, however, Cascadia believes that financing and M&A will begin to recover through the second half of the year and will normalize by the end of this year. We expect this recovery to be led in part by early stage financings, along with M&A activity in the energy efficiency and solar sectors.

We expect the following five themes to dominate throughout the remainder of 2012:

1. Investments in early stage clean-tech companies continue to accelerate.

Amid the apparent gloom from the first half of the year, a bright spot has emerged as the number of early stage financings have continued to grow. In fact, 44 percent of all Q1 2012 financings were early stage transactions. This is an encouraging sign for sustainable industries in two ways. First, investors are becoming more comfortable with the risks inherent in early stage deals, and secondly, it signifies that entrepreneurs are creating companies that investors find attractive from both business model and technology perspectives.

2. Consolidation in the energy efficiency sector continues to accelerate.

Last year the market saw a shift in transactions as money left capital-intensive sectors, such as biomaterials, biofuels, and wind, and investors – both private equity and corporate buyers – began shifting their attention to asset-light sectors such as energy efficiency. This trend continued into 2012, and energy efficiency has now become the most rapidly consolidating sector in sustainable industries. We believe that this sector will continue to see activity as managed services providers increasingly look to make strategic acquisitions of technology focused energy efficiency companies to meet growing customer demand for real-time energy solutions. We also expect to see companies which have not traditionally been involved with the energy services category begin to move into the energy efficiency market through acquisitions.

3. Downstream solar companies continue to see strong growth in revenue and profits.

While headline-grabbing failures like Solyndra have made investors wary of the solar market, these breakdowns resulted not from industry weakness, but failure to respond to important market trends. Indeed, the most important of these trends, the decline in the cost of curve panels, is actually expanding growth opportunities especially among the downstream solar companies, balance of system providers, solar finance companies, and solar integrators. Upstream companies however, will continue to struggle as they will be forced to cut prices to stay afloat as they struggle against new competition in the market.

4. Natural gas and renewable energy industries will find it in their best interest to cooperate

According to a January 2012 report by the U.S. Department of Energy, an estimated 141 trillion cubic feet of gas can be recovered from the Marcellus shale using current technology. The downside to this cheap and abundant form of energy is that we will likely see a decrease in renewable energy investments as the natural gas infrastructure is built out over the next 3-5 years. However, that natural gas infrastructure will drive overall economic activity, which in the long run will be positive for the renewable energy sector. We expect natural gas to replace many coal plants in the years to come, but in our opinion, the fossil fuel market is too large to be replaced by natural gas or renewable energy alone.

5. If Romney is elected it won’t be as negative for renewable energy as people think.

Mitt Romney, a major supporter of natural gas, has made it the number one goal of his energy policy to build out the natural gas infrastructure within the U.S. Obama has been supportive of natural gas development, but his policies have generally favored renewable energy.

While the uncertainty created by the pending elections has slowed funding and acquisitions across sustainable energy sectors, whether Romney or Obama wins in November, we expect to see a post-election uptick in investments across all market sectors, including renewable energy due to renewed investor confidence in the economy as a whole.

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The co-founder of Cascadia Capital, Michael Butler leads the firm and is an emerging thought leader in the New Energy Economy. His recent focus on sustainable technology has helped propel Cascadia into some of the most important transactions in this market.