Q2’09 clean energy investment interest begins to build

June 27, 8:55 PMEnergy ExaminerJohn Guerrerio

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Investment in green energy is building and will continue with the stimulus money.

The renewable energy industry has been hit hard in the recent financial crisis; no industry, especially not a fledgling one like clean energy, could have avoided the full-blown recession.  There are signs that the hardest times are behind us, though.  What does this mean for renewables.  Conditions seem to be indicating that the clean energy sector will begin seeing a renewed interest and an increase in capital flow before the end of the year.  In fact, many analysts are beginning to speculate that the only way forward from here is with a carbon market, energy efficiency regulations, and a developing clean energy market; too many Fortune 500 companies have already bet on the renewable revolution, so to go forward empty handed would result in disastrous ends.

Banks and other lending institutions withdrew their interest in lending money in the fall of last year, and still many houses of money are sticking with their strict ‘hold’ strategy.  The government has pumped billions of dollars into the financial industry in the hopes of stimulating the economy, but banks (for the most part) have sat on their hands.  They refuse to lend money to projects in the fossil fuel and clean energy sectors alike; they are averse to working through tax equity deals, banking on tax credits based upon government incentive programs, the lifeblood of the clean energy industry up until now.  They also refuse to lend to fossil fuel projects with the risk of carbon regulations looming heavily over the future.

Realizing that the tax equity market was drying up, with few significant players remaining, the government’s stimulus plan wrote into it its own grant and guaranteed loan programs, sidestepping the banks.  The stimulus provisions provided methods for clean energy companies to receive grants and low interest loans directly from the government in order to go forward in this tough investment climate.  The idea that the government will step in to do the job that the banks simply won’t do, not because banks do not see the merit of a clean energy industry but more so because of the timing of financial crisis, is not something new.  The lack of investment capital and the ensuing recession, alongside an incredible buildout period in renewable energy’s history up to the collapse, stalled clean energy’s engine.  Crash and burn or save and nurture.

The answer to that question depends on who you ask.  Some might argue that the financial crisis was perfectly timed to kill off an industry on the rise that had and still has the capacity to steal a significant marketshare of the fossil fuel industry.  The recession nearly crippled the clean energy sector, but now with government assistance it seems the industry is poised for an aggressive comeback.  Others might wish for a quick death to the clean energy industry as they fear higher taxes and residential and transportation fuels, but it appears that the actions of last week brought us one step closer to carbon regulations.  Increases in fuel prices are hard to predict future-forward where limited computer models lack the ability to factor in human ingenuity on the fly.

So, where is clean energy investment going; is it building or is it dwindling?

Q1-4 of 2008, global investment (asset financing only) in clean energy looked as follows:  $22B, $25B, $24B, $26B.  Q1’09, saw investment in renewables (again, asset financing only) as a mere $11B; and while Q2 is not yet over, global investment in renewables is showing a solid recovery, with still countless billions waiting on the sidelines for a lower risk entry point.  In 2008, investors in all spent roughly $250B on energy building out new power capacity, with $140B going to renewables and $110B going to fossil fuels.  Has the tide begun to change; are the winds shifting in the energy markets toward renewables?

This trend of growing investment will only get better through 2011 as the $100 billion in stimulus is set to hit the renewable market starting this summer and swing into high gear throughout 2010-11.  In addition to government funds, we will most likely see large sums of private equity and other publicly managed retirement funds joining in and going along for the ride.  The next two years could be the best years for clean energy on record.  Still, the  nearly $140B invested in renewables in 2008 will have to grow to almost $500B by 2020 if carbon emissions are to peak and then dwindle over the coming decade. 

Presidential leadership seems set more on small gains that add up, rather than expending political capital in divisive ways.  While environmentalists and clean energy moguls are balking at the watered down energy and climate bills, the truth of the matter is that a climate and energy bill with carbon limiting legislation has passed through the House of Representatives.  America is showing signs that it wishes to lead the world forward in the clean energy revolution; some of the regulatory risk involved for institutional investors is starting to diminish.  America wants to be part of drafting the climate commitments that the rest of the world will adopt later this year in Copenhagen.

No one would have guessed that May prices of oil in 2000 ($30), 2002 ($30), 2004 ($40), 2006 ($60), and 2008 ($140) would bottom out at $40 in 2009.  The relative cheapness of oil pushed Americans away from the EV murmurs that were stirring into a roar last summer, but the inner call for price stability never went away.  To have an EV industry, we need a grid that is powered predominantly by regional clean energy methods.  Oil is upwards of $70 and shows signs on increasing more as the economy continues to recover.

In the southwest we have abundant solar resources; in the intermountain west we have significant geothermal resources; in the Midwest we have abundant wind resources; and in the east biofuels are aplenty.  Converting our power plants from coal to renewables could take less than two decades with the right sense of urgency.  Dawdling will simply waste funds; getting sidetracked on building a CCS pipeline or cleaning coal is a waste of energy and money and time.  We don’t need a CCS pipeline if we simply convert to renewables.  If the Senate passed an energy and climate bill and America continues to show leadership in terms of an international treaty, this two decade timeframe can be shortened to one.

An international climate agreement regarding global energy initiatives can bring certainty to the carbon markets and provide clarity for investors and businesses.  This kind of global capitalization of an industry can unleash transformative processes that push into motion events that sweep across decades.  We are on this kind of precipice.  I think the clean energy space buy-in lows were earlier this year; from here forward, it looks as though clean energy stocks are getting ready a bullish ride.