Appropriately enough for an industry based on electrical polarity, the clean energy business has some negatives as well as positives right now. But its long-term growth potential remains hugely promising, and the US is beginning to take it seriously, which is why bankers continue to commit resources to the sector.
Banks traditionally fall back on energy and financial institution group business in hard times, but there is an even sounder reason why the savvy ones are interested in the clean sector today: because their big clients are, and not just those directly involved in energy. Faced with the two-pronged challenge of a global recession and a swelling governmental response to climate change, companies need to get to grips with energy and environmental dynamics as part of their strategic planning.
"How to deal with these issues is at the forefront of all our clients' thinking, both corporate and institutional," says Wanda Kim, head of UBS Investment Bank's environmental advisory group. "Whether they are palm oil producers or utilities, airlines or industrial facilities, they are all affected by this in some way."
Troubled times
General interest in clean energy may be on the rise, but the same cannot be said of investment, which tumbled in the first quarter of 2009, according to industry analyst New Energy Finance (NEF). It says that only $13.3bn was invested in the sector, down 53% against the first quarter of 2008 and 44% short of the year's final quarter. A mere $100m went into listed 'pure play' clean energy companies, compared with $2.1bn a year earlier.
Although activity slowed down as the year progressed and the financial crisis took its toll, 2008 remained positive in terms of funds committed. Total new investment was a record $155bn, inching 5% ahead of 2007 figures, according to NEF. Little of that was raised in the public markets, however, as valuations of clean energy stocks dropped.
The WilderHill New Energy Global Innovation Index, for example, fell by 61% during 2008 and at one point was down by more than 70%. The result was that public market net investment more than halved against 2007 figures, falling from $23.4bn to $11.4bn. The year's biggest initial public offering was Portugal's EDP Renovaveis, worth $2.4bn. There were more solar energy offerings than wind, accounting for more than half the total amount. Yet as the oil price fell and stock market conditions worsened, there were 29 cancelled flotations and many more were delayed.
Project finance accounted for the bulk of new investment in 2008, up 14% to $97bn, and the share of venture capital and private equity funds which still had money to spend grew by 35% to $13.5bn, reports NEF.
The year ended weakly, however, and that weakness has clearly rolled over into 2009, with the industry beset on all sides. The credit crunch has reduced banks' appetite and ability to lend, whether to clean energy projects or anyone else. Project finance is "in a holding pattern", according to one London banker, and where debt is still available, it is fragmented and more expensive.
"Eighteen months ago, a $200m wind farm project would probably have raised finance from a single bank on favourable terms," says Jon Williams, a former HSBC head of sustainable development who is now sustainability and climate change partner at Pricewaterhouse-Coopers (PwC). "Now it would need 10 banks, and some are simply not lending to a number of sectors."
Tough competition
The fundamental problem with alternative energy generation is that it still can't compete with fossil fuels on its own. It needs help from the state in the form of tax relief, direct support or other forms of encouragement. A higher oil price meant that investment in renewable energy was more appealing for a while, but that particular incentive has faded. Shifting carbon prices have had a similar effect. Depending on the scheme, high prices for carbon emission permits improve the viability of renewables projects which sell the permits to polluters, or encourage big utilities, which have to buy them, to invest more heavily in alternatives to fossil fuel generation. But those too have fallen.
Although countries such as the US, Australia and Canada are due to follow suit with obligatory, nationwide schemes, Europe has the most established carbon trading market, in which various banks are active, intermediating and taking risk. Its trading volumes have almost tripled during the past year but the price of benchmark EU allowances has fallen from more than €30 ($39.8) per tonne of carbon dioxide emissions to about €13, having hit the €10 mark along the way. There has been some alarmed press coverage about the 'collapse' of the carbon market, but bankers say it is simply responding to the laws of supply and demand.
"Oil prices have fallen from nearly $150 per barrel to $50 but no one says that the market is facing catastrophe," says Martin Lawless, global head of financial products in Deutsche Bank's carbon group. "In Europe, the carbon market has had a correction as it looks at a strong decline in industrial output. Reduced output from utilities, as well as cement, steel, glass and paper producers [all falling under the EU emission trading scheme], means they don't need as many permits. So lower prices demonstrate the robustness of this market as a market."
Permit supply is fixed by governments, which has a gearing effect on prices, exaggerating movements in either direction. As carbon caps get tighter, a subsequent rise in prices will be as dramatic as the current fall. "In the longer term, it is clear that the price has to go up, because supply will be continually reduced over time," says Patrick Birley, CEO of the European Climate Exchange, which trades the permits. So, longer-term, that will be beneficial for clean energy.
A bigger problem, says Mr Lawless, is the fact that there is no firm carbon price signal beyond 2012. That is when the current phase of the Kyoto Protocol and its varying national emission reduction targets comes to an end. This makes it difficult to project cashflows beyond 2012, which, in turn, creates difficulties for the long-term financing of renewables schemes.
So there is much interest in the next round of UN-sponsored climate change talks, to be held in Copenhagen in December. The hope, by no means guaranteed, is that a successor treaty to Kyoto can be agreed on, one that will include new emissions targets and give project developers and financiers something to aim for.
Wanda Kim, head of UBS Investment Bank's environmental advisory group
Production pledge
The EU has pledged to increase the renewables share of its energy production to 20% by 2020, as long as agreement is reached at Copenhagen. But the single most powerful boost to optimism, both for Copenhagen and for the immediate future of renewable energy, is the positive attitude of US president Barack Obama to this field, in stark contrast to that of his predecessor.
President Obama's $787bn stimulus package includes about $33bn in government spending on energy and another $20bn in tax incentives over the next 10 years. With time and value extensions to tax credits for wind power, geothermal and biomass projects, it also features $6bn-worth of loan guarantees for renewable energy and various other schemes. The first of these loan guarantees, worth $535m, was recently extended to Solyndra, a California-based solar manufacturer.
The US, if all goes to plan, will be setting bigger targets and offering bigger rewards. The Waxman-Markey bill, now in draft form, would oblige electricity suppliers to source more power from renewables, rising from 6% in 2012 to 25% by 2025.
"The message out of the US is pretty strong," says Robert Mansley, a Credit Suisse energy group director responsible for European renewables. "The question, as always, is deliverability. But if they only deliver half of what's promised, that's still a massive opportunity."
Although, on a global scale, the US stimulus package is the largest by some margin, other nations, including China and India, have unveiled their own packages with varying degrees of support for renewables. In a report on economic stimulus packages around the world, HSBC has identified $58bn targeted directly at low-carbon power, including carbon capture and storage.
Some say that this is a mere fraction of what is needed. The International Energy Agency estimates that it will cost $45,000bn in clean tech investment to halve carbon emissions by 2050 - about $500bn a year. "Where is the money going to come from?" asks PwC's Mr Williams. "The public purse is stretched, so 80% to 90% will have to come from the private sector. That's a role for the banks."
Plugged in
As well as directly providing finance, banks are plugged into clean energy via their equity and fixed-income businesses, their wealth management arms and corporate finance departments. Merger and acquisition (M&A) has been a rewarding source of income in the past, and will be again, but it is currently struggling, at least in terms of headline transactions. The most recent major deal was Scottish and Southern Energy's €1.1bn acquisition of wind power generator Airtricity at the beginning of 2008.
Large utilities buying into wind power have brought M&A into the energy sector during the past few years but, with capital tight and platforms now in place, attention has turned to greenfield development. "Valuations of big wind farms became competitive, and utilities have decided that returns can be higher if they develop from the ground up," says Chris Thiele, Morgan Stanley's head of utilities investment banking in Europe.
Some utilities are investing in solar power projects, but for relatively small sums. As technology and competitiveness improves and solar develops some scale, consolidation is likely to fuel M&A activity again.
"We may see utilities selling minority interests in wind projects and using the proceeds to further develop other renewable projects," says Mr Thiele. "We think they will be more selective on how they allocate their capital, so I expect more joint-venture structures, such as E.ON and Masdar's renewable energy relationship, including the London Array offshore wind farm."
Alongside generation itself, lenders and investors are paying closer attention to enabling technologies such as smart grids and smart metering. Overall, in spite of the present hiatus, there is a sense of much more to come.
"It is a very growth-driven sector," says Credit Suisse's Mr Mansley. "It has a requirement for capital and ongoing development in its shareholder base. This all means opportunities for banks."
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