Liebreich: Clean Energy’s Though Year – What We Got Right and What We Got Wrong

By Michael Liebreich
Chairman and CEO
New Energy Finance

This is the final VIP Brief of 2009, when we get to look back at the events of the last year.

Fresh in

As I write this, the world is picking through the wreckage of Copenhagen, looking for something to salvage from the debris.

The “Copenhagen Accord”, hammered out among scenes of indescribable chaos by the US, China, India, Brazil and South Africa, was put to the Plenary on the final day of the conference for just an hour’s consideration. The Accord was neither rejected nor accepted by the Plenary, but merely “noted” by 192 states represented at Copenhagen. Yet, even this was hard to come by, with the US, Australia and the UK reportedly having to step into the chair, ousting Prime Minister Lars Lokke Rasmussen, to salvage a compromise against harsh criticism from developing countries. Among the countries most active in trying to block the Accord were Sudan – whose chief negotiator without a trace of irony accused the developed world of genocide – and those bastions of open-minded international engagement: Venezuela, Bolivia, Cuba and Nicaragua.

So what does the Accord contain? Three pages, or 1,342 words, to be exact. Probably the most important aspect is that continuation of the Kyoto Protocol has been built in, largely at the demand of China and India as it gives them comfort that “common and differentiated” responsibilities will be maintained. It also recognises the 2°C temperature threshold, though with no guarantee that developed country targets will provide comparable action; a pledge to provide developing countries with additional upfront financing of $30bn by 2012; a goal of $100bn in developed country financing to fund mitigation and adaptation by 2020, but with no concrete measures to get there; and a commitment to mobilise resources to control international deforestation.

Overall, Copenhagen has clearly been a failure. It failed to deliver on the terms of the Bali Action Plan laid out in 2007, it failed to reach agreement on quantified emission reduction targets, it failed to clarify the terms of the post-2012 carbon market and it failed even to set a new deadline for a post-2012 agreement. But most of all it was a failure of expectations and of process: developing countries and the US never went to Copenhagen to negotiate, merely to restate existing positions. The one triumph of the process was the clarity brought by President Barack Obama in trying to circumvent the UN process and deal with the half a dozen heads of state of developing countries that really matter, and to force concessions out of them. Hugo Chavez may find it undemocratic, but in reality this is the only way meaningful commitments of action are going to be reached. He is also mindful of the US political process: without concessions from India and China in particular, no energy or climate bill will pass in the US in 2010.

So who fares well from the Copenhagen Accord? Candidly, the two largest polluters, China and the US. Speaking of the “deal”, Xie Zhenhua, head of China’s delegation, claimed that “after negotiations both sides have managed to preserve their bottom line”, demonstrating the dominance of economic concerns over those of addressing climate change.

Obama has not committed the US to anything new, yet has been seen to “stand up” to China over issues of transparency and international monitoring and verification of emission reductions. Similarly, whilst Premier Wen Jiabao can claim that he has committed China to curbing its emissions for the first time in its history, this commitment is very much in line with business as usual and there is no sanction for non-achievement. The US and China both left Copenhagen without having to commit to costly emission reductions, legally binding or not.

None of this should come as a surprise. Trading off economic growth for emission reductions by the developed world and donating billions of dollars in assistance to the developing world would be a difficult step to take at the best of times, let alone in the current economic conditions. And to do this in a circus atmosphere with over 190 parties present in two days of serious talk with heads of state and with the world’s media watching was never going to happen. Such decisions need cool heads and detailed discussions, not frantic and snatched meetings. Organisationally, this was Bretton Woods meets Red Nose Day, and it was a farce.

So where to next? As we have said before, in one sense the international climate negotiations have been very successful: although Kyoto and now Copenhagen created infinitely more heat than light, they have resulted in a steady gathering of momentum in legislation supporting clean energy and energy efficiency around the world – 696 separate laws in the past four years. This part of the process we expect to continue almost uninterrupted. On the global stage, the brotherhood of climate negotiators is facing the unenviable task of trying to build a legally binding agreement around the uncertain architecture of the Copenhagen Accord. Countries have been asked to confirm their emission reduction targets by 31 January 2010. The US will not have climate legislation passed through the Senate at this point, and with no official mandate for action, President Obama will again find it difficult to commit at the international level. Plus ça change…

And so the international climate caravan packs its tents and heads off – next stop Bonn, then Mexico. There is no guarantee the outcome will be any more palatable than Copenhagen, but it could hardly leave less of a sour taste in the mouth.

The year

Now this is also the time of year when I have to do some unwrapping. Not of presents, or at least not quite yet. Instead I have to unwrap, nervously, New Energy Finance’s 10 predictions for the year, published last January, refresh my memory on them, and then come clean on how well they matched the events of the past 12 months.

Our headline in January was “2009: A Wave Of Consolidation In A Sea Of Hope”. 2009 has indeed been a tough year – for almost all economies, for almost all sectors, and for many individuals too. The year-on-year falls in GDP have been severe – UK output for instance is likely to have fallen by more than 4% in 2009 compared to 2008 – and the increases in unemployment have been savage too, with the US jobless total up by nearly five million in the year to November 2009. In the clean energy sector, many top manufacturers were forced to shed staff and close factories, many project developers had to sell assets to stay in business during a debt famine, and many technology firms struggled to find venture capital. Some big names such as Econcern, Schmack Biogas and Aventine have bubbled under the waves. The consolidation has been real and painful, and it is not over yet.

And yet the clean energy industry has weathered the storm better than most industries: “We are not going to see things come grinding to a halt, as we did in the 1970s and 1980s,” I wrote back in January, and indeed we did not.

Investment, after a disastrous first quarter, has recovered to levels similar to what we were seeing at the end of 2006, beginning of 2007. So while I don’t think one could characterise the year as “a sea of hope”, nor was it an ocean of hopelessness.

And so to our 10 specific predictions:

My first prediction was: “Overall investment grows, but not by much”. I wrote boldly that the best we could hope for in 2009 was “a modest step” beyond 2008’s $155bn figure for total new investment in clean energy.

As things turn out, it looks like we are not going to see that modest step, but after the first quarter our cautious optimism seemed utterly out of place. Our current expectation is that 2009 will see total new investment in clean energy of around $130bn, down some 16% on 2008’s record figure of $155bn. However, when the first quarter produced identifiable financial investment activity down 53% from the equivalent quarter of 2008, it looked as if the end-result might be far worse.

Investment in the sector has certainly rallied, with both the second and third quarters seeing healthy asset finance of new projects such as wind farms – notably huge offshore wind schemes such as London Array and Belwind – and solar PV plants. The debt finance shortage, caused by the dire state of the banks after the crisis of autumn 2008, has started to ease, although finding banks willing to lend, and then negotiating those project loans, remains much harder than before the crisis.

Public market investment, which was almost dead in the first quarter, also flickered back to life, with eye-catching issues such as Vestas’ $1bn rights issue in the second quarter, and A123 Systems’ $371m IPO in the third quarter. Just in the last week or two, Chinese wind developer Longyuan Electric Power has succeeded in raising $2.6bn in a Hong Kong IPO, the largest clean energy flotation of the year, by far.

Overall, 2009 investment will end up below that of 2008 – a fair step back rather than a modest step forward.

SCORE 4/10

Our second prediction was that public market valuations would “recover some lost ground”. Again, the omens did not look particularly good for this forecast during the first quarter, and in fact the final day of the second New Energy Finance Summit in London in March saw the western stock markets visiting multi-year lows. The WilderHill New Energy Global Innovation Index, or NEX, touched 132 on 9 March, down from 178 at the start of the year.

However since then, there has been a decent rally, sharper for clean energy shares than for the overall stock market. For the past three months, the NEX has been trading in the 240–250 range, some 85% up from its lows. Barring some sort of unseasonable Christmas stock market upset, it looks like we will be right on this prediction, by some margin. We also got the shape right, predicting “further spells of high volatility, driven by hopes of recovery and fears of disaster, unfounded rumours and real surprises”.

One of those “real surprises” has been the composition of the NEX’s rally in 2009. It has not been about wind or solar stocks. Far from it – these have laboured. Instead, the index has been driven up by a super-charged performance from power storage and energy efficiency stocks, benefitting from excitement about electric cars and “green stimulus” programmes. BYD, the Hong Kong listed electric car and battery maker, and EnerNoc, the US efficiency firm, were up 500% and 271% respectively since the beginning of the year, as this article went to press.

SCORE 9/10

Prediction number three was that there would be a “consolidation-driven surge in mergers and acquisitions”, with “many more deals”. This trend has taken a bit of time to unfold; M&A activity was in fact weak in the first couple of quarters of the year, despite the attraction of much lower valuations that had pertained in 2007 or 2008. The reason was that even cash-rich potential buyers were in risk-averse mood in the face of a banking crisis and extreme uncertainty over the outlook for demand.

However, M&A activity has picked up since mid-year. Corporate mergers and acquisitions totalled $7.3bn in the third quarter of 2009, up sharply from $2.1bn in Q2 and 2.7bn in Q1, and the highest quarterly figure on record apart from the $8.7bn achieved in both Q3 2007 and Q3 2008. Among the transactions in Q3 were two in China, involving GCL-Poly Energy and China National Offshore Oil Corporation, Bosch’s purchase of Aleo Solar and EDF’s acquisition of EcoSecurities.

My hunch is that we have only seen the beginning of that pick-up in M&A forecast in January, and that uncertainty over things such as the outcome of Copenhagen and the US cap-and-trade legislation may have been holding back some acquirers from making their move. But after a slow start to the year, I think we can pat ourselves on the back on this one.

SCORE 7/10

Fourth on my list in January was a “tough first half, strong second half for wind”, with the credit squeeze cramping project construction. That is generally how the year has gone, although the severity of the debt finance shortage in the first half – particularly the first quarter – was certainly greater than we predicted.

Our latest Wind Market Outlook predicted that there would be 32GW of onshore wind installed in 2009, up 18% on 2008. But a large part of that reflects projects financed in 2008 or earlier. New financings in 2009 were hard to achieve in Q1 and Q2, although Q3 and Q4 have been better, and some turbine manufacturers have trimmed prices by 10% or 15% to try to fill order books. The days of large percentage deposits being required to reserve turbines are over, at least for the time being.

SCORE 7/10

Prediction number five was that 2009 would be a “dramatic year of consolidation and falling prices for solar”. We predicted solar module prices would fall by anything up to 40%, and that some cell or module makers without good cost economics and a strong balance sheet “would be looking for a new parent in a hurry”.

The first part of that was certainly a good call, although our solar analysis team reckons that the total fall in module prices from their peak in the summer of 2008 is probably now at some 50%. The second part has been less evident, with 2009 passing without as many distressed takeovers in solar as we expected. Some firms, such as Renewable Energy Corporation and Q-Cells, have managed to raise hundreds of millions of dollars in cash from equity issues, to bolster their balance sheets. Apart from the mothballing and cancellation of plants, and an occasional casualty such as Silpro, the French silicon manufacturing joint venture, much of the rationalisation in solar is yet to come.

SCORE 7/10

“A (relatively) quiet year for biofuels”, we foresaw in prediction six. The crystal ball showed consolidation continuing in first-generation biofuels, and investment proceeding in cellulosic ethanol “based both on scaling up plant sizes and on basic research”. We also tipped algae-based biofuels as a particularly bright spot.

This was perhaps one of the easier forecasts, but we did well on it. First-generation biofuels have seen subdued investment levels all year, with global asset finance at just $0.7bn in the third quarter for instance, below not just wind (by a factor of 15) and solar, but also biomass and small hydro. Consolidation has continued, with assets from Aventine and Panda Ethanol among those ending up under the hammer, and in Brazil, Louis Dreyfus taking over Santelisa and ETH agreeing to buy Brenco. Algae-based biofuel has attracted even greater interest from investors and oil companies. Jatropha has atrophied during 2009 with investor enthusiasm fading.

Where we were a little too bullish was on cellulosic. Developers of these second-generation biofuels, using non-food plant material, have had another somewhat anxious year. Most of them remain in the game, but venture capital money remains in short supply despite fundings for firms such as Amyris and TMO. The next stage will be demonstration projects, but as of now, the jury remains out on the economics of cellulosic.

SCORE 9/10

By contrast, we foresaw “a hot year” for geothermal, helped by easier access to drilling rigs as oil exploration slowed and by improving financial sector enthusiasm. Perhaps we should have said “warm” rather than “hot” – geothermal has indeed been one of the stronger sectors of clean energy in 2009, but the amount of asset finance (just over $300m in Q3) remains small.

There have certainly been wafts of heat during the year, with for example two Australian projects, from Petratherm and Geodynamics receiving a total of AUD 152.8m of government grants and a trio of firms (Ram Power, Polaris and Western GeoPower) merging and carrying out a simultaneous $170m IPO in Canada. Overall, however, geothermal activity was slowed by a stronger-than-expected oil price and tighter-than-expected debt finance. Conditions started to improve in the autumn, and the outlook for 2010 is bright.

SCORE 6/10

In prediction number eight, we looked forward to “choppy conditions for marine”, with some of the dozens of entrepreneurial firms in this sector failing during the year, others making progress on project performance, and a few “big energy providers” showing acquisitive interest.

“Choppy” has indeed been right. Wave and tidal firms have found it excruciatingly hard to raise new venture capital finance in 2009, and several have had to scale back the pace of development to make their cash last longer. New Energy Finance published research during the year, charting the efforts of no fewer than 35 tidal and 47 wave energy technology developers. This sector remains very crowded, devices are taking a long time to bring towards commercialisation and investors are in cautious mood. All is not lost, we have seen some good milestones met – among them Pelamis inking a 20MW JV with Vattenfall and Aquamarine Power generating the first power from its Oyster device. Governments have stepped in, providing some of the needed cash in the form of grants. We have not yet seen significant company failures or M&A activity, but something will have to give soon – unless investors find more money to put into the sector.

SCORE 7/10

We also scored well on prediction nine, which was that “digital energy” would grab the spotlight in 2009. At the start of the year, many investors and some policy-makers were probably unsure what the description meant. They might have heard of smart meters, but little more. I believe that 2009 has been a watershed year in that respect. There is now a strong understanding that the shift to low-carbon energy, with enormous increases in renewable power, greatly improved efficiency and distributed generation, can only happen with the build-out of networks that are far more responsive than the current grid architecture.

The stock market has got wind of the change, and that is one reason why power storage and energy efficiency stocks have dominated the list of winners in 2009. Big corporations too have woken up – in June, New Energy Finance hosted the first workshop in London for the Consortium on Digital Energy, a group of 50 top decision-makers from some of the world’s biggest utilities, IT, transport and telecommunications, together with technical experts and policy-makers. A second workshop was held in Boulder, Colorado, in December, and work is well under way to chart the way forward in what is set to be a multibillion dollar investment programme, starting in developed economies but spreading quickly to emerging ones too.

SCORE 9/10

Our last prediction from January was of a Clumsy Climate Compromise in Copenhagen, which – on paper, at least – was set to be the most significant single event of the year for the clean energy and carbon sectors. “While we certainly expect the Obama administration to take a much more constructive line than its predecessor, we find it hard to be entirely optimistic about a good new deal emerging in 2009,” we wrote in January.

For a while, it looked as if our prediction would turn out to be too pessimistic. In particular, there were signs of increasing realism by China and India about the size of emission cuts that the US Congress could sign up to. President Obama and other leaders stimulated optimism by announcing that they would attend in person. The breaking in November of the “Climategate” scandal in November – with hackers publishing material which showed scientists from the Climatic Research Unit of the UK’s University of East Anglia apparently bending their research results to fit an anthropogenic global warming thesis and conspiring to keep rival research from publication – certainly did not help set the right mood.

As the events unfolded over the two weeks of the conference, our prediction number 10 came true to the letter:
“We might see the emergence of a deal in Copenhagen, but if we do, sadly, it is likely to be either a clumsy compromise, or something that can be spun as a deal but in truth might not go much beyond the position papers released by the G8 in Gleneagles or the Bali Roadmap. It is highly likely that 2009 will finish without a full picture emerging of the successor regime to Kyoto, and that uncertainty will continue into 2010”.

SCORE 10/10

That is how I have marked our 10 predictions for 2009. Please excuse a bit of subjectivity. Our total is 75/100, up from 2008’s figure of 64, and not far below the record mark of 83 in 2007, when we scored a bulls-eye by forecasting a surge in investment but also trouble in credit markets. Overall I think we anticipated the character of 2009, and also anticipated some of its particular features. We were a little too bullish on investment, particularly in the first quarter, and a bit surprised at the slowness of industry consolidation. Otherwise we feel fairly pleased with ourselves: remember we wrote our predictions before the low point of the financial crisis, just after the election of a new US President, in the teeth of extraordinary uncertainty about the world’s economy.

Next month, with the help of New Energy Finance chief editor Angus McCrone, I will be chancing my arm with 10 forecasts for 2010. Some intriguing thoughts are already forming on that, and I do not want to steal my own thunder just now. Suffice it to say, with a somewhat better economy and the “green stimulus” billions finally starting to hit the front line, I expect 2010 to be a better year in terms of investment than 2009 – I have already said it will be in record territory, perhaps as high as $200bn. But more of that anon…

Finally, as I believe you all know by now, this month marked the end of an extraordinary journey for New Energy Finance as an independent company. We started 2009 worried about the impact the crisis would have on our clients and our business. As the year progressed it became clear that our services were, if anything, valued even more highly in difficult than in easy times. Then, with the crisis receding and the shift to a low-carbon economy once again rising up the world’s agenda, we decided the opportunity we faced was bigger than anything we could exploit on our own. We have established clear leadership in our niche, it is just that it is not going to remain a niche much longer. It should by now be clear to everyone that in future all energy is going to be clean energy, and all industries are going to have to figure out how to operate in a carbon-constrained environment – and they are all going to need the best news, data and analysis they can get their hands on.

We are delighted with the tie-up with Bloomberg – it gives us access to technology and access to markets on a scale that we could only dream of in the past. And with debt finance so key to the roll-out of clean energy, becoming part of the world’s premier provider of commodity and fixed income data and analytics is fantastically exciting – hopefully not just for us, but also for anyone concerned about accelerating the world’s shift to a low-carbon economy. Expect a raft of exciting new products in the coming months and years.

So it only remains for me to thank you for your support and to assure you that I am looking forward to working with you for a long time to come. Do make sure you have a relaxing break over the holidays, because although 2010 could hardly be as difficult as 2009, I am sure it will be every bit as challenging, unpredictable and exhilarating!

All the best,
Michael Liebreich

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