Liebreich: Our Crystal Ball Foresaw Aspects of 2008 – But Not Their Severity

By Michael Liebreich
Chairman & CEO
New Energy Finance

So 2008 finally draws to a close – an “annus horribilis” if ever there was one. We have seen with shattering clarity the end of a long period of general economic growth optimism; in the clean energy sector we have seen the end of an extraordinary four-year surge in investment activity, with ever-rising valuations. Gone are the times when we reported growth and excitement in every sector, every country and every asset class of clean energy and the carbon markets.

In this, the final Monthly Briefing of the year, we look back in the spirit of honesty at the 10 predictions we made for the clean energy sector in January. I think it’s fair that we get to brag about the forecasts we got right – as long as we also ‘fess up to the ones we got wrong!

At this time in 2007, I was able to give New Energy Finance a pat on the back for a new record score of 83/100, although I did point out that it wasn’t the hardest of years. How did our 10 predictions fare in a year that will probably become synonymous in the history books with the worst world financial crisis since the 1930s?

The answer is that we scored fairly highly with our caution on economics and markets, but our crystal ball failed to foresee the severity of the crisis or its full implications for the clean energy sector. Some of the trends we expected in specific parts of the industry, such as solar, wind and biofuels, did come to pass in 2008, but in others, progress was significantly slower than we expected. Overall, we scored a decent pass mark.

Our 10 predictions back in January’s Monthly Briefing appeared under the headline “Bumpy ascent for clean energy in a troubled world economy”. We got the “troubled” right, indeed, and the “bumpy”. And for the first half-year it seemed like we were on the money. However, our luck gave out in the second half of 2008, with investment activity – particularly in public markets and asset finance –beginning a precipitous fall.

Our first specific prediction for 2008 related to overall investment in clean energy. We knew that investment couldn’t keep up the 60% growth we saw in 2007, predicting that the weak economic backdrop and the effects of the credit crunch on the availability of bank debt for projects would peg that back to the 15% to 20% annual growth range. We all wish!

Based on the preview figures for 2008, which we produced at the end of Q3, it looks like the total investment in clean energy worldwide will be around $142bn, down 4% on last year. We give ourselves some credit for forecasting the strong growth in the first half-year, as well as surprisingly resilient investment figures in venture capital and private equity.

Forecast number two was that stock market valuations would be likely to suffer a “significant correction”, and that at some point “we do expect to see worries increase about the clean energy sector’s rating against the wider equity market”.

OK, we got that right, although from our vantage point at the beginning of the year, we did not dream of a fall all the way from 455 on the WilderHill New Energy Global Innovation Index, or NEX, to a mere 170 or so at the time of writing in mid-December.

Stock markets in general have dropped sharply, but clean energy shares have done worse, particularly since the start of September, as investors have fled from high-risk-high-return sectors, and as people have fretted about the implications of the oil price retreat and the sudden dearth of debt and tax equity finance for renewable energy projects.

The third prediction of our 10 in January was that 2008 would be another year of strong investment growth in wind, with the possibility of the US Production Tax Credit expiring at the end of the year pushing projects forward in that country. We expected Eastern Europe and Australia to play catch-up on wind investment, and turbine prices to remain high.

The final numbers for wind investment in 2008 are not yet crunched, but New Energy Finance data for the year so far showed that asset finance in wind was very strong in the first half, at some $25bn. Although the third quarter showed a marked fall, and the fourth is likely to see a further setback, total asset finance in wind could still match or beat 2007’s $41.4bn.

Venture capital and private equity investment in wind has been buoyant, and is likely to end up nearly double last year’s figure, as private equity players have stepped into the funding gap created by the sickly stock market. Public market investment in wind, inflated in 2007 by the huge $6.6bn IPO from Iberdrola Renovables, will be down by some 75% this year.

Forecast four was that solar would experience a “more difficult year, at least for PV manufacturers, but the Great Silicon Price Crash is shaping up to be in 2009, not 2008”. Events have largely borne us out – solar share prices are down even more than those of clean energy stocks as a whole, and PV has moved towards a really pronounced price fall along the value chain from silicon to modules next year. Our analysts now think silicon prices are set to tumble more than 30% in 2009.

We also said that we expected private equity-type investment and expansion finance to increase in solar, and that has certainly happened, with big injections into firms such as Sulfurcell, Miasole, SolarReserve, Nanosolar and Fotowatio. Finally, we surmised that some firms that raised capital in 2006 or 2007 might start to run out of money and be forced into the arms of larger players. That trend has not got going properly yet, but we expect it to be a big feature of 2009.

Our fifth prediction related to biofuels, and there we scored fairly well. We suggested that we would see a persistently uncomfortable “crush spread” in biofuels, and more ethanol plants mothballed or sold in the US, which indeed we did.

What we – along with pretty much everyone else – failed to see was the cresting of the speculative spike in feedstock prices for corn, wheat, palm oil and rapeseed in the first half of 2008, triggering furious international debate over whether biofuels were forcing up food prices, and then followed by a collapse in commodity prices. We did see plenty of blood on the US first generation biofuel carpet, as predicted, with US ethanol heavyweight VeraSun Energy filing for Chapter 11 insolvency this autumn, and continuing investment in second generation.

Prediction six was not so accurate. We said that in biomass, we expected 2008 to be the year international trade in feedstock reached critical mass, “with increased awareness among investors of the potential to build substantial international businesses in the areas of pellets, wood chips, and agricultural waste”.

Common sense perhaps, but this year the low-profile sector of biomass has largely been, well, low-profile. Our figures suggest that asset finance in biomass and waste-to-energy generation will be well down on 2007 levels, reflecting problems in particular sub-sectors such as German biogas and the restraining effect of the credit squeeze. There have been bright areas, such as Brazilian bagasse, and also Drax’s recent announcement of 900MW of dedicated plants in the UK. But in general, both biomass and the feedstock trade have failed to ignite in 2008.

The next was on the build-out of infrastructure, which we suggested would be a major theme in all sectors in 2008. We gave as examples “grid extensions to improve access to customers for wind power, ethanol pipelines in Brazil and, in the US, biofuel handling facilities at refining hubs”.

And indeed we were not wrong. Around the world, understanding of grid weakness as a factor holding back the shift to clean energy is growing. In the US, there was further planning around the innovative Texas Competitive Renewable Energy Zones. In Europe, the European Commission produced a blueprint for a supergrid that would run from north Africa to the Nordic nations.

However, actual progress has been patchy, as these initiatives will be long in the planning. In the US, one of the Federal Energy Regulatory Commission’s admirable “National Interest Transmission Corridors” has generated howls from locals concerned about historic lands in Virginia. Out west, a plan to connect San Diego to the sun-rich California desert has residents complaining about potential environmental impacts.

Increasingly, developers seem willing to take matters into their own hands. Anschutz Corporation bought the rights to a $3bn transmission project to link its proposed 2GW wind farm in Wyoming to Las Vegas. Meanwhile, Midwest utility and power generator AEP says it is considering 765-kv wires that would pull electricity from North Dakota towards the east.

Finally, there are signs that the Obama administration-to-be recognises the importance of building a larger, more advanced grid that could be funded via the much anticipated “economic stimulus” plan expected in January. In other sectors, those biofuel plants that have been financed in 2008 have often been those sited right next to ports such as Rotterdam or Houston. And finance has been agreed for the construction of new offshore wind turbine ships, removing another potential bottleneck. Overall, we feel we were directionally right, and the issue certainly remains a critical one.

In our eighth prediction, we said that the cause of clean energy would “continue to gain ground” pointing out that most of the then leading US Presidential candidates placed a higher priority on efforts to curb emissions and encourage investment in clean energy than the incumbent President George W Bush.

Like the rest of the world we were wrong-footed when the parlous state of the world’s economy and the collapse of stock markets monopolised the front pages from September on, relegating climate change to a bit-part role. But President-elect Barack Obama did indeed make a shift to clean energy a focal policy of his campaign, with a promised $150bn investment over 10 years, the promise to create 5m green-collar jobs, and a commitment to play a leadership role in global climate negotiations, all of which he has reaffirmed since the election. He also picked Nobel Prize winning physicist Steven Chu, an advocate of low-carbon power, as his secretary of energy.

And we certainly nailed it with our prediction that “there will be no conclusions to the discussions on the successor regime to Kyoto”. At the recent Poznan COP/MOP summit, one session spent two hours discussing the process to agree the agenda for the debate on one aspect of one element of the potential deal. Not good. Poznan broke up with little to show in the way of progress, other than – as we predicted – in the area of technology transfer. The world will have to wait for Copenhagen and Obama to see real progress.

2008 was a year of two halves for our ninth forecast, which concerned energy efficiency. We predicted continued emphasis on the sector, which we certainly saw in spades in the first half of the year as energy costs soared to record levels. We forecast a re-emergence of the ESCO business model, in which individuals and businesses with high costs of capital accept investment from third parties such as utilities, banks and leasing companies, and indeed we saw feverish activity for a while.

As the energy price soufflé deflated, however, the issue of energy cost has been pushed somewhat to the back burner by companies struggling to restructure their core operations to cope with the downturn. All is not lost, however, as politicians are stepping in with fiscal stimulus dollars to support energy efficiency moves, just as companies capital rationing is sucking money from the sector. Breathing new life into the ESCO model might take a little longer.

Finally, we suggested that 2008 would be the year that electricity generators looked to nuclear and clean coal as effective investments to cut emissions, and we were certainly not wrong. There were some eye-catching deals in the nuclear arena, such as EDF’s $18bn takeover of British Energy, and MidAmerican Energy’s $4.8bn bid for Constellation in the US. In carbon capture and storage (CCS), we have just completed a piece of work which showed up no fewer than 193 pilot projects either active or in planning, involving 155 different consortia and over 900 organisations; there are also 102 organisations researching relevant technologies.

However, in both nuclear and carbon capture, actual investment activity has been slow to pick up. There have been no big bangs, no multibillion dollar commitments. We need to be more careful with our choice of words.

Well, that is how I have marked the 10 predictions for 2008. I make it a total score of 64/100, well down on 2007’s score, but in line with previous years and high enough to avoid a re-sit.

It turns out that the very best prediction of the year was contained in my leader from July, which was entitled “Clean Energy Sails On In The Eye Of The Storm”. In it I described how the clean energy sector was poised between two diametrically opposed macro-economic forces: “Pulling in one direction is the economic crisis rolling through the capital markets…; pulling in the other directions are the record prices of oil and gas.”

“The worst short-term scenario for our sector,” I explained, “would be if the oil price falls steeply while the credit crunch is still intense. That could give clean energy investment a double hit.” You can say that again.

In the next edition of the Monthly Briefing, we will be tempting fate once again. Helped by New Energy Finance chief editor Angus McCrone and the company’s 100-strong editorial, research and analysis team, I will be publishing our 10 predictions for 2009.

Wish us luck, and enjoy the holidays. After the year we have just had, we all need a good break.

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