Liebreich: The Risk is that the Next Cycle Could Be Another Roller-Coaster

By Michael Liebreich
Chairman and CEO
New Energy Finance

Last month our chief editor Angus McCrone reported on the astonishing drop in investment activity in the clean energy sector in Q1 this year, and speculated on whether the stimulus funds being launched with so much fanfare around the world would help prevent 2009 being consigned to the garbage heap.

The good news is that seven weeks into Q2 there are real signs of a thaw in financing activity. Venture capital and private equity investment remains in the doldrums – perhaps after their spending spree in the second half of 2008, managers now realise just how hard it will be to raise their next funds in the coming few years – but the quarter’s asset finance is already ahead of the figure for the whole of Q1. On the public markets, Vestas, Q-Cells, REC and SunPower have either secured, or are in the process of securing, more than $2.2bn via secondary offerings, and there has been a trickle of smaller issues. We may even see some IPO activity in the coming months, after all the NEX has bounced back nearly 70% from its low of 132 in March to clear 220 (although still down 50% on its high of 450 at the end of 2007).

The bad news, at least from a macroeconomic point of view, is that none of this has much to do with the nearly $200bn of stimulus that we have so far identified around the world as being targeted at the clean energy sector. Little if any of this money has flowed to date, and we are busily revising down our estimates of how much might hit the bank balances of the world’s clean energy technology providers and project developers in 2009. Our best estimate at this stage is between $20bn and $30bn, in no way enough to make up for the collapse in private financing activity. As a result, our best estimate for total global investment in clean energy in 2009 is for a drop of 25% to 40%, from $155bn in 2008 to somewhere between $95bn and $115bn.

To put this in perspective, total investment in 2006 – seen as one of the most extraordinary years in the history of clean energy – was $95bn. Taking a three-year step back in time is not pleasant for any industry, but we should note that the recession has knocked many other infrastructure and capital goods sectors back to 1999.

All of this raises an interesting possibility. Scroll forward to the second half of 2010. If last month’s stress tests prove right, we will have seen no more major bank failures – indeed lured by the monster spreads they can currently command, banks could well have piled back into lending in a big way. Syndications might have begun to reappear, as that wonderful thing, competition, returns to the debt markets. Copenhagen should have produced the expected fudge, packaged as a new deal for the planet. The US may have a new omnibus energy and climate change bill, ending a decade of uncertainty about its commitment to weaning its energy system off fossil fuels. Even more countries will have bedded in strong policy packages to support the growth of renewable energy. The strongest companies, having amazed the world with stunning advances in the cost of clean energy, will have bolstered their balance sheets and be snapping up their weaker rivals. Life could be looking pretty good for the clean energy sector, after a tough two years.

And then the stimulus money will really start to flow. Our figures show that by mid-2010 there will still be an overhang of more than $100bn in unspent stimulus money focusing on clean energy (not including other areas of the “green” economy such as water, or rescuing SUV-makers in the hope they will start making smaller cars).

Coming on top of an underlying recovery in the sector, this looks like a recipe for another bubble. After two years of below-trend investment, we could see the reappearance of supply chain bottlenecks, soaring asset values, a return to silicon shortages and the NEX could break into new territory above its all-time high of 450.

Oh, and one other thing: despite the deepest global recession for decades, the world crude price is currently hovering around $60-a-barrel. That may be far down on its level 10 months ago, but it is two and a half times the average price during the 1990-2003 period. Meanwhile oil exploration has dropped, with the number of US oil drilling rigs in operation down some 30% in Q1 2009 compared to Q4 2008. The risk is surely that as world economic activity picks up, the markets will head straight for another oil price spike, raising interest in alternative fuels and clean energy generally.

Fanciful? It is worth remembering the reason that Keynesian economics fell out of favour during the Eighties. It’s wonderful in theory to believe that our political masters can somehow spot the economic cycles and intervene with perfect timing to smooth them out, utilising the excess capacity in a downturn to invest in valuable, productivity-enhancing assets which will be ready for use in the coming upturn. Real experience was rather different: the timing of stimuli tended to have more to do with the political than the economic cycle. In one study of Keynesian interventions in the UK, it was found in retrospect that the timings were almost diametrically opposed to the point in the cycle when they would have been helpful. And, of course, at best the interventions are attempts to pick winners, and at worst they are simply pork-barrel politics.

I am not arguing that nothing should have been done to restore confidence in the world economy during those dark days of December and January, and the first few weeks of the Obama Presidency. Some strong signals had to be sent. But it is worth reflecting that the clean energy stimuli that we are all now so happy to see may well prove strongly pro-cyclical.

If that is to be the case, then clean energy investors need to think very carefully indeed about their strategies, and particularly about the timing with which they make investments and realise exits. Don’t be surprised to see another clean energy boom starting in 2010, followed by another clean energy bust a few years later. And remember, you read it here first!

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