McCrone: Last Into Recession, but Can Clean Energy also Be the First Out?

By Angus McCrone
Chief Editor
New Energy Finance

Is the clean energy sector in recession? There is no doubt that much of the rest of the world economy is – every day seems to bring grimmer and grimmer figures, one of the latest being that Japan’s economy contracted by an extraordinary 3.3% in the last quarter of 2008.

We could split hairs and say that on the standard definition of a recession, two successive quarters of declining output, clean energy is not in one. Electricity output from renewables continued to grow right through last year, with for instance 8.2GW of new wind capacity added in Europe and another 8.4GW added in the US. Output of hardware also carried on expanding – Vestas for example shipped 2.5GW of turbines in Q4 2008, up from 1.5GW in Q3 and 1.8GW in Q4 2007 – and production of solar modules grew rapidly.

However the clean energy sector did enter an investment recession in 2008. Figures from New Energy Finance show that new investment in the sector grew to $155bn last year, up modestly from $148bn in 2007 – but that the second half figure was down 17% on the first half, and indeed down 23% on the final six months of 2007.

The sector is also in the grip of a sentiment recession. Clean energy share prices fell 61% in 2008, more sharply than the overall stock market, and although there has been a tentative rally since the low last November, it has made up only a fraction of the lost ground. Meanwhile key players such as Siemens, LM Glasfiber and Clipper have been trimming staff numbers, and others, from T Boone Pickens downwards, have been delaying projects.

It is worrying news for those hoping for a rapid transformation of the world’s energy infrastructure. A report from the World Economic Forum, co-written by New Energy Finance and released at the end of January, warned that unless at least $515bn-a-year is invested in clean energy between now and 2030, carbon emissions will reach a level deemed unsustainable by scientists.

It is a big jump from last year’s $155bn, to $515bn, despite the coincidental similarity in the digits. In 2008, clean energy resisted the credit crunch more successfully than many other sectors for much of the year, helped by sky-high oil prices. But it then suddenly felt the impact hard from September onwards. The question in early 2009 is whether it can emerge in the next few months as one of the lead sectors out of this world downturn.

Certainly, the expectations are there. In the US, presidential candidates of both parties last year claimed that “green collar” jobs could help get the country’s economy back on track. Then-candidate Obama at one point promised 5m such positions could be generated with proper investment. The jury remains out on whether the industry is sufficiently labour-intensive to lift an entire economy.

The investor mood will be critical to continued growth. One of the reasons clean energy share prices under-performed in late 2008 was a general flight from risk and from growth sectors. It may not feel like it at the moment, but I suspect that at some point in 2009, there will be a shift in the stock market’s mood, back towards shares and a bit more risk. The trigger could well be a realisation that government bonds and cash will not be good investments when the recovery comes, particularly if it is accompanied by higher inflation.

That could act as an accelerator, but if clean energy is to lead other sectors out of this recession, the main impetus will have to come from government policies. Since the economic crisis broke, many of the big developed economies have announced measures designed to stimulate investment in renewable energy and energy efficiency.

These have included a Green Infrastructure Fund, worth $800m, in Canada, to be spent partly on carbon capture and storage, and Japan’s twin programmes, of $2.2bn for tax breaks on eco-friendly cars and $2.1bn for tax breaks to encourage energy efficiency investment.

France has announced $5.2bn of public investment in the “energy network, railways and postal services” – some of which may find its way to renewables – while Germany committed $588m for research and development in energy efficiency and climate protection research. The UK’s so-called “green stimulus” of November last year consisted of $811m, but the money was a hotchpotch of grants for insulation, and cash for new railway carriages and flood defences. The only renewables-focussed measure was a 10-year extension to the Renewables Obligation, providing some extra comfort for offshore wind project developers.

A bigger splash is likely to be made by the European Union-wide programmes currently in the late stages of discussion, and due to go to the Council of Ministers for a vote in early March.

On the table at that meeting will be a proposal from the Commission for a EUR 3.5bn financial package for gas and electricity connections, offshore wind projects and CCS. Some EUR 500m of that will be earmarked for offshore wind, including grid connects on specific projects, money for the development of 6-7MW deep water devices and new structures, and a EUR 10m hand-out for the Thornton Bank project off Belgium. The CCS element involves EUR 1.25bn in grants for projects in five countries – Poland, the UK, the Netherlands, Germany and Spain.

The EU has also tried to strengthen the regulatory framework to encourage renewable energy deployment, via its Renewables Directive, approved before Christmas and committing the bloc to achieve a renewable share of 20% of total energy consumption by 2020.

Worthy though these efforts may be, they will not be enough to turn sentiment in the clean energy sector worldwide from caution to confidence during 2009. The only programme that has the potential to come close is the one signed into law by President Barack Obama on Tuesday 17 February. The legislation actually passed Congress the prior week but the White House wanted the proper pomp and circumstance for the signing, so off Obama went to Denver to be photographed admiring PV panels at the city’s Museum of Nature and Science. The message: renewables stand to benefit most from the stimulus.

The $787bn economic stimulus package is a blunderbuss shot that will inevitably miss some of its targets, but it appears to have hit dead-centre with its proposals on tax incentives for US wind.

The Production Tax Credit as it applies to wind, previously due to expire at the end of this year, was extended for three years, providing long-term support for the subsidy that has long been lacking. The legislation went further, however, by allowing developers to take advantage of the even more generous Investment Tax Credit if they choose.

Most importantly, the legislation addressed the shortcomings of tax credits as subsidies. The problem this year has been that the traditional providers of tax equity finance for wind projects – principally banks and other financial services giants – have been hit so hard by the downturn that they do not have the same need as before to shelter taxable profits. Result: a serious shortage of tax equity for wind projects.

The US stimulus sets out to tackle that by the bold introduction of a Department of Treasury grant for renewable energy projects. Developers will be able to receive these grants as soon as projects are commissioned. So developers will get cash equivalent to 30% of the project cost directly, rather than having to rely on a tax equity provider to tap government incentives.

Will this set wind project development alight in the US during the course of 2009? The proof of the pudding will be in the eating – in particular whether Treasury bureaucracy will be equal to the task of approving the large number of grant applications that may come their way, and whether banks will be able to provide the construction debt to enable wind farms to get to the point where their developers can apply for the 30% grant. We should have a good idea how this particular pudding tastes by the end of the spring.

In the meantime, there is more that governments around the world can do to rekindle renewable energy investment, and sector lobby groups will be doing their utmost to extract that action. The British Wind Energy Association, for instance, plans to make a submission to the UK government in early March, in time to influence the annual Budget, timed for 22 April this year. Among the ideas the BWEA is likely to chew over are up-front capital allowances for offshore wind, a higher Renewable Obligation banding for marine, and perhaps a plea for government to lean on the partially state-owned banks to lend to renewable energy ahead of other sectors.

The Irish government has already gone furthest in that direction. On 11 February, as it pumped a total of EUR 7bn in core capital into Bank of Ireland and Allied Irish Bank, it said: “The recapitalised banks have confirmed that they have established, or are about to introduce, EUR 100m funds to support environment-friendly investment and innovations in clean energy. A quarterly report to the Financial Regulator of the loans made and the purposes for which they have been made will be required.”

What governments should do, and whether they should direct the banks explicitly, will be topics for debate at the second New Energy Finance Summit, in London on 4, 5 and 6 March. It is taking place at a pivotal moment for our sector, and I look forward to seeing you there.

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