McCrone: Will the Cavalry Come Over the Hill?

By Angus McCrone
Chief Editor
New Energy Finance

So now we know how bad it is. The clean energy sector was in deep hibernation through the winter months, with investment levels sharply down in asset finance, venture capital and private equity, and – most dramatically of all – in the public markets.

New Energy Finance’s data, based on actual investment transactions in the first quarter of 2009, show a figure of $13.3bn, down 44% from the fourth quarter of 2008 and an eye-watering 53% lower than the equivalent figure for the first three months of last year.

The big question now is what the chances are of the finance freeze easing as we go through the second quarter and into the third. Or are we going to see the continuation of the Q1 trend, implying not just a blow for hopes of curbing carbon emissions but also a decimation of the ranks of clean energy companies, as many of them run out of money?

Writing in the third full week of April, it has to be said that there has not yet been a definitive warming in the investment climate. The number of deals announced day-by-day remains well down on what it was a year ago, and the sector is still waiting for one or two landmark transactions in M&A, VC/PE or project financing that would give a big fillip to confidence.

The nearest thing to a thaw we are seeing so far is an apparent increase in the trickle of venture capital and private equity transactions. Recent weeks have seen Nordic Windpower soak up an undisclosed amount (but likely to have been at least $20m) in further funding, Dutch biofuel producer BioMCN take $48.8m, tidal developer Atlantis Resources receive $14m, lithium-ion battery maker A123Systems absorb $69m, and portable fuel cell developer Lilliputian take $28m – as well as a litany of smaller deals.

In general, VC/PE has held up better than other types of investment during this downturn. Even in the first quarter of 2009, as the article on page 6 explains, this category of finance for clean energy companies totalled $1.8bn, down “only” 22% from the last three months of 2008 – although that still made January-to-March the weakest quarter for more than two years.

By contrast, public market investment in the sector remains stymied by the depressed state of investor confidence on quoted exchanges. If clean energy shares, as represented by the NEX index, are still down more than 60% on their highs of late 2007, it is hard to blame investors for being short of animal spirits.

One thing I had expected to see more of by now is purchasing of clean energy shares by insiders, such as directors and the companies themselves. There has been a certain amount – SolarWorld, for instance, had a programme last autumn to buy back up to $300m of its stock, and a few smaller firms such as Helius and Leaf Clean Energy have also announced modest moves.

As for director purchases, there have been some since share prices plunged last September and October. But two factors may be holding back other board members from topping up their holdings on the cheap.

The first is that executives are not confident enough that their shares really are cheap. PV Crystalox, the solar ingot and wafer maker, stated recently that there was “very little visibility” on likely demand for the rest of 2009, and many other firms in wind and solar would say the same, given the problems their clients – the project developers and utilities – are encountering in raising debt finance.

The second is that some of them may be keeping their powder dry. If share prices remain depressed and visibility improves, there will be a temptation for some directors to try to take their companies private via a management buy-out, before predators have a chance to pounce with a takeover offer.

So far in 2009, merger and acquisition activity has been relatively subdued, at $8.8bn in the first quarter, less than half its level in the previous three months or in January-to-March 2008. There have been some April deals already, including First Solar’s purchase of Optisolar for $400m and Colexon’s all-share acquisition of Renewagy’s equity for around $100m.

However at New Energy Finance, we think it is only a matter of time, and probably a fairly short time, before the M&A deal flow gathers pace. One reason is necessity – many quoted firms in the sector are burning cash and have enough to last them only a few months, and among the young technology companies backed by venture capital, the IPO route is largely blocked and some are close to exhausting the pockets of existing VC investors.

Asset finance has been at the centre of the clean energy recession of recent months. It is not that debt finance for wind farms and solar parks has become too expensive – in fact, the fall in central bank interest rates has largely offset the widening of project finance spreads and swap charges. But, for many developers, it just has not been available.

Putting construction of projects on hold is sensible enough during cold winter weather, but the prime building season is now with us in the Northern Hemisphere, and developers are increasingly desperate to get on with their work. Some solar projects in southern Europe have started construction even though the debt finance has not been finalised. The developers concerned have stated with confidence that their debt deals are almost agreed. But “almost” is a long way in the current environment, when banks are loath to lend long because of the squeeze on their own funding.

In some cases, the dearth of debt finance has produced strange behaviour. One developer, lucky enough to get finance this spring, told us that he was unable to disclose the names of the banks that had provided it for fear that those institutions would immediately be inundated with begging phone calls from other developers.

This week has, in fact, seen a project financing that could perhaps prove to be a bellwether for renewable energy in 2009. The EUR 160m, or $207m, Cottbus thin-film PV plant on a disused German military base will be one of the largest in the world, at 53MW. It is encouraging to see that five banks have backed it with debt of “more than 80%” of the total investment, although sceptics might argue that this project is exceptional – First Solar is a blue chip hardware supplier and investor, and Cottbus will get handsome support from local government.

But if others follow, including the expected GBP 400m ($582m) refinancing of Centrica’s Lynn and Inner Dowsing offshore wind farms in the North Sea, then the sector will start to believe that the very worst phase of the debt finance freeze is past. In the first quarter of 2009, asset finance was $11.5bn, well down on Q4 2008 and only half the figure for Q1 2008.

The trouble is that a minor improvement would be little good to companies in the sector, investors, or indeed the cause of restructuring the world’s energy system and addressing carbon emissions. Clean energy in 2009 needs the cavalry to come over the hill.

Luckily, the cavalry is there, somewhere in the next valley, in the shape of government stimulus packages. New Energy Finance’s analysis shows that economic stimulus packages from 12 countries (Brazil, Canada, France, Germany, India, Italy, Japan, South Korea, Spain, the UK, and the US) have promised no less than $183bn to “green” investments.
To put that number in perspective, it amounts to significantly more than the $155bn total new investment in the clean energy sector in 2008. So, in theory, the government stimulus packages are sufficient to pump more than a full year’s supply of investment into the sector.

In practice, the cavalry is likely to be less rapier-like than that. For a start, government stimulus money does not arrive all at one time, or even all in one year. The $67bn earmarked for clean energy by the Obama administration’s stimulus package was passed in February, but the first dimes and quarters are only beginning to clink through now, mainly in grants to energy efficiency projects.

New Energy Finance’s estimate is that only around $40bn of the $183bn of clean energy stimulus from the 12 major economies will be spent in 2009, with another $75bn in 2010, $43bn in 2011 and smaller amounts in the years following that.

For a second thing, the “green stimuli” are not as green, or as clean energy-focussed, as the publicity surrounding them might suggest. The headline number includes measures such as car-scrapping programmes, which should have a net positive impact on emissions as inefficient vehicles are taken out of service but will do nothing for clean energy; and also other steps such as grid development that will help the sector but do not result directly in more clean energy deployment.

So the impact of the stimulus packages will be slower, and more diluted, than investors and executives in the sector would wish. They will not be a cure-all by any means, although they will help – particularly in wind and solar deployment in the US, and in energy efficiency in all the major economies. We suspect that Q1 2009 will prove to be the low for clean energy investment. But there remains a mountain for the private sector to climb.

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