Clean Energy's Bright Rebound

The last year-and-a-half have taken the clean energy industry on a roller-coaster ride. Among the minuses, the sector suffered from a shortage of financing for projects such as wind farms and solar parks and there was last December's disappointing outcome of the Copenhagen climate change conference. Among the pluses, prices of renewable energy technologies fell sharply, improving renewable energy's cost-competitiveness, and major countries announced $184 billion worth of "green stimulus" programs.

The outlook for clean energy in the next decade—and the development of appropriate policy mechanisms to bring about curbs on carbon emissions—will be key areas of focus at the annual Bloomberg New Energy Finance Summit in London from Mar. 17-19. The event brings together 300 clean energy and carbon leaders from global industry, the investment community, and government.

Clean energy investment was down in 2009 but proved surprisingly resilient. For much of the year it appeared that investment activity in clean energy would come in well below 2008 levels, but 2009 ended with total clean energy investment of $145 billion, a mere 6.5% drop from the record $155 billion invested the year before.

The pace of spending last year varied widely by region. New financial investment—excluding small distributed projects and corporate and government research, development, and deployment (RD&D)—fell 15% in the Europe, Middle East, and Africa (EMEA) region and 26% in the Americas, but increased in Asia-Oceania by nearly 25%, driven mainly by the wind sector. For the first time, new financial investment in clean energy in Asia-Oceania (amounting to $37.3 billion) outstripped that in the Americas ($29 billion). Europe, the Middle East, and Africa continued to lead the world with $45.3 billion invested.

resurgence in clean energy investment

The period from 2004 to 2008 saw a surge in global clean energy investment, from $33 billion to $155 billion. By the second half of 2008, the financial crisis stalled the industry's rapid growth. The low point came in the first quarter of 2009, when financial investment in clean energy was more than 50% below a peak it had reached just over a year earlier.

Investment activity recovered quickly, driven by rapid growth in China, the funding of some big, long-awaited, offshore wind farms, and a steady upturn in the financial markets. Prompt action by a number of development banks and a trickle of money from government stimulus programs spurred private sector activity, albeit at a slower rate than in previous years.

By the end of 2009, total financial investment in clean energy (excluding RD&D) was $112 billion (compared to $122 billion in 2008), with investment averaging $31 billion in the second, third, and fourth quarters. The recovery mainly came from pockets of investment focused on specific technologies and countries, such as wind megabases in China, offshore wind farms in the U.K., and solar thermal electricity generation plants in Spain. Asset financing for clean energy projects accounted for $92 billion of the total 2009 investment of $145 billion, while equipment manufacturers and technology companies raised $13 billion from the public markets and $6.6 billion from venture capital and private equity investors. Government and corporate R&D spending, plus small scale projects, accounted for the remaining investment.

Government Green Stimulus

Government stimulus funding has supported investment volumes in 2009, although to a lesser extent than expected. HSBC (HBC) estimates that governments allocated more than $430 billion in fiscal stimulus globally for "climate change themes." However, this total includes money for rail, water, and electricity infrastructure not specifically dedicated to clean energy. Once those are stripped out, Bloomberg New Energy Finance estimates that a total of $184 billion in stimulus funding has been allocated to renewable energy, energy efficiency, smart grid, advanced transportation, and further core clean energy technologies.

The value of the world's green stimulus packages rose by nearly $7 billion by the end of 2009, but funds have flowed more slowly than expected. Bloomberg New Energy Finance estimates that by the end of 2009, only 9% of the overall low-carbon commitments had reached the clean energy sector. Stimulus packages that rely on public companies to implement programs have flowed fastest: Almost all the stimulus money spent so far in France and China, for instance, has come via public energy giants.

Government administrations, on the other hand, have been slow to design disbursement rules and procedures. Once the rules are set, the money should flow much faster. The U.S. green stimulus is the largest program, accounting for most of the estimated amount spent worldwide so far. The energy efficiency sector has to date taken the largest share of the U.S. money spent.

Bloomberg New Energy Finance estimates that the flow of government stimulus spending will strengthen to around $55 billion in 2010, and $64 billion in 2011. It will then slow, with private sector investment more than taking up the slack over the next decade.

Public Markets

Historically, clean energy stocks have been more volatile than those of other industries but their returns have been higher, making them an attractive investment proposition on a risk-adjusted basis. Their 2009 performance confirmed this, as clean energy stocks recovered more rapidly than the overall market after having fallen more sharply in the second half of 2008.

Publicly quoted clean energy stocks initially held up well during the credit crisis. The WilderHill New Energy Global Innovation Index (NEX) tracks around 80 clean energy companies listed on 25 exchanges worldwide. Indexed to 100 at the start of 2003, the NEX traded as high as 450 at the end of 2007. During the first three quarters of 2008, it continued to outperform the rest of the market. After investment bank Lehman Brothers collapsed, however, the index fell to 178 at the end of 2008, and to 132 by March 2009.

The NEX recovered to close 2009 at just under 250—up 39% for the year, and up 87% from its lowest point in March. The compound annual capital appreciation of the NEX over seven years from the beginning of 2003 to the end of 2009 stands at 13.8%—a respectable return when compared with almost any major asset class.

The volume of clean energy investment on the public markets, which came to a standstill in the first quarter of 2009, finished the year down 4% from 2008, at $13 billion. Shortfalls in initial public offerings in Europe and the U.S. were offset by fundraisings in Asia, particularly in China and Taiwan. December 2009 brought the largest public market deal of the last two years: Longyuan Power Group's (916:HK) $2.6 billion initial public offering on the Hong Kong Stock Exchange, which saw shares sell at the top end of their indicated range, rising a further 10% following the launch.

Venture Capital and Private Equity

Last year saw a significant drop in the volume of venture capital and private equity investment in clean energy. Investment had soared from 2004 to 2007, with no fewer than 1,573 funds targeting technology investments in the sector by the end of that period.

As the credit crisis set in, investment volumes held up surprisingly well. With the IPO route closed because of the market downturn, some late-stage technology companies turned to private equity funds. By the first quarter of 2009, however, investment volumes had fallen sharply. Although they recovered slightly in the year's second half, they did not return to 2008 levels.

Consequently, venture capital and private equity investment in clean energy during 2009 came in at just $6.6 billion, down 44% from 2008—mainly due to lower financing of solar and biofuels companies, especially in the U.S. Still, investment in efficiency technologies held up, with little change.

On a positive note, a number of venture capital and private equity managers closed new funds in the last quarter of 2009 and are ready to invest in 2010.

Asset Finance

Asset financing—funding to build wind farms, solar projects, biofuels plants, and the like—was hit hard by the financial crisis. Not only did lower energy prices squeeze margins, but capital became scarcer and more expensive around the world. Asset investment dropped 19%, from $21 billion in the first quarter of 2008 to just $17 billion a year later, before recovering to an average of $25 billion in each of the subsequent three quarters of the year.

Wind accounted for most of the financing by value, including several large offshore projects, many of them in the U.K. The London Array Consortium has allocated just under $3 billion for the development of the 630-megawatt Phase 1 of a 1,000Mw wind farm located off the British coast. Centrica (CPYYY) has raised $1.6 billion to develop the 270Mw Lincs Offshore Wind Farm; Statoil (STO) and Statkraft are investing $1.5 billion in the development of a 316.8Mw wind farm off the Norfolk coast; and RWE (RWEOY) has committed $1.4 billion for the development of the 295Mw Nordsee Ost Offshore Wind Farm in the North Sea.

Large projects using other renewable technologies also raised funds in 2009, including the $1.7 billion Gorgon carbon-capture-and-storage project off the coast of Western Australia, funded by Chevron (CVX), Shell (RDS.A), and Exxon Mobil (XOM); $1.2 billion in project financing secured by Acciona (ACXIF) to develop a 150Mw solar thermal electricity generation portfolio in Spain; and Neste Oil's (NTOIF) $934.6 million, 952-million-liters-per-annum biodiesel plant in the Netherlands.

Higher borrowing costs have been a major cause of the slowdown in asset financing. In Europe, even though central bank rates have fallen dramatically since August 2008, borrowing costs rose as several lenders left the infrastructure finance business and the remaining banks demanded higher spreads. As a result, the cost of debt remains over 100 basis points higher for clean energy projects now than it was during the period from 2005 to 2007, despite historically low interest rates.

On top of higher spreads, debt-to-equity ratios for clean energy projects have fallen since the days of easy credit. Whereas it used to be possible to fund projects with 90% debt, this has now dropped to 70% to 75% on a normal project, or 50% to 60% for higher risk projects, if they can be financed at all. Loan lengths also have contracted, with historically typical loan agreements of up to 18 years all but disappearing; banks are focusing on periods of 10 years or fewer in order to reduce their mismatch with short-term deposits or money market finance.

All of this has significantly changed the economics of clean energy projects. Good proposals can still be financed, but marginal ones have been shelved until conditions improve. It has also meant that public sector debt providers, such as Germany's KfW and the European Investment Bank, have had to play an unusually important role in financing large projects, especially offshore wind. In Brazil, the national development bank BNDES has been involved in almost all financings of new sugar cane-ethanol capacity.

Mergers and Acquisitions

Mergers and acquisitions are excluded from headline investment figures because they represent money and assets changing hands within the industry, rather than new investment. However, M&A activity can be a useful indicator of an industry's maturity and of confidence levels within it. As share prices rose in 2009 and earnings recovered, confidence among senior executive increased and deal flow started to gain momentum.

M&A in 2009 totaled $60 billion, slightly lower than the $67 billion notched in 2008. Activity slowed in both of the main subsectors—corporate M&A (companies being bought or sold) and asset acquisitions/refinancing (projects being bought or sold). Acquisition activity got off to a slow start in the first quarter of 2009, followed by three quarters of activity at levels comparable to prior years. This was very much in line with trends in other investment classes.

The solar sector saw the highest corporate M&A volumes, boosted by 2009's largest deal, GCL-Poly Energy's (3800:HK) acquisition of GCL Solar Energy, a Chinese solar-grade polysilicon producer, for $3.4 billion in July 2009. Other substantial solar deals included RBI's $539 billion acquisition of Chinese thin-film module manufacturer Apollo Precision, and Siemens' (SI) $418 million acquisition of Solel Solar Systems, an Israel-based solar thermal company.

Asset acquisitions and refinancings were mainly focused in the wind sector, with several significant deals such as Acciona's acquisition of a 1.9-gigawatt portfolio of Endesa's (ELEZF) renewable assets for $4.06 billion and the refinancing of the Iberwind Enersis Portuguese Wind Portfolio with $1.5 billion of bond financing.

This article is based on "Clean Energy Investment in Turbulent Times," from the World Economic Forum report "Green Investing 2010: Policy Mechanisms to Bridge the Financing Gap", published at Davos in January 2010.

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