Financial crisis slows cleantech investment

Analysts call for realism in alternative energy sector while important drivers remain up in the air

The credit crunch is already slowing the pace of investment in renewable energy, an environmental investment conference heard on Tuesday. On the plus side, however, cleantech stocks are now much better value for money.

The conference, organised by Environmental Finance magazine in London, heard how cleantech had become an increasingly important investment class over the past 18 months, with “phenomenal” levels of interest.

“As we moved into 2008, we’ve seen a deteriorating market,” said Bozena Jankowska, head of the sustainability research team at Allianz Global Investors. “Companies are scaling back for 2009, and the pinch point now is financing.”

Traditionally, renewables projects are funded 80% borrowing to 20% equity, and a number of projects have recently unwound.

In the wind sector, the financial crisis coupled with a recent expansion in production capacity in China means there is no longer a shortage of turbine capacity – a huge problem until quite recently. “Now the tables have turned,” Ms Jankowska said, with developers dictating the price.

On solar, the bottleneck had been silicon production, and prices had shot from $30 per kg up to $400 at peak. “Prices are now coming down on spot markets,” Ms Jankowska said, as manufacturers in China increase capacity and find that barriers to entry are surprisingly low. “We will see a shake-out of players.”

“Now we are seeing much more attractive prices [for cleantech stocks],” Ms Jankowska said, adding that the fiscal stimulus planned by US President-elect Barack Obama will provide new opportunities, as will government measures in the EU and China.

Green collar jobs

However, she queried the extent to which these measures can create “green collar” jobs in the short term. Investment in carbon capture and storage is long-term; wind projects will create jobs but many of them will be in China.

Richard Boddington of consultants Sgurr Energy pointed out there were also opportunities for companies offering wind support services, both for the installation of offshore wind farms and the maintenance of turbines outside the manufacturer's guarantee period.

Danyelle Guyatt, from the responsible investment team at Mercer, said the cleantech sector had a long way to go. “There are still less than a handful of cleantech fund managers,” she said, “but we’re seeing more investors looking at alternative energy investments.”

The size of the cleantech market is a question of definition. Ms Guyatt put it at a modest $5 billion, whereas Kevin Bourne, global head of equities at HSBC which manages a series of sustainability indices, said the wider market for companies providing climate-relevant goods and services was considerably larger.

“A lot of drivers for cleantech are still up in the air,” said Ms Guyatt, with uncertainties including the carbon price, relationships to the oil price and government policies. “A global carbon price would certainly make investment analysis in cleantech much more robust.”

The conference keynote address was from David Blood of Generation Investment Management which he co-founded with former US Vice President Al Gore. Factors contributing to the current downturn – lack of transparency, lack of good governance, failure to consider the long term – were all sustainability issues, he argued. “What has occurred to us lately is that market capitalism is going to have to change.”

Silver lining

“Unlike the financial system, you cannot bail out environmental problems. The one silver lining from this crisis is that it may allow us to address the challenges of climate change. But we will need to unfreeze credit markets to unleash many of the opportunities.”

“The transition from a high-carbon to a low-carbon economy will be the biggest in history,” he said. However, prerequisites included a successful Copenhagen climate change summit next year; speedy introduction of a US cap and trade scheme for greenhouse gases; and getting China on board.

“I believe there will be a backlash to sustainable investing but fundamentally it will remain with us because this is based on facts.”

But Gus Hochschild, from Mirabaud Securities, called for realism. “I don’t see these broad-based wish-lists being helpful.”

He warned that investors cannot assume there will be a global carbon price or that China will get involved – and “it will be easier for Obama to prop up the ailing auto-makers...Copenhagen will be a series of fudges,” Mr Hochschild said. “Unfortunately my optimism is limited.”

Meanwhile, in a new report, market analyst Frost & Sullivan confirms that the global economic turmoil has started having an impact on the wind energy industry in Europe, and that some companies are cutting down forecasts and production for 2009.

There are also signs of problems in the solar sector, with the world's biggest solar cell manufacturer, Q-Cells, recently issuing a profits warning. See links for further information.

• Frost & Sullivan news release
• Q-Cells news release
• Environmental Finance conference