Tuesday, October 21, 2008

Winds Shift for Renewable Energy As Oil Price Sinks, Money Gets Tight


The prospects of renewable-energy companies soared with oil prices, but the global credit crunch and the easing of energy costs have brought them back to earth with a thud. With banks reluctant to lend and their stock prices tumbling, many green-energy concerns are struggling to find the long-term funding they need to expand in a capital-intensive industry. In the past three months, global renewable-energy stocks tracked by New Energy Finance, a London-based consultancy, have dropped about 45%, compared with a 23% decline in the Dow Jones Industrial Average over the same period.


The sector's problems have been compounded by the skid in oil prices to below $70 a barrel last week from more than $147 in July. The sudden reversal in crude prices has removed -- at least temporarily -- a key rationale for investors to pump billions of dollars into alternative fuels, industry analysts say.

The result: At least in the short term, a slew of projects from palm-oil-based biodiesel plants in Indonesia and Malaysia to wind farms and solar projects across the U.S. and Europe may not be able to get funding.

Some companies are shelving plans for IPOs as long as stock markets remain weak and volatile. German solar-power company Schott Solar AG, for example, called off a $900 million initial public offering earlier this month, citing poor market conditions.


But some listed companies have little choice but to issue more shares given the difficulty of getting bank loans. Indian wind-turbine producer Suzlon Energy Ltd.'s stock has fallen more than 40% since late September, when it announced plans for a $380 million rights issue later this year to raise capital. Earlier, the company had told analysts it had lined up euro-denominated bank financing to fund its expansion plans.

U.S. wind-farm developers, which have commitments to build a record number of projects in 2009, are also scrambling for alternative sources of credit after the troubles of Lehman Brothers Holdings Inc. and American International Group Inc., both of which were big lenders to the green-energy sector, says Eric Silverman, a partner at law firm Milbank, Tweed, Hadley & McCloy LLP in New York.

"The credit crunch deals a negative blow to the whole [wind] sector because it's heavily dependent on debt financing," he says.


General Electric Co.'s GE Energy Financial Services, another major investor in U.S. wind-farm development, is cutting back outlays because the credit crisis has made it difficult to price investments. "This is a very tough market for any investor," says Andrew Katell, a spokesman for GE Energy Financial Services. "Everyone is impacted."


To be sure, many investors, including GE, still see renewable energy as a long-term opportunity to make money because of the apparent political will in the U.S. and Europe to reduce dependence on Middle Eastern oil and cut greenhouse-gas emissions. For example, the financial-bailout package approved by Congress this month also included provisions to extend federal tax breaks for wind energy by one year and solar by eight years.

For now, though, many analysts say tight credit is likely to force further consolidation in the sector, with large state-owned utilities and private-equity firms that can still access bank credit or are sitting on cash reserves buying up renewable projects from cash-strapped developers.  That would accelerate a trend seen recently in the U.S. in which big European players such as Iberdrola Renovables SA of Spain, the world's largest wind-farm developer, and Energias de Portugal SA purchased smaller U.S. wind companies.


"Over the next 12 months, large utilities have a competitive advantage," says Jonathan Johns, head of renewable-energy research at Ernst & Young in London.

Last month, German power-giant RWE AG agreed to pay $50 million to the British company Helius Energy PLC for a controlling stake in a 65-megawatt biomass-power plant in northern England. RWE will invest a total of $380 million in the wood-pulp-fueled plant, which is due to start operating in 2011.

Hudson Clean Energy Partners, a private-equity firm based in New York, announced last month that it was buying Helium Energy, a small Spanish wind and solar developer, for up to €100 million, or $134.5 million. Hudson, which was formed in 2006 by a former head of Goldman Sachs Group Inc.'s green-energy investment-banking team in the U.S., is buying the assets from Hemeretik S.L., a Spanish construction and property company that decided to ditch its renewable-energy business amid the economic downturn.  Some global-infrastructure funds are also dumping clean-energy assets to strengthen their balance sheets. Australian investment firm Babcock & Brown, whose shares have been pummeled amid concerns over its heavy debt, is planning to sell 2,000 megawatts of wind-farm assets in Europe this year, with large European utilities the likely buyers.


Investors are also likely to become more selective about which green projects they back, with those that don't depend on government subsidies likely to attract the most funding in the short term, industry analysts say.  That could slow development of cutting-edge alternative-energy technologies like celullosic biofuels, which have received private-equity funding but are still far from commercially viable. They will now have to compete with wind and solar for financing, says Angus McCrone, chief editor of research at New Energy Finance.

Private-equity firms "will now also have many companies from many sectors knocking on their doors," he adds, "especially while IPOs on the stock market are out of the question."



Sunday, October 19, 2008

Hot, Flat, and Crowded - Why We Need a Green Revolution

I have read Thomas Friedman’s new best-seller Hot, Flat, and Crowded which has helped me put the financial crisis and economic recession that we are undergoing in a crystal clear context.  His book is a much-needed wake up call for every nation in the world – we desperately need authentic leadership supported by collaboration and innovation. I would strongly recommend it for anyone who has enjoyed The World is Flat and is ready to cross-pollinate the “green revolution” around the world….Here’s what he says about the new book in his blog:

“Thomas L. Friedman's no. 1 bestseller The World Is Flat has helped millions of readers to see globalization in a new way. Now Friedman brings a fresh outlook to the crises of destabilizing climate change and rising competition for energy—both of which could poison our world if we do not act quickly and collectively. His argument speaks to all of us who are concerned about the state of America in the global future.

Friedman proposes that an ambitious national strategy—which he calls "Geo-Greenism"—is not only what we need to save the planet from overheating; it is what we need to make America healthier, richer, more innovative, more productive, and more secure.

As in The World Is Flat, he explains a new era—the Energy-Climate era—through an illuminating account of recent events. He shows how 9/11, Hurricane Katrina, and the flattening of the world by the Internet (which brought 3 billion new consumers onto the world stage) have combined to bring climate and energy issues to Main Street. But they have not gone very far down Main Street; the much-touted "green revolution" has hardly begun. With all that in mind, Friedman sets out the clean-technology breakthroughs we, and the world, will need; he shows that the ET (Energy Technology) revolution will be both transformative and disruptive; and he explains why America must lead this revolution—with the first Green President and a Green New Deal, spurred by the Greenest Generation.

Hot, Flat, and Crowded is classic Thomas L. Friedman—fearless, incisive, forward-looking, and rich in surprising common sense about the world we live in today.”

Private Equity Market Drying up Even in the Middle East

I came across an interesting FT article about the demise of the Private Equity market in the Middle East which has been flushed with petro-dollars.  The "L" in the LBO market has disappeared while the strategic buyers with strong balance sheets can simply cherrypick among distressed assets or struggling leveraged firms in the region:

"....Until recently, the Middle East had hoped to sidestep the worst of the financial storm thanks to abundant Gulf oil money. Now even the region's buy-out kings are in a more sombre mood.

"There are new realities in the world," says Ahmed Heikal, chairman of Citadel Capital of Egypt. "People are taking a long, serious look at their portfolios, reassessing their business plans, and delaying exits and fund raising."

Though bankers say leverage is less used in the Middle East than in the west, debt is still a central part of most private equity players' strategy. Typically, a transaction would be leveraged four or five times the target company's earnings before interest, taxes, depreciations and amortisations, according to experts. But international banks that could previously be relied on to supply the needed debt are now rapidly deleveraging.

Local houses are suffering from a domestic cash crunch that economists expect will curtail lending, despite recent liquidity injections. The little credit that remains is much dearer, making deals less profitable. The cost of leverage has doubled in recent months, says Karim El Solh, chief executive of Gulf Capital, an Abu Dhabi-based firm.

"Some people are still in denial," he says. "We are looking at an LBO [leveraged buy-out] industry without the L for a while now."

Private equity has been a fashionable industry in the Middle East in recent years, but the momentum is slowing. Last year 10 funds managed to raise $3.5bn, but so far this year only three funds have been announced and only $1bn committed, according to Preqin, a private equity data provider Preqin estimates that 25 funds are still actively trying to raise approximately $12bn. Private equity insiders say they may face difficulties reaching their targets.

Over 100 funds have been raised in the Gulf in recent years, but not all have performed as expected. The next time investors are approached "they might be less keen on parting with their money," says Mr El Solh.

"In a storm, even turkeys can fly . . . [but] we will now see a consolidation in the region."

The firms that do have cash to spend may still find the Gulf a challenging place to invest.

Most companies are owned by families who have little interest in relinquishing control, and many private equity firms have headed into the wider Middle East to countries such as Egypt, Jordan and Turkey more receptive to investment.

Even more than the rest of the Middle East, the Gulf thrives on personal relationships, and to do deals "you have to drink a lot of coffee with the owners", admits Mr El Solh.  Thus, most deals in the Gulf are minority stakes, such as Bahrain-based Investcorp's $98m purchase of a 36 per cent stake in Redington Gulf, a unit of the Indian IT distributor Redington India.

Given market turbulence and poor investor sentiment, firms sitting on mature investment portfolios may also have to sit tight a little longer before exiting. The MSCI Arabian Markets has plummeted 32 per cent this year. And for the foreseeable future "there are no exits. Period", says Mr Heikal....."


Saturday, October 11, 2008

The World is at Severe Risk of a Global Systemic Financial Meltdown and a Severe Global Depression

The G7 countries - the U.S., Japan, Canada, the U.K., Italy, France and Germany - agreed Friday on guidelines to address the world financial crisis but balked at crafting a joint plan, an outcome that forced me to post the following analysis by “Mr. Doom”.  I was hoping for a dramatic agreement such as to guarantee bank debt to prevent further market chaos this week, which could end up worse than last.


By Nouriel Roubini - Oct 9,2008

The US and advanced economies’ financial system is now headed towards a near-systematic financial meltdown as day after day stock markets are in free fall, money markets have shut down while their spreads are skyrocketing, and credit spreads are surging through the roof. There is now the beginning of a generalized run on the banking system of these economies; a collapse of the shadow banking system, i.e. those non-banks (broker dealers, non-bank mortgage lenders, SIV and conduits, hedge funds, money market funds, private equity firms) that, like banks, borrow short and liquid, are highly leveraged and lend and invest long and illiquid and are thus at risk of a run on their short-term liabilities; and now a roll-off of the short term liabilities of the corporate sectors that may lead to widespread bankruptcies of solvent but illiquid financial and non-financial firms.

On the real economic side all the advanced economies representing 55% of global GDP (US, Eurozone, UK, other smaller European countries, Canada, Japan, Australia, New Zealand, Japan) entered a recession even before the massive financial shocks that started in the late summer made the liquidity and credit crunch even more virulent and will thus cause an even more severe recession than the one that started in the spring. So we have a severe recession, a severe financial crisis and a severe banking crisis in advanced economies.

There was no decoupling among advanced economies and there is no decoupling but rather recoupling of the emerging market economies with the severe crisis of the advanced economies. By the third quarter of this year global economic growth will be in negative territory signaling a global recession. The recoupling of emerging markets was initially limited to stock markets that fell even more than those of advanced economies as foreign investors pulled out of these markets; but then it spread to credit markets and money markets and currency markets bringing to the surface the vulnerabilities of many financial systems and corporate sectors that had experienced credit booms and that had borrowed short and in foreign currencies. Countries with large current account deficit and/or large fiscal deficits and with large short term foreign currency liabilities and borrowings have been the most fragile. But even the better performing ones – like the BRICs club of Brazil, Russia, India and China – are now at risk of a hard landing. Trade and financial and currency and confidence channels are now leading to a massive slowdown of growth in emerging markets with many of them now at risk not only of a recession but also of a severe financial crisis.

The crisis was caused by the largest leveraged asset bubble and credit bubble in the history of humanity were excessive leveraging and bubbles were not limited to housing in the US but also to housing in many other countries and excessive borrowing by financial institutions and some segments of the corporate sector and of the public sector in many and different economies: an housing bubble, a mortgage bubble, an equity bubble, a bond bubble, a credit bubble, a commodity bubble, a private equity bubble, a hedge funds bubble are all now bursting at once in the biggest real sector and financial sector deleveraging since the Great Depression.

At this point the recession train has left the station; the financial and banking crisis train has left the station. The delusion that the US and advanced economies contraction would be short and shallow – a V-shaped six month recession – has been replaced by the certainty that this will be a long and protracted U-shaped recession that may last at least two years in the US and close to two years in most of the rest of the world. And given the rising risk of a global systemic financial meltdown the probability that the outcome could become a decade long L-shaped recession – like the one experienced by Japan after the bursting of its real estate and equity bubble – cannot be ruled out.

And in a world where there is a glut and excess capacity of goods while aggregate demand is falling soon enough we will start to worry about deflation, debt deflation, liquidity traps and what monetary policy makers should do to fight deflation when policy rates get dangerously close to zero.

At this point the risk of an imminent stock market crash – like the one-day collapse of 20% plus in US stock prices in 1987 – cannot be ruled out as the financial system is breaking down, panic and lack of confidence in any counterparty is sharply rising and the investors have totally lost faith in the ability of policy authorities to control this meltdown.

This disconnect between more and more aggressive policy actions and easings and greater and greater strains in financial market is scary. When Bear Stearns’ creditors were bailed out to the tune of $30 bn in March the rally in equity, money and credit markets lasted eight weeks; when in July the US Treasury announced legislation to bail out the mortgage giants Fannie and Freddie the rally lasted four weeks; when the actual $200 billion rescue of these firms was undertaken and their $6 trillion liabilities taken over by the US government the rally lasted one day and by the next day the panic has moved to Lehman’s collapse; when AIG was bailed out to the tune of $85 billion the market did not even rally for a day and instead fell 5%. Next when the $700 billion US rescue package was passed by the US Senate and House markets fell another 7% in two days as there was no confidence in this flawed plan and the authorities. Next as authorities in the US and abroad took even more radical policy actions between October 6th and October 9th (payment of interest on reserves, doubling of the liquidity support of banks, extension of credit to the seized corporate sector, guarantees of bank deposits, plans to recapitalize banks, coordinated monetary policy easing, etc.) the stock markets and the credit markets and the money markets fell further and further and at an accelerated rates day after day all week including another 7% fall in U.S. equities today.

When in markets that are clearly way oversold even the most radical policy actions don’t provide rallies or relief to market participants you know that you are one step away from a market crack and a systemic financial sector and corporate sector collapse. A vicious circle of deleveraging, asset collapses, margin calls, cascading falls in asset prices well below falling fundamentals and panic is now underway.

At this point severe damage is done and one cannot rule out a systematic collapse and a global depression. It will take a significant change in leadership of economic policy and very radical, coordinated policy actions among all advanced and emerging market economies to avoid this economic and financial disaster. Urgent and immediate necessary actions that need to be done globally (with some variants across countries depending on the severity of the problem and the overall resources available to the sovereigns) include:

- another rapid round of policy rate cuts of the order of at least 150 basis points on average globally;

- a temporary blanket guarantee of all deposits while a triage between insolvent financial institutions that need to be shut down and distressed but solvent institutions that need to be partially nationalized with injections of public capital is made;

- a rapid reduction of the debt burden of insolvent households preceded by a temporary freeze on all foreclosures;

- massive and unlimited provision of liquidity to solvent financial institutions;

- public provision of credit to the solvent parts of the corporate sector to avoid a short-term debt refinancing crisis for solvent but illiquid corporations and small businesses;

- a massive direct government fiscal stimulus packages that includes public works, infrastructure spending, unemployment benefits, tax rebates to lower income households and provision of grants to strapped and crunched state and local government;

- a rapid resolution of the banking problems via triage, public recapitalization of financial institutions and reduction of the debt burden of distressed households and borrowers;

- an agreement between lender and creditor countries running current account surpluses and borrowing and debtor countries running current account deficits to maintain an orderly financing of deficits and a recycling of the surpluses of creditors to avoid a disorderly adjustment of such imbalances.

At this point anything short of these radical and coordinated actions may lead to a market crash, a global systematic financial meltdown and to a global depression. At this stage central banks that are usually supposed to be the "lenders of last resort" need to become the "lenders of first and only resort" as, under conditions of panic and total loss of confidence, no one in the private sector is lending to anyone else since counterparty risk is extreme. And fiscal authorities that usually are spenders and insurers of last resort need to temporarily become the spenders and insurers of first resort. The fiscal costs of these actions will be large but the economic and fiscal costs of inaction would be of a much larger and severe magnitude. Thus, the time to act is now as all the policy officials of the world are meeting this weekend in Washington at the IMF and World Bank annual meetings.

Thursday, October 02, 2008

Cleantech Funding at Record $2.6B in Q3

Clean technology investments in North America, Europe, China and India increased 17 percent between the second and third quarters of this year to a record $2.6 billion, according to a report released Wednesday.  The money invested in 158 companies increased 37 percent compared to the same quarter last year, the report by the Cleantech Group said. The $6.6 billion total for such venture investments through the third quarter already exceeds the full-year 2007 total of $6 billion.

U.S. companies received a record $1.75 billion in 77 financing rounds, accounting for 67 percent of the global total. California-based companies received about 42 percent of the global total, with a record $1.1 billion in 35 investments.  “Cleantech venture investing has continued to show strong growth despite the unprecedented turmoil in the credit markets during the quarter,” said Michael Goguen, managing partner, Sequoia Capital and co-chair of the North American advisory board of the Cleantech Group’s Cleantech Network.

Cleantech sectors which posted all-time highs in the quarter were: 

-- THIN-FILM SOLAR: Solar energy companies using thin-film technology raised $620 million. CIGS (copper-indium-gallium-selenide) startups raised the most capital, including San Jose-based SoloPower Inc. at $200 million; Hayward-based OptiSolar Inc. at $78 million; and Santa Clara-based Miasole Inc. at $35 million. German CIS (copper-indium-sulfide) provider Sulfurcell Solartechnik raised $134 million.  AVA Solar in Colorado, which uses cadmium telluride technology, raised $104 million. UK-based G24 Innovations raised $30 million for its flexible organic dye thin film technology.

 -- SMART GRID: Companies that are developing ways to use advanced sensing, communication and control technology to generate and control electricity raised a record $202 million in 3Q08. Leading in this sector were Virginia-based Gridpoint Inc., which raised $120 million; Redwood City-based Trilliant Inc. at $40 million; Pennsylvania-based BPL Global Ltd. at $23 million; and Maryland-based Eka Systems Inc. at $18.5 million.

 -- ALGAE: Third quarter investments in ways to produce energy from algae of $95 million topped a record $84 million in the second quarter. Sonoma-based Sapphire Energy Inc. raised at least another $50 million while Solazyme Inc. in South San Francisco raised over $45 million.

Rockport Capital Partners, with offices in Boston and Menlo Park, made the most investments in the quarter with six. Mountain View-based Google Inc. was next with five. Making four each were Kleiner Perkins Caufield & Byers and Khosla Ventures of Menlo Park and Advanced Technology Ventures with offices in Palo Alto and Waltham, Mass.