Tuesday, October 21, 2008

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

By TOM WRIGHT


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."

 

 

1 comment:

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